What's so great about a 10-K? Two things put 10-K filings at an advantage over other resources, like press releases and presentation slides.
- Companies have to provide a lot of relevant information in a standardized way (or, as the SEC says , "The annual report on Form 10-K provides a comprehensive overview of the company's business and financial condition and includes audited financial statements").
- Securities regulators can penalize companies and management for misleading investors in regulatory filings.
For these reasons, many investors start the research process by reading a company's most recent 10-K filing. As SA Editor Marc Pentacoff put it, " It is not for nothing that Buffett feasted on a steady diet of annual reports for his entire adult life."
Let's take a look at a few recent examples where consulting the 10-K has enriched the analysis.
As of July 1st, bebe reported $53mn in assets and $64mn in liabilities, implying a net liability of $11mn. That's bad, right?Not really. ... Included in the $53mn in assets is $27mn of assets of discontinued operations, both held for sale and not held for sale. This includes the properties they are in the process of selling. However, these properties are currently valued well below market values, so it doesn't make sense to use that $27mn estimate.If we exclude these estimated property values, bebe has $26mn in assets, vs. $64mn in liabilities. This leaves a net liability of $38mn.In the 10-K, bebe noted that after July 1st, it sold its Benicia distribution center for $22mn and two condos in LA for $2mn, or $24mn total. Subtracting the $24mn from the net liability of $38mn leads to a revised net liability of $14mn.
Whatever your own opinion of bebe's balance sheet, there's plenty of material to discuss here, and Margin of Saving does a good job putting these numbers in context, contrasting the book value with potential market value - a critical distinction for investors. As Marc from PRO pointed out when we discussed this article, "Since the sales are material to the company, they must be discussed in filings by law. There is also a hint in that they are held for sale on the 10-K balance sheet."
Marc points out that the "held for sale" assets on the balance sheet offers a clue to guide further research. If an item is discussed briefly in the 10-K, you might find more elaboration in previous filings, such as a recent 10-Q.
Meanwhile, in " A Speculative 14.4% Yield As This Green Energy Company Turns Cash Flow Positive ," SA Marketplace author Richard Lejeune climbs up FuelCell Energy's ( FCEL ) capital structure to discover an overlooked preferred security with some interesting (and complex) characteristics.
Dividends may be paid in cash or shares of FCEL common stock (based on current market prices) at the company's option. ... As per the 8-K filing, FCELB holders originally had the option to convert to common stock at a strike price of $11.50. Note however that this strike price is now $141 per share (see pg. 40 of the 10-K filing ) on a reverse split adjusted basis. That conversion option is of no value with FCEL now trading at just $2.08 per share. The company cannot force conversion of FCELB to FCEL unless FCEL trades at 150% of the conversion price (see section #8 of the prospectus) which is now $211.50. That is certainly not going to happen. FCELB is what's known as a
In discussing this paragraph, Marc from the PRO team said it's "a great example of how 10-Ks can do some of the hard work for you (note, however, that I didn't check all his statements regarding conversion). These figures, and many others, are frequently computed in the 10-K as of the filing date."
I recommend reading the whole article for an example of discussion based in a thorough exploration of a company's SEC filings.
As you can see from these two examples, 10-K filings are rich with information, much of it of substantial benefit to readers. When we talk about writing articles with "edge," it's clear that familiarizing yourself with a company's 10-K is a solid first step.
See also Earthstone Energy: If At First You Don't Succeed, Then Sell The Stock And Try Again on seekingalpha.com