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Sound Advice: September 28, 2022

 Inside Information?

Yes, inside information about companies is available, but it’s not what you might think.  There may well have been a time when company officials provided hints or even specific comments to analysts or insiders looking to get a leg up on the general public, but those days are long gone.  These days, given the risks associated with doing so, companies have usually gone out of their way to release new information to the public as quickly as possible.

Analysts typically seek information about current developments and what lies ahead.  The latter is forward-looking and is known as guidance.

In most cases, when companies are releasing their quarterly results, they include guidance about the near future.  This guidance covers revenues and profits, usually in ranges, e.g., $200-220 million in revenues or $2.00-2.20 a share in earnings.  There may also be interim updates when management expects that the numbers will be higher or lower than those previously released.

Interim updates may be beneficial or problematic.  When guidance is raised, the price of the shares may rise.  And vice-versa, though lowered guidance may have a greater impact on the stock’s price.

Guidance is not the final word.  In fact, many companies provide guidance that is below what they are looking for.  This approach is used to increase the likelihood that actual numbers will be better than guidance, thereby drawing a more enthusiastic response from investors.  Whether this actually works in practice is another story.

There’s more.  That’s what’s known as whisper numbers. Whisper numbers are what analysts estimate.  They may or may not be the same as what the companies provide as guidance.  So when actual results are in line with guidance, but fall short of the whisper numbers, the shares may drop.

There are other ways of getting what amounts to inside information. That’s a process of getting in touch with suppliers or end users of products and services to learn about the rate of activity along the supply and delivery chain.  This is a matter of due diligence, which if properly executed can fill in the blanks about how things are going.

Listening to what companies say about their current operations may be interesting, but learning from those they buy from or sell to may be even more revealing.  That’s the real inside information.

 N. Russell Wayne, CFPÒ

www.soundasset.com

 Any questions?  Please contact me at nrwayne@soundasset.com


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