When Yawns Turn to Gapes

Until recently, there was little danger of confusing SEC filings with anything interesting say a best-selling novel or a hard-hitting newspaper story. In the days before the scandals, plowing through SEC documents, such as 10-Qs, 10-Ks and proxy statements, required a particular kind of patience and a peculiar appetite for nitty-gritty detail: So they've decided to capitalize rather than expense this.

Until recently, there was little danger of confusing SEC filings with anything interesting — say a best-selling novel or a hard-hitting newspaper story. In the days before the scandals, plowing through SEC documents, such as 10-Qs, 10-Ks and proxy statements, required a particular kind of patience and a peculiar appetite for nitty-gritty detail: “So they've decided to capitalize rather than expense this. Very interesting.”

However, as one of those freaks who actually enjoy time with regulatory filings, I am here to tell you that the world of SEC documents is boring no more. In fact, if you find the right company at the right time, they can be downright entertaining — as well as profitable.

Bigger is Better

One of the things that has changed about the filings in the last few years is that they have grown substantially in size. Exhibit A: General Electric's third quarter 10-Q. At nearly 100 pages, it's three times as large as the one GE filed for the 2002 third quarter. Packed into those extra pages are rich (no pun intended) details on the inner-workings of one of America's largest companies — much more interesting stuff than I found in Jack Welch's best-selling biography.

GE is not alone on this account. In the extra pages of their filings, an increasing number of other firms are airing all sorts of dirty laundry, and it can make for some interesting reading. Of course, most of the good stuff is buried in the fine print (that is, the footnotes) — an area that many companies assume, correctly enough, that few people bother to read.

Except for me.

Every weekday, I pore over new filings, looking for juicy tidbits that investors can use to make more intelligent stock-buying decisions. The main goal of this research is to inform my writings on the subject (I've authored an investor's guide and I maintain a Web site, footnoted.org). But in my travels, I've also picked up more than a little insight into how to manage my personal investments.

For starters there's this: Instead of relying on gut reactions based on skims of company numbers, I now understand the value of taking the time to understand what's really going on within the financials of a potential investment. If the fine print also delivers some salacious information — over-the-top perks of upper-level managers, hyper-creative accounting — all the better.

Where Credit's Due

Here's one example of a benefit of reading the fine print. In early November CompuCredit, a fast-growing secured-credit card issuer, issued a press release trumpeting estimate-beating earnings of $1.11 per share. The news gave its stock a 20 percent bump to $24. However, the company also had some bad news to tell: At the SEC's insistence, CompuCredit needed to revise its revenue-recognition practices, which apparently were resulting in some chickens being counted before they were fully hatched. Despite the fact that this news was released the same day as the earnings, CompuCredit did not mention it in the earnings press release. Instead, it filed an amended 10-Q and 10-K. As a result, few investors had anything but a rosy picture of the company, when in fact they should be probably be viewing its results with some skepticism.

Of course, not every company uses the regulatory filings to obfuscate. Some, like Microsoft, strive for clear, concise filings that average investors can understand. Still, even for the most forthcoming of companies, there seems no shortage of attention-grabbing detail for those who are willing to invest the time uncovering it.

For instance, Krispy Kreme's former CEO and a former company director recently received $67.5 million from the company for six stores in Dallas and Shreveport, La. Whether this transaction masks impropriety — and I have no knowledge whether it does or does not — it still gives investors an important starting point for finding out (a) the average fetching price of a Krispy Kreme store or (b) a way in which executive compensation might be delivered on the QT.

Eventually, corporate executives will start paying closer attention to this kind of thing and how it looks to ordinary investors. Until then, get out your magnifying glasses.

Writer's BIO:
Michelle Leder
is a freelance journalist and author of Financial Fine Print: Uncovering a Company's True Value. She also maintains a Web site, footnoted.org.

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