Investing in Stocks:
Gaining Insight through Company Quarterly Filings

One of the most important things to look at when making an investment decision is the company's quarterly (10-Q) and annual (10-K) filings. These are reports that every publicly-held company is required by the SEC to file. They outline the company's financials in detail, and often contain insight into operations, business processes and new sales/marketing initiatives.

While some quarterly reports are minimal and basic, including only the minimum amount of bean-counting required by the SEC, most take the opportunity to release important information to the investor and analyst community, to highlight their strengths and explain their weaknesses, and to make announcements of new programs.

Often, companies will also make a prediction as to what the EPS (earnings per share) results will be for the coming quarter and fiscal year. This prediction is not required by the SEC, but it is often included in the filing. In addition to the prediction of coming quarters, the report will also state whether or not the company met the prediction that was made in the previous quarter. These predictions take on enormous importance. A stock price may go down, for example, if a forecast has not been met, even if the company is still profitable and all other fundamentals are solid. Various stock analysts will also make their own independent predictions as well.

Because these forecasts take on greater importance than they often should, companies will often partake in a non-GAAP adjustment to try to shoehorn their numbers into what was an overzealous forecast. Here's an example: Suppose a forecast predicted a ten cent EPS, but the actual results came in at nine cents. The company is still profitable, but the penny shortfall means the share price will go down, and analysts may lower their recommendations. So the company looks to see if there were any one-time significant expenses. Taking away those one-time expenses, such as expenditures for a new building or a special acquisition, the EPS gets adjusted, and they then exceed the forecast, which assuages the analysts and investors to at least some degree. The stock may not go up, because everybody realizes that this is a "fudged" number, but it won't go down either, because the shortfall may not have extenuating circumstances.

What to look for: It's always important to look at the past few quarterly filings and the past annual filing when deciding on whether to invest in any particular stock, to get a good idea of what the company is doing, whether they meet those expectations on a regular basis, and what plans are for the future. The importance of these quarterly reports is evidenced by the fact that the share price often rises or drops significantly, sometimes out of proportion with underlying fundamentals, immediately after the report is released. Immediately after the release is also the time when stock analysts release their own recommendations, so this is a particularly volatile time. If you expect a stock to perform well and meet expectations, buying just before the report is released is often a good strategy for taking advantage of a short-term spike in share price.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.