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Sound Advice: December 14, 2022

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


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