We all know that the junior resource sector offers the potential for spectacular returns – and staggering losses. But many investors don’t realize that a simple half hour of internet research can help stack the odds in their favor when selecting an investment. If the right resources are used.
One website that should be at the top of every stock buyer’s “favorite links” is the System for Electronic Document Analysis and Retrieval, or SEDAR (www.sedar.com). This site was developed to facilitate the electronic filing of securities information by public companies, as required by regulatory agencies in Canada.
By using the “Search Database” function, and then choosing “Public Company”, you can view all of the public filings for any Canadian-listed firm. The site can even search within specified date ranges, to retrieve documents from a particular period.
Of course, a company search will return pages and pages of reports, circulars, and notices. So, where to start? Perhaps the most important document to look at is the company’s latest interim financial statements. This will give the best idea of the company’s current financial health, as well as new developments that may affect their business.
Many investors – if they do look at financials at all – simply check a firm’s profits for the most recent quarter. But such reports offer other valuable information. For example, the company’s cash position. Looking at how much money they have on hand lets you know if a company is well-enough funded to move their project forward. If not, you should expect dilution by means of a private placement to raise the necessary capital.
Along those lines, it’s also crucial to look at share capital. One section of the report will identify the number of shares issued and outstanding for the company, as well as the number of warrants and options, with their associated exercise prices and expiry dates. Without knowing the number of shares issued by the company, share price is irrelevant. A firm trading at 10 cents with 10 million shares out – with a resulting market cap of $1 million – is a different beast than a 10-cent company with 150 million shares out, for a market cap of $15 million. Knowing about a company’s warrants and options also helps flag situations where the share price will hit a wall of selling once these instruments are in the money.
Another, often revealing, detail mentioned in financial reports is management compensation. Many junior companies reward management through fees rather than salaries, and it’s important to make sure that not too much of your invested money is going into an officer’s pocket. Another way for management to be paid is to receive options; also an appropriate form of compensation – assuming it’s not excessive.
After you’ve looked through SEDAR, be sure to also check out www.sedi.ca – a system that tracks trades by company insiders. The website is the not the easiest to navigate, but well worth the effort if it turns up the fact that insiders have been dumping hundreds of thousands of dollars in stock, even as they promote the company to the public.
Here are the steps:
1) Choose language preference
2) Click “access public filings” from top right corner
3) Click “view summary reports” (in yellow) from left hand side
4) Choose “insider transaction detail” and click next
5) Choose “insider” from transactions sorted by section
6) Choose “issuer name” from identify insider or issuer drop-down menu
7) Enter company name
8) Choose “date of transaction” from identify date range drop-down menu
9) Enter date range
10) Do not make a selection in optional criteria section
11) Click “search” at bottom of the page
12) Click “view” (in blue lettering)
Once the information comes up, you’ll be able to see if there’s been any excessive selling of shares by the company’s brain trust. Remember, many individuals running these companies are only paid by means of options; exercising some to take care of the family and pay bills is appropriate – to a certain extent. But if they’re selling more than is reasonable, it may be a sign that they don’t believe the company’s share price is going much above its current level.