When we are thinking about investing in a company we want to find something of value. We do not want to blindly follow the herd and put all of our money into the next hot stock tip. You might as well go to Vegas and start gambling if that is your approach to investing. If you want to become a value-investor you need to do your due diligence and perform some research on a company. This can seem daunting at first as there is a myriad of information on the internet about these companies. How should you start? What information is credible? In today’s article, I’m going to be explaining the best resources available to you to perform research on any company.
Every year a company has to submit a 10-k report to the Securities and Exchange Commission (SEC) which is basically just a comprehensive summary of the company’s performance. This document contains everything you will need to know how that particular company operates! Everything from its origins, organizational structure, financial statements, competition, how they perform in their industry, and much more. The great news is that this document is available to anyone! You can find it on the companies investing website or on Sec.gov. Let’s say you wanted to search for the 10-k on Facebook. Just google “facebook 10-k” and it will be one of the first links. Now let’s get into more detail on the advantages of the 10-k.
- Accurate Info
All of the information in the 10-k is regulated by the SEC so you know it is the most accurate information you will find. Many articles on the internet are written by people who do not accurately know what they are talking about. Other times they litter articles with their own opinions which can inhibit your ability to interpret the information. The information contained in the 10-k is all facts, no opinions.
- Shows How Company Makes Money
Whenever you are considering a company to invest in, you need to understand it’s business model so you know how it makes money. The 10-k outlines how the company makes money in its industry and where the majority of its revenues come from. For instance, looking at Facebook’s most recent 10-k, you will find that 98% of its revenue comes from advertising.
- Describes Competition
In each 10-k, the company will describe how competitive of an environment it operates in and who its main competitors are. Recall porters five forces! It is good to know if there are high barriers to entry and the bargaining power of the top competition.
- Describes Risk Factors
In my opinion, this is one of the greatest sections of the 10-k. The company basically has to explain situations that could be detrimental to their business. You could title this section, “This is how we could get fucked” They disclose all relevant risk factors that are currently present in their business and their industry. These can be industry specific but can also involve government regulations. For instance, all companies in the cellular sector have a risk factor of the government not auctioning off enough spectrum licenses for their growing demand of customers.
- Can Compare Financial Statements
The 10-k Provides various financial statements such as an income statement and balance sheet. These statements allow you to compare a company’s financial data, year over year, to see if the company is growing or not. This is a powerful tool for finding value in companies. If a company’s stock price has been taking a hit recently but it’s continuing to grow financially, then it may be a great investment.
The 10-k is a very bulky and dry looking document. Only a few companies throw some pictures in there and it can be very daunting when you open it to find 100 pages of material. I recommend doing a high level overview and mainly focusing on the sections I described above in the advantages portion of this article.
Understanding the company’s business model is the most important thing you should take away from reading the 10-k. If you do not understand what some parts are talking about, then do a little research outside the 10-k to see if you can find the necessary information. For instance, when I did research on Verizon, I did not fully understand what spectrum licenses were and how they were costing the company so much money to acquire them. I did a simple google search and read a couple articles to fully understand what spectrum licensing was and why it’s so important to Verizon’s business. Often you will find that if you do this research for one company, you can grasp a whole new understanding on an entire industry!
The 10-Q is another document that every company has to file with the SEC quarterly. This is their quarterly earnings report and it describes all relevant financial data to that particular quarter.
**Important to Note* A company will only file three 10-Qs during the year and one 10-k. The 10-k will cover the 4th quarter of the company and has to be filed within 60 calendar days of their fiscal year.
The advantages of the 10-Q are similar to the 10-k but on a much more narrow scale. Since the 10-Q is a company’s performance for that particular quarter it will be very specific and disclose things like:
- Financial Performance compared to same quarter of previous year
- Any mergers/acquisitions that occurred during the quarter
- Any new liabilities taken on
- Any major news that affected the company
- Any share buybacks from the company
The biggest advantage in my opinion is the comparison of financial data from this quarter to the previous year. You need to get a good idea if the company is growing or if it is taking on more liabilities that will inhibit its numbers in the short-term.
Homework: Go to Sec.gov, pick a company, and look for their most recent 10-k. Read through the document and cover the highlighted areas as mentioned in this article. The more you start to dissect these documents, the better and faster you will get at finding value in companies!