What You Can Learn From Shareholder Letters

by Eric R. Heyman

One of the fundamental tenets of our investment philosophy at Olstein Capital Management is that a forensic analysis of a company’s financial statements, regulatory filings and accompanying footnotes reveals the quality of a company’s earnings, the success of its strategy, the sustainability of its performance and the impact of management decisions on future free cash flow. We believe that a forensic analysis of company balance sheets, income statements, and other regulatory filings is more useful when assessing a company’s ability to produce future free cash flow than management forecasts, earnings forecasts, or company visits.

While most investors usually pore over the pages and pages of financial data that companies provide, they often overlook or skim the Letter to Shareholders at the beginning of each annual report. Investors also often fail to adequately read earnings releases, conference call transcripts, the quarterly SEC filing Form 10-Q, other SEC filings (e.g., Form 8-K, proxy statements, etc.) and company press releases. These communications contain valuable information, some of which we uncover by “reading between the lines” looking for “heat” or other subtle messages. Shareholder letters and earnings-related reports usually discuss the company’s recent performance and its future prospects and may provide a more detailed discussion of the strategy that management believes is the right course for the company to follow. A careful reading enables us to determine whether management emphasizes the importance of financial strength, cash flow, working capital controls and the company’s competitive position within its industry. A good shareholder letter, in our opinion, describes how the company’s strategic planning process anticipates and responds to the ever-changing economic, industry or competitive environment and thus provides insight into the quality of management and their commitment to creatin

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Eric R. Heyman is senior vice president, director of research and co-portfolio manager of the Olstein All Cap Value and the Olstein Strategic Opportunities funds.


Roger from Florida posted over 2 years ago:

Surely, reading & analysis of annual reports, SEC filings,letters, etc. are necessary for OCM and similar investment advisory companies.
But I argue that this reading and analysis is neither necessary nor appropraite to the "normal" individual investor.
They should listen to what the market is telling them about both the overall market and individual stocks, rather than reading reports, which are just "promises" about performance.
For the market, look at the indexes price, volume, and moving averages - 50 & 200 day.
Losses (gains) with higer than average volume often indicate selling (buying) by institutions etc., which drive the markets.
For stocks, look at short & long term earnings, price & volume, relative price and moving averages, among other things. (Indicators such as P/E are often unimportant.) By watching price, volume and averages you are listening to the market.

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