Valuation and Industry Trends
Financial ratios count for less in penny stocks than
in larger ones, not least because the underlying company
is less likely to have earnings or tangible assets.
The share price can soar on rumours but can just as
quickly drop back if, as is very likely, they prove
unfounded. Some investors buy profitably for the short
term.
Creative accounting is more difficult under today’s
reporting standards than in the past but it is still
worth watching for it on the financial statements.
Check that annual depreciation is not so small that
it barely hits the profit & loss account. Be wary
if an item that would normally be an expense in the
profit & loss account is instead capitalized on
the balance sheet.
Try to predict rather than follow industry trends.
Takeover rumours or corporate restructuring may give
a fillip to the share price.
Management
Assess the management of the companies in which you
are considering investing. Look for leadership and
technical expertise, which are often not combined
in the same people. For example, Charles Muirhead,
a 25-year-old technology genius, employed experienced
management to run Orchestream, his software company
that was listed on the London Stock Exchange in July
2000.
A change in management can send the share price soaring
in anticipation of a positive earnings surprise. You
can gain an inkling of pending staff changes by watching
the company’s recruitment advertising in trade
or national press. |
