Inside Information
Have you ever wondered about unusual price changes in
stocks? These days, more often than not,
atypical price movements are the result of new information about the related
companies. Some of the time, it’s about the
possibility of a merger. Other times, the
information is about potential surprises in the pace of operations. Perhaps there’s a large new contract on the
way or maybe the level of incoming business has slowed dramatically. Whenever such a change will impact profitability,
there’s likely to be a reflection in the stock’s price.
Before government regulations were tightened, it was
entirely possible for analysts to get a head start on important information and
take advantage by buying or selling a stock.
As part of their research process, analysts always ask about things like
incoming order rates, supply issues, acquisition possibilities, and what’s new
in company pipelines. Those who were in
regular communication were the first to know.
That unfortunate situation is long gone. If and when companies disclose information
about material events, such disclosure must be to everybody at the same time. Period.
Since regulators clamped down, the flow of information
continues in the form of forward-looking guidance, which many companies state
as ranges for revenues and earnings per share.
This guidance is often provided during quarterly progress reviews and
may subsequently be revised, as needed.
Beyond the guidance, there’s also what is known as the
whisper number, which may be quite different from what companies would have you
expect. The whisper number is what analysts
are looking for and in the few cases where there are whisper numbers, that’s
when things become interesting. When
quarterly revenues and profits are announced by companies, it’s reasonable to
expect that if the actual results are in line with the guidance, the stock will
not have much volatility. But if the
whisper number is significantly different and the actuals are well above or
below that number, sharp movements in the stock are most likely. There are also situations when one of the
numbers is matched, but the other falls short, i.e., revenues or profits. In most cases, the whisper number is close to
the guidance provided.
Although company sources are under strict rules against
favoritism, more aggressive analysts may be in contact with suppliers and
customers of the companies they are evaluating to corroborate their
expectations. This approach remains wide
open for analysis and may well prove advantageous.
In all cases, it’s a matter of having information and knowing
how to interpret it.
N. Russell Wayne, CFPÒ
Any questions? Please contact me at nrwayne@soundasset.com
Comments
Post a Comment