Information in SEC filings will often let you know if there's a significant problem with the company before that becomes common market wisdom.
Jeremy Glaser: For Morningstar.com, I'm Jeremy Glaser.
I'm here today at the 2010 Morningstar Stocks Forum, and I'm joined by Michelle Leder, who's the founder and editor of Footnoted.com, which Morningstar acquired a few months back.
Michelle is an expert in SEC filings, and I thought I'd get a chance to talk to her to see how investors could get the best use out of them.
Michelle, thanks for joining me.
Michelle Leder: Thanks for having me, Jeremy.
Glaser: You get a lot of alerts that say "New SEC filing" for one of your holdings. But a lot of them seem indecipherable. You have 8-Ks, you have 10-Ks, you have 10-Qs. How can investors make sense of all of this information that is coming at them?
Leder: The problem, the reason it isn't decipherable is that a lot of companies go out of their way to make it that way, first of all, because the rules are very clear. Companies are required to disclose a lot of information. But that doesn't mean they have to make it easy for the average investor, or even the more sophisticated investor to find the information they're looking for.
As a general rule of thumb, though, you want to pay attention to the key filings that a company that you have an investment in, is making. If it's a small investment, obviously you don't have to pay as close attention. But if it's a significant investment for you in a particular equity, you really need to be paying attention to those filings.
Glaser: What are some of those big filings you should watch out for?
Leder: Well, obviously, the big filings are the 10-K, which is the annual report. And when I say annual report, I don't mean the pretty one with the photographs, and the CEO shaking the hand of the janitor. We mean the actual annual report. The 10-K.
In addition, there are three 10-Qs that the company is required to file. And there are also periodic 8-Ks. I also think it's a good thing to take a look at the proxy statement. And that's sort of the bare minimum. From there you have some additional filings as well, for special situations, and so on. But those are the basic filings you should be looking at.
Glaser: So when you think about the annual report, which is probably the document that investors turn to the most, what are some of the key sections and key areas you should hone in on, and what are parts that you could ignore? Sometimes these things are 300-400 pages long.
Leder: Some of them are actually 1,200 pages long. If you look at Citigroup's 10-K from last year, I believe, it was well over 1,000 pages, if I remember correctly. With the exhibits and everything, it was actually 1,200 pages, which is longer than Anna Karenina, or some Russian fiction. I think we calculated it out; it's not quite as long as Proust, but it's getting close to it.
So, obviously the name of my site is Footnoted.com, and what we pay attention to very closely is the footnotes, because you have the numbers, and then you have the story behind the numbers. And I think that that's important to pay attention to, particularly if it's a significant holding for you.
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Glaser: What are some of the red flags you've seen in footnotes?
Leder: Well, I think you want to be paying attention to some of the legal issues that companies are facing. Now there's a very fine line there because companies will say "We could be sued for this or that or the other thing," and obviously you don't want to be thinking that everything is a significant issue, that the sky is falling. But we've found some really significant things that are disclosed in a footnote in legal situations that turn into a significant legal issue for the company.
I think back to a couple of months ago with Intel, for example. Intel had disclosed an issue with the European Commission. And that turned into a multibillion dollar fine for Intel. And that was a significant thing, and the stock took a hit because of that.
Glaser: So it's always good to take a closer look. Read the footnotes. Make sure that there aren't these hidden issues or potentially explosive issues, but you shouldn't necessarily blow everything out of proportion.
Leder: If everything is an emergency, if everything is a significant issue, you don't know what to do. And these filings, quite frankly, are written in such a dense way. You think it's technically written in English, but it's really accounting-speak mixed with lawyer-ese, to make some kind of gobbledygook language. That makes it very hard for the average person to really cut through and understand, and that's unfortunate.
Glaser: So it could potentially be a lot of reading, but the reward could be pretty large as well.
Leder: Yes, I think, obviously, there's a lot of boilerplate in the SEC filings, and that's what I try to share with people, is that you can pick and choose what you're going to read. Just because there's a universe of filings out there doesn't mean you have to read every single one word-for-word. It's kind of like going to the Borders bookstore, and trying to read every single book. No person would ever be able to do that in their lifetime, obviously.
Glaser: Unlike Anna Karenina you don't have to turn in a book report after reading a 10-K.
Leder: Yes, absolutely. But there is a lot of interesting information in there, and if you just own 100 shares, it may not be as important for you. But if it's a significant holding for you, I think it's something that you ought to be paying close attention to, because there's some good information in there, and it will often let you know if there's a significant problem with the company before that becomes common market wisdom.
In general, what I find is that, the things that we find in the filings are usually a warning that winds up appearing three to six months down the road. So, company discloses something in the filings; it becomes part of the common knowledge in the marketplace three to six months later. That's when the stock falls. Now wouldn't you like to know about that beforehand, because if you know about a potentially problem beforehand, you can decide, "am I going to get out of the stock, or can I tolerate this risk?"
Glaser: Michelle, thanks so much for talking with me today.
Leder: Thanks for having me, Jeremy.
Glaser: For Morningstar.com, I'm Jeremy Glaser.
