This is Part 4 of the series of posts on my process for selecting and investing in growth stocks. The previous posts can be found here:
Part 3: Journalist Lawyer Scientist
In Part 2, I detailed how I find leads for stocks to analyze. Let’s assume we’ve identified a stock to analyze, so we need to investigate the company’s financial history, business model, market(s), and any relevant recent news.
FINANCIAL STATEMENTS AND KEY PERFORMANCE INDICATORS (KPIs)
Always, always, always get the company financials directly from the company. I can’t stress enough that to ensure accuracy of information it’s important to rely only on financials reported directly by the company. When researching a company, I usually pull at least two years of quarterly financial history. I prefer quarterly numbers because it’s easier to detect brief anomalies, one time effects, and seasonality. The financials can be found in the company issued press release which can be found on the investor relations site of the company website. Just Google “CRWD investor relations” to find the investor relations website for CRWD. The unaudited company financial statements, which include the balance sheet, the income statement, and the statement of cashflows, are at the end of the press release (be sure to scroll down). Some companies (e.g. PTON and SQ) don’t include their financial statements in their press release but opt to issue a shareholder letter instead; the financial statements can be found near the end of the shareholder letter.
Several days after the quarterly financials are released via press release, companies submit their audited financials to the SEC as Form 10-Q (quarterly) and Form 10-K (annual). The financial statements will be identical, but the 10-Qs and 10-Ks will contain additional information (e.g. detailed information about current and non-current RPO, for example) that may not be in the press releases. The SEC maintains a public searchable website called EDGAR that contains all the filings made by public companies to the SEC.
In addition to financial metrics such as revenue, expenses, cash, cashflow, stock-based compensation, etc., etc., companies report other metrics called KPIs. These KPIs will vary company to company, but each company will report KPIs that management considers relevance to the company’s business performance and progress. Examples of KPIs include metrics such as number of customers, net dollar-based expansion rate (DBNER), and so forth. I track KPIs along with some of the financial metrics found in the financial statements. This post about the information sources and how to access them; I will focus on specific metrics, how I track and weigh their importance in future posts of this series.
KPIs are typically reported by the company on a quarterly basis. The company financials and KPI figures can be found in one or more of the following places:
- Company Press Release: Companies typically include their KPIs in their quarterly financial release press releases.
- Company’s Investor Presentation: Many companies have a PowerPoint investor presentation on their IR website. This presentation, which is normally updated each quarter, contains a series of slides some of which contain financial metrics and KPIs. Some of these presentations contain an appendix with several years’ worth of quarterly data. When researching a new company, it’s easier to get two years of data from this source rather than opening eight quarterly press releases one by one. Here is an example of CRWD’s latest investor presentation.
- Supplemental Financial Information: Some companies create a document with summarized financial information and KPIs. Such documents typically contain several years’ worth of quarterly data. This document, if available, is on the investor relations website such as this one on NET’s website.
- Quarterly Earnings Conference Call: Many companies state their KPIs verbally in the prepared remarks portion of their earnings calls. Transcripts of these calls are often available on their investor relations website. Seeking Alpha also makes the transcripts available a few hours after the earnings call.
- Most Recent 10-K: The 10-Ks contain two years of quarterly income statement data (but not quarterly balance sheet and statement of cashflows). Thus, many of the financial metrics found on the income statement can be retrieved from the most recent 10-K rather than from eight different press releases. However, it is easiest to get the data from the appendix of the most recent investor presentation or from the supplemental financial information document mentioned above.
INITIAL PUBLIC OFFERINGS (IPOs)
As mentioned above, I like to get at least two years of quarterly data. For newly public companies or companies that are about to go IPO, the S-1 document will be available on the SEC EDGAR website. The S-1 will contain eight quarters of financials, but this information will be far down in the document (so scroll down until you get there). Prior to going public, companies may modify their S-1 document, and each time it is modified, the company will upload a new or amended version which will be named S-1/A. There may be several versions called S-1/A, and it is always best to work with the most recent version. Note that SPACs are an alternate for companies to become public by merging into an existing public company; I have avoided investing in SPACs because the disclosure requirements are less rigorous than for companies that enter the public market through an IPO process.
BUSINESS & MARKET INFORMATION
Companies describe their business, target market(s), products & services, value propositions, and other pertinent information in their investor presentation. For more detailed information, the annual reports (10-Ks) describe their business in sections of these reports. Information about the business can also be obtained by researching the company’s competitors. Finally, third party companies do market surveys and assessments of companies in specific markets. In the technology space, Gartner (magic quadrant reports) and Forrester Research provide unbiased (probably/usually) assessments of the various competitors within different market segments; these reports can help investors get an understanding of the competitive dynamics within specific technology sectors/markets.
OTHER COMPANY PRESENTATIONS
Public companies will present at investor conferences, and their executives occasionally give interviews to the media. Transcripts, archived webcasts, and/or videos of such presentations may be available on the company’s IR website. Alternatively, when access is not available on the company’s IR website, the information can be searched using an internet search engine.
EMAIL SUBSCRIPTIONS
Almost all publicly traded U.S. companies allow investors to subscribe to email alerts. Such alerts can be set up to receive email notifications of press releases, events, and other information. The alerts ensure that the investor is promptly informed of important developments. To avoid unnecessary email clutter, I only sign up for alerts on companies that I have in my portfolio.
SUMMARY
Most of the information that I use to analyze a company is gleaned directly from the company’s financial statements and quarterly earnings calls. I follow the numbers, and the numbers need to be accurate from the primary source: the company itself. This post described where the information can be obtained.
We must remember that the numbers, as important as they are for assessing a business, are backward looking. It’s easy to rule out a company as an investment if the recent past doesn’t look good. However, investing is also about predicting how the business will perform going forward. If I don’t like the past numbers or their trajectory then I will almost always pass on the investment. The numbers will illuminate problems with a business but not all of the problems. Understanding potential issues that may cause future growth to deteriorate is equally important to arriving at a decision to buy, sell, or hold. In upcoming posts of this series, I will cover how I analyze past numbers, how I track an investment on an ongoing basis, and how I weigh the past numbers together with other information about the company.
The opinions, thoughts, analyses, stock selections, portfolio allocations, and other content is freely shared by GauchoRico. This information should not be taken as recommendations or advice. GauchoRico does not make recommendations and does not offer financial advice. Each person/investor is responsible for making and owning their own decisions, financial and otherwise.