I love the idea of using mathematics to analyze different stock picks. It’s why I started this blog and a technique I believe can be extremely useful when looking at stock portfolios. The logic behind using mathematics in equity analysis is simple: Stocks by nature are probabilistic and mathematics gives us the opportunity to make sense of the uncertainty.
In order effectively apply statistics to stocks you first need to understand the underlying up / down probabilities of stocks themselves. This is somewhat less mathematical but a critical foundation to successful Smart Money Math. To determine the likelihood of stocks going up or down in a given period of time there are two unique schools of thought.
In this post (and the follow-on 5 posts) I will go over how to perform fundamental analysis for a given stock. Although the data required to perform this analysis is readily available, most novice investors are unaware of even where to begin. Hopefully by reading this series of posts you can find an edge over these investors and use it to your advantage.
All publicly traded companies in the United States are required by law to file a number of periodic reports letting investors know how the company is performing. These reports are usually released around the same few weeks for most companies four times per year. This is what is referred to as “earnings season” by the media and is often a volatile time for the stock market.
When a company reports results during one of these four periods, it will either produce a 10-Q or 10-K report. A 10-Q report is a quarterly report that is produced three times per year. It is not reviewed by an independent accounting firm (unaudited) but gives the critical financial information for that company over the previous business quarter. A 10-K is the financial report that describes a company’s overall yearly results. It takes data from the previous three 10-Q reports. Unlike the 10-Q, the 10-K is required to be audited by an independent firm.
The data contained within the 10-K and 10-Q is used by all professional investors to help them determine when to buy and when to sell a stock. That is why I believe you should use it too! In addition to listening to the earnings calls (which can often be found on the company’s investor relations page of their website), any intelligent investor will read and understand the five following sections of the current company 10-Q and / or 10-K.
The Securities and Exchange Commission (SEC) has made finding this information for any publicly traded company as simple as visiting the Edgar Database online.
To find the latest (and historical) 10-K or 10-Q enter the company name or ticker in the boxes provided. Personally, I prefer to enter the ticker in lieu of the company name since common company names might be listed under the its parent company registration (e.g. Google is Alphabet Inc.).
When the company page appears enter 10-K or 10-Q in the “Filing Type” box to filter your query. There are numerous other public filing types that are of less interest to us and will clutter up page.
Finally, with the filter in place you can finally select the “Documents” link to read the published 10-K or 10-Q. Note that the Edgar Database exposes historical reports as well so that you may go back and review trends for the company of interest.
By taking a half hour or so to adequately go over these reports will improve your understanding of the company and is absolutely necessary if you want to assess overall health of the business. In my following posts I will go into detail on each of the five 10-K / 10-Q sections mentioned above and provide worksheets to help you easily keep track of the critical reported data.