Michelle Leder unearths nuggets that companies bury in routine Securities and Exchange Commission filings. She blogs about her discoveries at Footnoted.org.
Where's the best place to find these filings?
A number of places: EDGAR (the SEC's online database of corporate financial information), a company's Web site under "investor relations" or a number of free and subscription sites, such as SECWatch.com. Unfortunately, these filings aren't easy to plow through. Bank of America's recent Form 10-K report was over 750 pages. And the language can be daunting.
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So what's an investor to do?
It's up to investors to do due diligence if they want to own individual stocks. If that seems like too much trouble, then maybe you belong in ETFs or mutual funds. Pay attention to key documents, such as the 10-Q, which is filed quarterly, and the Form 10-K, filed annually. Don't rely on a company's glossy annual report with the pretty pictures; you want the 10-K with a lot of heavy writing. Companies are required to file documents, but they're not required to make reading them easy on investors.
What should we look for?
In 10-Ks and 10-Qs, look for the list of the company's risk factors and look at the financials. See whether there are significant differences from what the company reports in its press release. I have yet to see regulators go after companies for overstating facts in a press release. "Record earnings," "record revenue," "record growth" -- when I see that hyperbole, I put the company on my watch list.
Are there other filings to watch?
The other one is the proxy statement: officially, Form DEF 14A. That's where you'll find the juicy stuff, such as executive compensation. I like to pay attention to how much directors are making. The other day I saw three directors of the same company who make more than $600,000 a year each -- for a part-time job. How many questions will they ask? Are they really going to rock the boat? Check out any related-party transactions -- business dealings with insiders or affiliates. Are the deals the best use of shareholder money? Look at how perks are doled out. Use of the corporate jet comes up a lot -- that's expensive. When you see millions of dollars a year spent on personal use of the corporate jet, you have to wonder, When are these people working?
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