Be an Investment Sleuth!

How many times have you heard someone on financial television news say: “This stock is a screaming buy!” But just because a pseudo-pundit on TV is saying it, doesn’t make it true.

Comedian Jon Stewart put it best: “If I had only followed CNBC’s advice, I’d have a million dollars today, provided I started out with 100 million dollars.”

Be forewarned: Some of those “hot stocks” getting hyped on TV are hiding problems.

Corporate managers aren’t always forthright about internal difficulties; they’re understandably reluctant to trumpet bad news. You can’t always count on financial television to get the story right, either.

If a company’s books are murky, management is concealing something. Smart investors just want the facts and the Securities and Exchange Commission (SEC) feels the same way. If a company gives the government bad information, the SEC has the power to punish them. If you want the complete truth without obfuscation, the first place to look is a company’s SEC filings.

Every investor should be familiar with forms 10-K and 10-Q, which detail annual and quarterly performance, respectively. Every quarter, the team of analysts at Investing Daily sift through reams of these documents, looking for justification to hold an investment or a reason to sell. Those are important forms, but there are others with which we should spend just as much time.

Triggering events…

During the pandemic-induced economic crisis, one form we’ve seen a lot lately is the 8-K, which is used to report materially significant events of which investors and the SEC should be aware. A complete list of the triggering events is available under “Fast Answers” at http://www.sec.gov/.

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Among the most common triggers are unexpected financial problems or unplanned departures from the C-Suite. Another important event detailed on the form is a change in a corporation’s bylaws. That could mean, for instance, that a poison pill is being inserted or removed, hinting at a potential takeover.

Forms 3, 4 and 5 also convey useful information. They detail the stock ownership of every director and officer, as well as anyone holding more than 10% of a class of equity securities.

Form 3 is typically filed after a company’s initial public offering (IPO) and then whenever new insiders join the firm. Any changes are reported on Form 4, which outlines the relationship between the reporting person to the company, as well when the transaction occurred and how many shares were bought or sold. Form 5 is the annual statement of beneficial ownership of securities and details changes over the course of the year. These three forms cover all insider investing activity.

Similarly, Form 13G contains a statement of beneficial ownership of common stock by certain interested, though uninvolved, persons. That usually means the stock is controlled by an insider’s spouse or child. Watch these forms carefully because it’s a red flag when an insider starts selling shares.

If corporate insiders are dumping a stock, they know something the rest of us don’t. It’s a tip-off that the people running the company realize that the stock is about to underperform the market. But there’s a caveat: sometimes insiders sell for personal reasons that aren’t related to the health of the company.

If only one corporate insider is selling, or if the stock has run-up quite a bit, it may simply indicate an individual’s desire to pocket profits. But if several corporate insiders are all selling within a short period of time…watch out.

If you begin to see a flurry of selling activity that looks as though major holders are systematically reducing their holdings, it’s a safe bet that something’s not right at the office. Conversely, if insider buying is picking up, it may be time to add to your position.

Form 13D filings must be made within 10 days of anyone acquiring 5% or more of a company’s shares. Someone picking up that many shares could be a precursor to a takeover.

Employee stock incentive plans also are elements to track. You can do that with the S-8, which outlines how purchase plans work, and the 11-K, an annual report of employee stock purchases. A company that keeps its employee’s interests aligned with its own through a cut of the profits tends to be a better performer.

DEF 14A is a notification to shareholders that contains information of matters to be brought to a vote. Knowing what policy changes are under consideration, e.g., executive compensation, options incentives, golden parachutes, board seats, etc., may sway investors to make certain decisions.

Although the forms I’ve just covered may not be as well-known as 10-Qs or 10-Ks, they’re just as crucial. When your hard-earned investment money is on the line, no information is trivial.

Editor’s Note: I’ve just described the sort of in-depth research regularly conducted by the staff of our flagship publication, Personal Finance.

My colleague Jim Pearce is the chief investment strategist of Personal Finance. After weeks of combing through documents, Jim found an impeding technology company IPO that should richly reward early investors. He’s calling his trade the “Tech IPO Retirement Stock.”

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John Persinos is the editorial director of Investing Daily. To subscribe to his video channel, follow this link. Send your comments or questions to: mailbag@investingdaily.com.