The Role Fundamental Analysis Plays In Penny Stocks, Seriously

Another solid guest post from a trading challenge student of mine:

Before rolling your eyes this is not an article about finding those few penny stocks that might be real companies. For people who like to study news and filings there is much they can learn about a stock, and that can be useful when momentum kicks in or a promotion is launched. Once you have identified a ticker that you find interesting for whatever reason, such as new volume or a thin piece of news that is the harbinger of more news, then you can look at filings to get a sense of the path. Lots of times filings are less than helpful, but they can contain the seeds of the future.

Whenever I consider potential promotions I like to see if a stock has a good story. Something for the many emails to chew on in order to sell the stock to the unsuspecting. Technical analysis sells, but a real story sells since promotions require some people to hold for too long. Normally those left holding the bag are either too slow or actually bought into the hype.

It would be hard to lay out exactly what to look for . This is where a wealth of experience really comes in. No one has seen everything, and that is the reason that groups can be successful. The amount of experience and data processing of a group will always outpace the individual’s abilities.

There are always vague statements in filings or forward-looking PRs, and that is where I like to focus. It tells you that despite the wishy-washy nature of the statement you are reading there is something going through the heads of the people who made it. These seeds will probably be picked up later to create a string of news, because that creates credence to the PRs an filings. The point here is not to deliver something substantially, but make it seem like important things are in the works.

Great promotions always have some sort of news. The emails that get sent out contain information about upcoming big things for the company. You cannot justify the story of a stock increasing over 50 times without something to drive it. It may be incredulous to those with some experience, but those stories are necessary. Promotions do not plead with the reader to buy the stock to keep the run going. It is always about getting in before the big thing that will make the stock go nuts happens.

Mining stocks are a favorite for promotions. That is because the news can always talk about impending acquisitions. Look for that word in filings, because normally you will see follow-up filings. It makes sense to keep an ear to the ground, because promotions love acquisition news. Acquisition and production are buzz words with mining promos. Lots of times there is news regarding acquisition, reserves, production, and strategic partnerships. All of these might be hinted at previously.

When you have your suspicions that a promotion is coming sometimes it is helpful to see if the cannon fodder is there. Also, once a promo is launched getting an idea of the news hyped in the emails and news still waiting might give you an idea of the course of the promo. You are still flying by the seat of your pants on these, but at least you have some semblance of what you expect to see. News might be released at the same time as the promotion, but lots of times you see hints of it all in old filings. The qualitative parts of the filings like material events or risks are always the best places to look.

If a company is on the pink sheets and using the alternative reporting system then there might be even more information. Unlike SEC filings, the alternative reporting filings are more like letters, and things can sneak in. It is not uncommon to see one line alluding to an upcoming deal announcement in a filing. These are normally just written and not carefully parsed during revisions, and anything the writer might have been thinking at the time could creep in.

The utility of all this is limited. The best use of this is when you have strong suspicions. Also, at the outset of a promo you can go back and see what was and was not mentioned. If there were talks about acquisitions before and the promotional email was silent, then there might be more coming. If the promoter is known to be a multi-day promoter then it could be an extended promo. Once you see some good technical signs that more is coming you can be comfortable knowing that you have more time. So do not go sifting through hundreds of filings to find any stocks with a ton of news. If you suspect a promotion, and see pre-promotion activity this can help show yourself if you are right or wrong. In the most extreme example, imagine if the company had no filings or news. A good promotion would be unlikely.

If you are looking to short a promotion it might be nice to see if there are any potentially large pieces of news still coming. Most promotions turn when they rehash old news. Obviously, only a few promotions are so methodically planned out. The haphazard ones are risky in general. Usually those are just a flash and there is no need to do extensive research. Multi-day promotions though could do with some research. Calling this fundamental analysis is not entirely accurate, because balance sheets and the like are ignored. Still the research can prove useful sometimes. Take it for what it is, one more tool to use when making trading decisions.

Posted in Basics, Guest Posts

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