Press Releases Scams And Successes: Reading Between The Lines
Even novice investors are likely well acquainted with Press Releases, however it may serve all investors to review some important aspects of them. Press releases are a means through which companies can keep the public up to date regarding their recent affairs. It is the duty of every public company to keep its investors and indirectly potential investors aware of what is going on in the company. It should not be forgotten, however, that it is in the ultimate interest of the company for the price of the stock to increase. Consequently, companies are increasingly selective about what and how information is presented in such releases.
Your mother always told you, "If it sounds too good to be true, then it probably is." That popular adage holds particularly true with regard to penny stock companies' press releases. Certainly all press releases are optimistic; companies would not release them otherwise. But when looking to invest in a company, be aware of overly ambitious, optimistic, and unsubstantiated press releases. A company that has had annual revenues of 10 and 11 million for the past two years and that claims that the coming year will bring revenues of 40 to 50 million, better have a darn good reason. Examining press releases by breaking down the argument into its underlying logic is an excellent way of uncovering reasoning that has been intentionally muddled to appear better than it is.
For example, if a company says that its software sales increased 300% over the past year but do not indicate what percentage of their total revenue was composed of software sales, be suspicious. If a company does not lay out a detailed plan explaining how they will make money and increase earnings, it is likely that their only source of revenue is selling valueless shares to sucker investors.
Another diversionary tactic more frequently employed by Pink Sheet Stocks but which have also been used by OTC-BB stocks, is ambivalence about their filing status. These companies know that one of the most sure-fire ways to increase the price of the stock and thus the earnings of the investor is if the stock becomes listed on a higher exchange.
(That is, the OTC-BB for Pink Sheet Stocks, the NASDAQ for OTC-BB, etc.) Because of this knowledge, unscrupulous marketing firms or even the companies themselves will release information indicating that they either will file or have filed the financials and paperwork necessary to apply for another exchange.
This release is typically followed by a sharp increase in the stock price, and then?nothing. If pushed the company generally makes up some garbage about how for one reason or another now was not a good time to file after all, but that they had sincerely planned to all along. The reality is, they were driving up the price so that they could dump the stock and make a killing off unsuspecting investors.
Unless you specifically know 100% for sure that the company has actually hired the personnel and then physically handed over the financials to be evaluated, you should follow this simple advice:
When a company says = What it actually means is
We are planning on filing this quarter = We are planning on selling our shares this quarter.
We have filed with the SEC = We will soon be under investigation by the SEC for what we are currently doing.
That is not to say, however, that you should not generally trust and act upon Press Releases. One type of positive Press Release of particular note to Penny Stock investors is when a small firm announces that they have entered into an exclusive agreement with a larger company to perform some function or service for that company. This sort of press release is particularly important for potential investors for a number of reasons. The first is that unlike announcements which optimistically prognosticate about the future, this sort of announcement is verifiable through the partner company. For example, if ABC Internet Technologies Company signs an exclusive contract to provide General Electric with its accounting software for the next five years you can be assured that the price of ABC Internet Technologies Company will skyrocket.
To verify the announcement, you can check with the more established GE who should also release information on the contract. Some of the most pertinent information will be; the size of the contract, the exit penalty on the part of GE, as well as the anticipated initial investment on the part of the Penny Stock Company. This will allow you to predict the new valuation of the company and use this information in deciding on your own plans for buying and/or selling the stock.
Another potentially windfall-esque discovery amongst Press Releases is being on the front end of those to discover a release indicating that a firm which had previously been slated to file for bankruptcy has reached an agreement with creditors to continue.
The proposition of bankruptcy is a very real threat for some Penny Stocks, and as a consequence typically the price of such stocks is trading at only about a cent because if the firm goes under shareholders lose their entire stake. If a company is able to avoid bankruptcy the price will typically multiply many, many times over offering early investors the opportunity to multiply their money 10 or 20 times over in less than a day. (Not bad for a day?s work, eh)
The key to understanding press releases is the ability to simultaneously act upon two contradictory thoughts. Remember that the Penny Stock market, because it is less institutionalized, is often more about predicting the emotional and erratic behavior of your fellow investor rather than simply making the next rational and logical decision based on the numbers. In this sense, it is important when reading a Press Release to consider how your fellow investor will interpret the information initially, for this will come to formulate much of the initial direction and drive of the stock. But it is also vital to consider the Press Release more meticulously.
If you find that the company appears to be leaving important information out, seems to be muddling numbers and percentages, or uses any of the catchphrases for standard scams, avoid the stock altogether. Even if your? fellow investors initially drive up the price of the stock and you believe you could have been at the crest of that rising wave, you cannot be sure when the scam will hit. You can have no idea whether inside investors are planning to dump their stock at 50% 100% or even 200%. And though you may be able to earn a profit once or twice, by playing the game to can ensure that after a time you will guess wrong, sell out too late, and be stuck holding thousands of shares worth less than the paper they are written on.
About the Author: Chad Pington enjoys writing about financial topics, especially Penny Stocks ( http://www.pennystocksbook.com ).