IS YOUR STOCK ABOUT TO SLUMP?
Discontinuation of Guidance
It’s never been easy to provide quarterly or annual financial forecasts to investors, as the business environment changes over time. Let’s add to the mix the company’s enormity and the chance the projected revenues could be pushed back or bumped up. But it does not give them excuse not to release guidance.
The problem starts when a company suddenly discontinues giving its guidance. Doing so may imply the company has no idea or does not expect to have an idea of when earnings could come in. Such silence may create a huge impact on forward earnings, making a precise prediction impossible. Either scenario is not encouraging. But even beyond guidance, those who are not forthcoming and does not update the investing community about its progress may be attempting to conceal not-so-good news, although this is not always the case. Nevertheless, be alert.
Industry Hints
Firms within the same industry may experience the same trends. It is important to assimilate how the company may be doing compared to its competitors. For example, a particular firm is sustaining a decline in stocks in the United States. Keep an eye on industry indicators to know what is happening in a sector.
Insider Selling
Realistically speaking, insiders at publicly traded firms sell shares of their company’s stock. Some executives unload their stocks for some reasons, such as purchasing a house. Others simply want to lock in profits or diversify their holdings, or both.
Not all insider selling are beneficial. It may be alarming when insiders sell their shares at (or near) 52-week lows, individuals unload a huge percentage of their overall holdings, or a group of executives unexpectedly shed a portion of their holdings. Just take note of this: unloading shares at rock-bottom prices may transcend a bad signal to investors.
Lack of Diversification
Companies need to innovate to stay in the game. They can do so by introducing new products or diversifying product offerings. Firms that do not remain relative are at risk of losing their ground in case another firm unveils better product in the market. Be on the lookout for companies that do not come up with new products or are depending only on the success of one product line.
Missed a Lowered Forecast
Lowering the earnings guidance is a common practice among publicly traded companies, which is normally done when the macroeconomic situation worsens or a company-specific issue surfaces. But they should clear it and strive not to miss the revised projection.
If the firm fails to meet the new estimate, it can negatively affect the confidence of retail and/or institutional investors, as well as their trust on the management. This can make them uncertain about the company’s future, in terms of earnings. Also, analysts could end up lowering their forecasts and rating on the shares for failure to meet projections, which can influence the share price.
Slash on Dividends
Investors love companies that pay dividends, indicating a firm is performing well. But when a company abruptly suspends dividend payment, chances are the company is going through some soft of financial difficulty. If a company stops paying dividends, income-oriented investors and the like may cut or ditch their shares, lowering the turnover in its shareholder base. A dividend suspension may emerge before asset sales, job reductions, or plant closures.
Stop on Repurchases
The company is perhaps short on cash or believes the shares are not a good investment if it has been buying back shares and suddenly stops. Neither situation would be appealing to investors.
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