Friday, November 2, 2012

Alternative information sources

Is more information better?  Is different information better?  Let's face it, as investors what we do is trade on information.  Some could be meaningful such as knowing that a company is selling for less than their cash.  Some could be meaningless, but seem useful, like the fact that the CEO just dumped a bunch of stock.  Our currency is information, having additional information should give an edge, and those with less information should be at a disadvantage.

I remember reading some story about Benjamin Graham and it talked about the fact that he was able to obtain detailed regulator reports showing that the company had far more assets than the market cap, and the investment was almost a sure thing.  When I read this story I had visions of being in the back of some old dusty library looking at an old book making a discovery like this.  Slowly turning a brittle page, and after sneezing realizing that a company had a pile of hidden assets squirreled away only known to a select few.  This is all a fantasy of course, I'm guessing any experience like this now would consist of sitting in front of a microfiche machine, getting bored, and scrolling past that vital piece of information quickly.

The truth is there are many different sources of information that investors can use to find out about a company beyond regulatory filings.  Most semi-intelligent investors are aware of regulatory filings, and read them, or at least have a subordinate read them before making an investment.  There is a cliche on Wall Street that if you read filings you'll do better than 90% of other investors.  Maybe this is a phrase investors like to tell themselves as a way to convince themselves that doing basic due diligence is a special task.  But beyond reading filings, and talking to management there are many avenues for information that few investors take.

The first avenue is former employees.  In the past doing this meant needing to get a hold of a company directory and placing a number of phone calls and networking.  That method of information gathering is as outdated as the the phonebook itself.  Today we have something called LinkedIn, which every person who's between 22 and 45, and either wanted a different job, or thought about a different job has signed up for.  It's easy to reach out to current and former employees via LinkedIn and just ask simple questions.  The idea is to get an opinion on a company from both former and current employees.  Even something simple such as, "what's your opinion of the company? Are you happy with the direction it's headed?" will reveal a lot.  If you get the same answers from both current and former employees you know you're onto something.  Maybe you'll learn nothing, but it's easy, and will usually only cost a simple email.  This method also has the most to lose, be sure to stay very clear of inside information.

For companies that do any government work details about their contracts should be available, if not online through the agency they work with.  Sometimes the contracts aren't all that interesting, but other times you might find out a small piece of information, such as how profitable a certain segment is, or the size of jobs the company bids on.  It could also be useful to know how a company and their competitor bid on the same project, why was one selected over the other?

One route I'm sure not many investors take is using the Freedom of Information Act (FOIA).  Jeff at ragnarisapirate used this to obtain the EPA agreement between the government and Solitron Devices.  Solitron continually referenced this agreement as the reason they couldn't pay a dividend, yet when Jeff got a copy there was no verbiage mentioning this restriction at all.  For an unlisted company that won't release financials the FOIA could be used to obtain tax records and financial information that could help make a more informed investment decision.

My favorite route for information is through local governments.  I was looking for the annual report on an unlisted company and I stumbled upon the finances for a local fire department.  In the fire department's annual report they showed the taxes paid by the largest tax payers in the municipality.  The taxes were shown for the company I was researching, and that small piece of information was enough to rule out a further search.  While I thought this particular company was very profitable, the pittance they were paying the fire department told otherwise.

Regulators are another great source of information.  Banks are required to file reports with the FDIC, insurance companies with the NAIC.  Various other regulated industries with their respective regulators.  Regulator websites can be somewhat clunky, but they often have all of the information you'd ever want to know buried deep within them.

To use a cliche from the business world, investors need to think outside the box when gathering information on companies.  Before leaving this subject I'd be remiss if I didn't mention that more information isn't always better.  My guiding rule has been if I'm looking for more and more information to confirm an investment thesis, the idea isn't cheap enough, or good enough.  When I look for companies I want to find things that I consider so cheap that it's unbelievable.  Once I find a company like this I spend most of my time looking for information that would provide a valid reason as to why this company deserves to trade so low.  Sometimes that information is in one of the above mentioned sources.  A company might look cheap on the surface, but everyone knows the CEO is a snake, or there's an outside shareholder with a crazy agenda.  Those sorts of stories aren't in any 10-K, but yet hold as much informational value as how much accounts payroll grew over the past two years.  I don't think it's necessary to go overboard with every investment, but in some cases it might be the difference between a 30% loss and a 300% gain.

Talk to Nate

Disclosure: Long SODI

7 comments:

  1. This post shows the genius of simplicity, and is probably more valuable than many readers will realize.

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  2. What was the company you stopped researching?

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    1. It was an unlisted company up in MA, they lease land to Ocean Spray, I can get the company name and ticker tonight.

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  3. Have you really done the research-via-LinkedIn-employees thing? I'd expect to be kicked out as a spammer pretty quick if doing it more than very occasionally, and it may turn out expensive if not (don't they charge per-message for emailing outside your connections?).

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  4. Not extensively but yes. You can get a free trial for a month, it is expensive.

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  5. I believe Nate was talking about A.D. Makepeace. (MAKE)

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