Wednesday, February 16, 2011

Hint, Hint!

Value investors tend to favour quantitative over qualitative factors when evaluating stocks. Nevertheless, it is absolutely imperative that investors go beyond the quarterly reports in evaluating a company's prospects.

In the past, we have seen many instances where qualitative information gleaned from conference calls has been useful in determining the future direction of the business. For example, it was clear that Acorn International was under pressure to pay out some of its large cash balance. It was also clear that Quest Capital was intending to buy back shares as quickly as regulations allowed. Qualitative factors such as these allow investors to make more accurate quantitative assessments of a company's intrinsic value.

Throughout a quarter, in between conference calls and financial reports, companies will also release material filings. For example, last week GameStop released a filing that gives a strong suggestion that the company is in buy-out talks. The filing stated that contracts with certain executives (including both GameStop's CEO and CFO) were amended such that these key employees could not terminate their contracts following a change-in-control of the company's shares. This suggests a buyer has expressed interest, and wants assurances in writing that he'll be able to keep the current management team. While this particular filing may not change an investor's estimate of the company's value, it does certainly increase the likelihood of a catalyst, for those who are into such things.

For part-time investors, there are options that can make it easier to stay in touch. For example, one can subscribe via RSS to a company's filings or press releases. Investors then only have to consult their RSS feeder every now and then to see all the filings of all the companies they follow. Companies will make disclosures throughout the quarter, and the onus is on investors to follow along.

Disclosure: Author has a long position in shares of GME

No comments: