Chapter 11. SEC filings & earnings

SEC EDGAR and report types

Filings by US listed companies are free for anyone to read on the SEC’s EDGAR (sec.gov), the counterpart of Korea’s DART. Reports are identified by name (form number).

What to read first in a 10-K

1. Item 1. Business: what it sells, who its customers are, and which segments and regions revenue comes from.
2. Item 1A. Risk Factors: risks the company discloses itself. Comparing items newly added each year shows what the company has started to worry about.
3. Item 7. MD&A (management’s discussion and analysis): management’s explanation of why results came out as they did, and segment numbers.
4. Notes to the financial statements: revenue recognition, segment information, stock compensation, debt maturities, lawsuits.

Form 4, 13F and 13D: who is buying and selling

• Form 4: executive sales usually follow pre-set trading plans (10b5-1 plans) or raise cash for taxes on shares received as stock compensation, so one sale alone is hard to judge. By contrast, several executives buying in the market with their own money is relatively rare and worth noticing.
• 13F: you can see famous funds’ holdings, but they are as of quarter end and published 45 days later, so the information is already stale. Some short and options positions don’t appear, so it doesn’t show the whole strategy either.
• 13D: a signal that an activist investor has built a stake, which may be followed by demands for management changes or shareholder returns.

What an earnings release contains

US big tech companies usually publish their numbers first in a press release after the close, and 30 minutes to an hour later management explains them and answers analyst questions on a conference call. Dates are listed in the US market calendar.

• Headline numbers: revenue, EPS (usually non-GAAP), key segment metrics
• Guidance: the revenue and profit outlook for the next quarter (or year). The stock often reacts more to guidance than to last quarter’s results.
• Capital allocation: buyback size, dividends, capital expenditure (CAPEX) plans
• What is said on the call: management’s wording on demand, pricing, inventory and regulation. Even with good numbers, the tone of the call can reverse the after-hours price.

GAAP vs non-GAAP, and stock-based compensation

GAAP numbers are the official figures under US accounting standards; non-GAAP numbers are “adjusted” figures the company recalculates after excluding some items. Commonly excluded items are stock-based compensation (SBC), amortization of acquired intangibles, restructuring costs and one-off legal costs. The market’s consensus EPS is usually on a non-GAAP basis too.

Reading the reaction to earnings

The stock reacts to the gap from expectations more than to the numbers themselves. Expectations come in layers.

1. Consensus: the average of analyst estimates. The published expectation.
2. The market’s real expectation: if the stock rose sharply before earnings, expectations have climbed above consensus. That is why a stock can fall even after beating consensus.
3. Guidance and key metrics: even with good revenue and EPS, the stock falls if guidance or the segment metrics the market watches fall short of expectations.

The expected move priced into options

Just before earnings, the prices of options expiring that week contain the move the market expects. Dividing the cost of buying both an at-the-money call and put (a straddle) by the share price gives a rough expected move.

What happens after earnings

The gap right after earnings is only the market’s first reaction. Academics have long studied the tendency of stocks with better (worse) results than expected to keep moving in the same direction for weeks to months afterward, called post-earnings announcement drift (PEAD). One interpretation is that information is not priced in all at once but gradually, through analyst estimate revisions and institutions trading over time.

• Watch the direction of estimate upgrades and downgrades over the weeks after the report.
• If most of the first day’s gap is reversed within a few days, the market may have judged the first reaction excessive.
• Many studies find this tendency has weakened as it became widely known. Use it as a tool for interpretation rather than as a rule.

Reading buyback announcements

When a US company announces “a $50 billion buyback authorization”, it means the board approved a limit, not that it will buy that much right away. The actual amount bought is shown in the share repurchase table of the quarterly and annual reports (10-Q, 10-K).

Since 2023 the US has levied a 1% excise tax on buyback amounts. Whether a company favors dividends or buybacks is also tied to its tax situation and shareholder base (details need confirming).