SEC filings can provide enormous insight into both what’s happening within a company and how

investors are reacting on the outside. With a little homework, this insight can be turned into investment
ideas that you can use to profit! Knowing this, let’s take a look at five SEC filings that every investor
needs to know…

1. Schedule 13D/13G
Hedge funds represent a large part of the public markets, recently accounting for nearly 20% of all
trading on the exchanges. Many of them utilize exotic strategies in order to generate hefty returns for
their managers and partners. How would you like to be able to not only determine which stocks they
are involved in, but also what they are trying to accomplish with their investment? Despite the
enormous amount of secrecy surrounding hedge funds, this is possible through SEC filings!

It turns out that even hedge funds are required to report their trades to the SEC when they acquire
more than 5% of a company’s outstanding shares in what is known as a Schedule 13D or Schedule 13G
filing. The difference is simply that Schedule 13D filings are for hedge funds that intend to actively
engage management, while Schedule 13G filings are for those who simply maintain passive investments.

Come the end of the year, the hedge funds are required to report all of their significant holdings in what
is known as a Schedule 13F. This report contains a nice itemized list of all of the hedge funds holdings
divided out by percentage of their overall holdings. This enables investors to see where hedge funds are
most vested and at what prices they are averaged in at – a perfect place to find investment ideas!

Who to Track…
Activist hedge funds are among the most interesting to follow via Schedule 13D filings. Often times,
these funds attempt to work with management to unlock shareholder value. This is often accomplished
through restructuring, exploring a possible sale, spinning off divisions, issuing special dividends, or a
multitude of other methodologies. Ideas regarding possible changes are often expressed in letters
attached to these Schedule13D filings, which spell out exactly why the company’s shares are
undervalued and what they plan to do about it!

Sometimes, if management doesn’t agree with the fund, they may resort to what is known as a proxy
fight – that is, a process aimed at replacing members of the Board of Directors with their own
candidates. We’ll talk more about this later when we get into the Schedule 14A filing…

2. Form 3/4/5
Gordon Gekko said it in the movie Wall Street, and it’s still true today: “The most valuable commodity I
know of is information.” In public companies, those with the most knowledge about the company’s
operations, prospects, and future are the management team – specifically, the CEO and CFO. Since
everyone in this business is out there for the same goal (making money), we can reason that a
company’s officers will trade their own company stock based upon their expectations (with information
we don’t know). Therefore, watching their trading activity can be extremely advantageous! But how is
this possible? Again, SEC filings can provide the missing piece! It turns out that all officers in a company
are required by law to disclose their trades (of their own stock) within five days of making them.

There are several types of filings containing these disclosures. When officers disclose holdings for the
first time, often after an IPO, it can be found in the Form 3 filing. Standard disclosures thereafter can be
found in Form 4 filings. Finally, year-end summaries of their holdings and transactions can be found in
Form 5 filings.

What to Look For…

They key piece of information to look for in these filings is the transaction code.
After all, there are many different ways for executives to receive stock. The
company can simply grant them stock, they can exercise options, they can be
given stock as part of a retirement plan, and so forth. Most of these do not
necessarily mean that the executive thinks the stock will perform well in the
short-term.

The key thing to look for is a type “P” transaction, which indicates that the
executive purchased stock with cash.

3. Form 10-12b
“Sometimes when you mix a fabulous business with a more mundane one, the market values it as a more
mundane business. And literally just separating the two enables the market to understand the values.” -
Bill Ackman

Many activist shareholders push for spin-offs as a means to unlock shareholder value. These situations
typically arise when the activist investor believes that one of a company’s business segments could
achieve a higher valuation as an independent company. The primary targets of such actions are usually
conglomerates who own high-performing business segments that share no synergies with the rest of the
company. For example, maybe a software company wholly owns a data management company - while
the two are related, they may not share enough synergies to justify ownership.

Why Spin-off?
Activist shareholders like spin-offs because they offer a wide variety of benefits to everyone involved:

 Appropriate Valuation - The spin-off enables the business segment to achieve an appropriate
valuation, which could be many times higher than their valuation operating under the parent
company.
 Generate Cash - The spin-off provides an opportunity for the parent company to generate
significant cash on the sale and even unload some of its debt on the new entity.
  Tax Free Distribution - The spin-off enables parent company shareholders to receive “free”
shares in the new company in a tax-free distribution.
 Dividends and Buybacks - Many activist shareholders like to push the parent company to then
distribute their proceeds to shareholders in the form of one-time cash dividends or share
buyback programs.
 Buyout Target - A spin-off reduces a parent company’s market cap, provides it with large
amounts of cash, and helps get rid of some debt on its balance sheet. Activist investors will
sometimes recommend these transactions to make the parent company a more attractive
buyout target.

And spin-offs can also be an attractive investment opportunity for another reason too. Typically when
spin-offs occur, shares are distributed automatically to all parent company shareholders - including
mutual funds and other institutional holders. Now, many mutual funds have to abide by specific
investment criteria based on market cap, revenues, and other metrics. Consequently, some institutional
shareholders may be required to sell their new stock as soon as the spin-off becomes publicly traded.
This windfall of unjustified selling creates an excellent buying opportunity for the enterprising investor.
In fact, published studies have shown that spin-offs tend to outperform the overall market by a wide
margin during their first year!

Types of Spin-offs
There are several types of spin-offs, including:

 Pure spin-offs are by far the most common in activist situations. These spin-offs involve the
parent company selling off 100% of their stake in the business segment.
 Carve-outs are instances where the parent company will retain a non-majority portion of the
new spin-off.
 Stubs are instances where company’s spin-off a minority interest in a business segment.
Typically this is done to generate cash without giving up control.
 Tracking stocks are spin-offs that are designed specifically to track the value of their business
segments.

All of the information regarding new spin-off issues can be found in Form 10-12B, which is filed with the
Securities and Exchange Commission (SEC). Proposals to create spin-offs are often found in 8-K filings
(when proposed by the company) or Schedule 13D filings (when proposed by activist investors).

4. Form 10-K
Most investors start researching a company by looking at its Annual Report – otherwise known as the
10-K SEC filing. This document contains all the public information you could ever want about a public
company divided into two key sections:

 Financial Statements – The most important thing to look for here is the statement of cash flows,
as even net income can be manipulated by management.
  Management Discussion and Analysis – This section contains management’s views regarding
the company. This is great to read in order to get an idea of where management plans to take
the company in the future.

Executive Compensation
New SEC regulations also require
companies to disclose executive
compensation information in what is now
known as the “Compensation Discussion &
Analysis”, or CD&A, section.

This section contains, among other things,

a detailed overview of how executive
compensation is determined, exact
amounts for the company’s top four employees, and a ton of other information that investors may find
useful in evaluating executive compensation.

5. Schedule 14A
Activist investors have one vehicle available to them in order to get changes implemented – the proxy
fight. This occurs over multiple stages, but they are all detailed in the Schedule 14A filing (better known
by those who follow it as the DEF14A filings).

In general, most proxy fights are unsuccessful because incumbent management and directors have a
large advantage – just like in politics! However, many companies are not willing to spend the money
necessary to defend itself in the event of a proxy battle. Consequently, they often respond by either
agreeing with the hedge fund or implementing what are known as poison pills.

These poison pills come in many different forms:

 Adding provisions to the company charter enabling current shareholders to sell their shares to
the acquirer at an increased price.
 Taking on a large amount of debt.
 Diluting shares by granting stock options that vest immediately after a company is taken over.
 Providing customers with huge benefits upon being taken over.
 Staggering board elections in order to prolong the process.

The Process
Typically proxy solicitations work in the same manner:
 Obtain
Shareholder
Officially Lists; Print
Nominate Proxy
Their Own Material;
Directors. and Vote on
Threaten to New Board
Solicit Candidates
Proxies

Conclusion
There are many different opportunities available in SEC filings – these five just begin to scratch the
surface. SECFilings.com provides all the tools and resources that you need to analyze and track all types
of SEC filings using e-mail and RSS alerts.