Analyzing the fine print of companies outside of 10-k
Where do hedge fund researchers who do deep research on companies find out the finer print information on companies like the nature of their revenues and the contracts attached to them and also the more hidden information on related party transactions. I never seem to be content with what I find in 10-ks. I'm only a student so I know I don't have the nearly as many resources as an actual hedge fund but are there are any accessible resources the pros (HF analysts, PMs) use or am I just not looking hard enough in IR and official filings(10-k, proxy, 8-k)? Additionally, what's the best source of news information HF analysts use to follow and track the activity of companies they cover?
Following because I'm also curious. When I research companies, I always try to read a few earnings call transcripts as well. Generally gives me a good picture of what analysts are talking about. Also, compiling press releases.
Earnings call presentations and transcripts. If you go through the last 2 years of earnings calls and transcripts minimum, you’ll get a lot more of the color that you’re looking for. Then all of the other transcripts from conferences companies do throughout the year. Also the investor day is the really big one (sometimes annual, sometimes every few years, sometimes never- depends on company and their opinion on engaging with street). That gives you A TON right there. Sell side has primers and industry research to get up to speed, but end of day you accumulate a lot of knowledge doing this simple stuff across companies and/or an entire sector.
Also those conferences throughout the year that I mentioned, investors attend them in person and meet with management from of all the companies (IR, CFO, CEO etc.) and can get deeper questions answered (the wonderful 1x1s or group sessions in modified hotel rooms). You also set up calls with IR just by reaching out. So between all of that you are the majority of the way there to understanding how the business works, and more importantly the key items that will really drive the stock.
Then you continue with 3rd party transcripts from expert networks- industry insiders doing Q&A on businesses, themes, sectors, or you use these same services to do tailored calls on a topic. Or sometimes it’s just “alt data” (yipit). Then finally, you can attend trade shows, and build up your own personal network of industry people, and do survey work with customers and suppliers. Some hedge funds like to brag about their independent consultants and journalists as well, who paint a deeper picture on the people running the business or whatever else. Oh and tiger global famously spent a fortune paying consultants to do deep dives on industries and tell them things like “software is eating the world” or whatever.
So there you have it! This covers the majority of deep due diligence investors do. As a student, transcripts and investor days and any sell side research you can find is your best friend. Obviously you don’t get access to management though or anything else (a big driver of sell wider services in the first place).
wow this is great info on HF due diligence resources - definitely confirms what I suspected it to be!
Thank you! This is more comprehensive than I could've imagined. Will dive into those
Great summary. Only thing to add is if you do the same research for a few competitors, you will begin to understand the quirks and nuances between each companies within the same industry. One company may pursue more long term contracts in favor of stability while another pursues shorter term in favor of flexibility. In a vacuum, it may be hard to know the pros and cons and impacts of those strategies, but in the broader context of the industry, it will make more sense and may explain other aspects of the business.
I think a lot of it comes from over time gaining a deeper appreciation for what the 10-k actually tells you. Revenue recognition...a product invoiced on shipment vs. delivery vs. installation can be meaningful and impacts collectability risk and cash flow timing...project businesses with large, upfront deferred revenue components may invoice revenue on a gross basis but actually only collect cash net of the upfront consideration, which actually means the EBITDA recognized for the delivery period is almost entirely fake...commissions or other upfront contract costs can be capitalized, in which case EBITDA is likely overstated...a manufacturing business may have a note some of their business relies on third party contractors, which greatly diminishes their influence over timing and product control...an investor presentation may talk about "long term contracts" but a note reveals there is a monthly renewal option...P&L for businesses where revenue is recognized on a "% of completion" basis is almost entirely made up...so on so forth. I think if you are paying close enough attention a 10-k can tell you almost everything about how a business model actually works which gives you enough information to discern how things fall apart or can sharply inflect upwards.
Unfortunately, its hard to actually gain an appreciation for these type of things until something blows up and you're forced to appreciate it.
great comment - obviously the timing of the cash flows is going to be different vs. what is expensed on the income statement, but you are referring to the actual collectability probability could be lower than what the income statement is reflecting? These situations would not be that common though?
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