How to Choose the WinnersUnderstanding Penny Stocks

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Leeds Analysis III - Fundamentals

Political or Social Shifts

Businesses arise to fill needs of companies and consumers. As the needs change, so too do the companies filling these needs. A major change in government policy, even a shift in social values, can have dramatic repercussions.

What is a good sign: Increased military spending will help certain defense contractors, as long as they are in the correct arm of the military service business. The sudden commitment to build a multi-billion dollar Star Wars defense system will literally create some companies that previously did not exist.

When September 11th happened, social opinion and government policy both shifted significantly. Once the markets reopened, some of the defense and security stocks I had previously featured were instantly caught up in a wave of buying (while at the same time sellers disappeared).

Command Security (CMMD) spiked mainly on speculation, even though they saw little tangible increase in revenues or earnings.

Paravant Computers (PVAT), one of my long-time favorites, also spiked sharply and held onto the gains well, as they were the beneficiaries of increased defense spending.

What is a bad sign: Social trends create new business needs while disintegrating others. I do not see many fur coats or horse-drawn carriages around any more.

News and Press Releases

Read what the company is saying about themselves, and what others are saying about the company, and the industry. However, always consider the source.

Some companies pay web sites to promote their stock, so the editors will say whatever they can think of just to get you to buy shares.

Details on the best places to get news releases and press coverage for penny stock companies can be found in Chapter Seven, Information Sources.

What is a good sign: Coverage of the company by major newspapers or relevant trade magazines. Positive earnings releases and quarterly financial reports. Major announcements of FDA approvals, new strategic alliances, share buy-backs.

What is a bad sign: Little or no news is a depressing thing to see, although it is all too common among penny stocks. A company should try to create a buzz with ongoing and exciting advances. Good public relations will help increase awareness of their company, and hopefully generate more buyers for their shares. At the same time, they are showing their accountability by keeping investors and potential investors informed.

By far, the best company for public relations / news releases I have ever seen (and a company which I recommended to my subscribers) was Xybernaught (XYBR). Their interesting technologies allowed for endless public relations hype, and most of their stunts and demonstrations were picked up by major news agencies without XYBR having to do much begging. What the company's wearable computers could do, and the potential applications, was news.

In addition, it was further news when the company's technologies were actually put into use, as they were almost always high-profile clientele. For example, XYBR made hand-held technologies that enabled shorter line-ups at stadiums and airports. It was the stadiums and airports doing the press releases, trying to tell the world how clever they were, and how much better it would be for patrons, while all the time they were selling the benefits of XYBR!

AlarmForce (AF on the TSX), a small burglar alarm-monitoring company, did an interesting thing to help generate investor interest. Each radio or television advertisement that they ran noted at the end that they were a publicly traded company. The ads helped increase sales of their service and investors in their stock at the same time, without any increase in cost. Very smart, while demonstrating a commitment to increasing their share price. This won them a first look from me, and although I had to pass on the stock, I was impressed by the tactic.

New Alliances

When two companies co-operate, they usually (though not always) find a way to help each other make more money. A great example of this would be Yahoo! and the Associated Press. Yahoo! gets the AP news feed to increase the value of their site for surfers, while not having to pay out for in-house production, or for information from another service. The Associated Press instantly gains an incredible reader base. When I was interviewed by the Associated Press on the Enron situation, it was great to see my news story on Yahoo! the next day.

What is a good sign: If the alliance makes instant and obvious sense (like the one just mentioned above), it is probably a good one. Yahoo! and AP. Peanut butter and chocolate.

What is a bad sign: Too often companies create a new strategic alliance for the sake of being able to use the buzz-words or just to feel like they are making some kind of progress. Be wary of those agreements that do not seem to make sense or do much for the company, especially when they hype it like it will completely change the company's future.

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