The Flow Of Company Information
A basic principle of solid fundamental analysis is striving to find out everything one can about the stock issuer's business. Good analysts and investors search for all material information about a company before starting to do a company analysis project. Gathering information about a company is like turning over all the pieces of a jigsaw puzzle before starting to search for matching pieces. In this article, we'll show you which pieces to look for and how to put them together to solve the puzzle to learn the most about a company.
In the United States, investors are fortunate to have a relatively standardized flow of information from equity issuers. The Securities and Exchange Commission (SEC) has a comprehensive set of rules covering everything from financial statement rules to risk factor disclosure. The SEC also says what companies must present to investors and when they have to do it. For the most part, investors know what to expect and when to expect it. (To read out more about the SEC, see Policing The Securities Market: An Overview Of The SEC.)
Earnings releases are important disclosures of financial information and business conditions because they are timely, even though they are often incomplete. Investors usually have enough information in an earnings release to see how well a company met earnings expectations and how close management's financial outlook matches their own. That's key when reviewing the status of a stock you already own. Reviewing historical earnings releases is also important in building a thesis on a stock you are considering for purchase because they help give the investor a sense of the progress of management's business plan as well as management's approach to disclosing financial results. (Keep reading about earnings in Earnings Forecasts: A Primer and Surprising Earnings Results.)
Investors must be aware of management's outlook and must also be aware of how well management has done with its earnings predictions in the past. While definitely not the only source of information for making predictions, guidance is important in building a set of financial expectations for a company. Examining the trend in historical guidance and how well results matched the reported forecasts can provide a sense of management's understanding of where the company is headed. One can also get a feel for management's conservatism in giving guidance – regardless of whether management tends to "low ball" Wall Street in order to generate positive earnings surprises.
Press Releases and Investor Presentations
Press releases are also the avenue through which companies disseminate earnings warnings. When management becomes aware that the company's financial performance for a quarter is not tracking Wall Street's expectations or its guidance, they will disseminate a press release stating this. The idea is to get material information that could affect a stock's price in the market out to the public as soon as possible. Bad financial news is often released well ahead of actual earnings releases.
Many companies include special presentations on the investor relations pages of their websites. These are usually intended to help investors understand the business and management's approach to running it. They can be an important place to start looking at the fundamentals of the business as they often explain key business drivers, industry exposures and non-financial fundamental business drivers. Management often delivers these presentations at institutional investor conferences put on by sell-side firms. These conferences are typically held a few times a year in big cities throughout the country. Institutional investors have to be invited to attend these conferences, requiring ample trading business. Conferences are typically not open to the public, even though investors can usually get a copy of the presentation's slides from the investor relations page. (Find out more about drivers in Forces That Move Stock Prices and What Is The Impact Of Research On Stock Prices?)
The Bottom Line
Before starting to build an investment thesis on a stock, investors should put their printer to work. Most company analysis files will have at least one 10-K report, several 10-Q reports, a big stack of press releases and hard copies of investor presentations. Once an analyst or investor gets a good base of knowledge from doing this reading he or she can then move on to building a financial model and conducting the financial and business analysis necessary to develop a good investment thesis on a stock.
By Bryn Harman, CFA, Contributor - Investopedia Advisor
Bryn Harman, CFA, is a seasoned investment professional, amassing over 13 years of experience in the fields of corporate finance and investment finance. His focus has been on bottom-up fundamental analysis of small cap companies for over seven years. Bryn is currently the Director of Research for a value-oriented investment firm in the Northwest. Bryn has a Bachelor of Commerce from the University of Saskatchewan, Canada.