Due diligence

Here are places I look for information when researching a stock.  There is a lot of useful information online that you won’t find in the 10-Ks and other documents filed with regulators.

Is management promotional?

Is the company paying for blatant stock promotion?

Some companies will give money to stock promoters.  These promoters will often state how much they were paid (to avoid legal repercussions).  You can find evidence of paid stock promotion simply by searching for the ticker symbol(s) of the company, the company’s name, and words like “sponsored”, “client”, “advertisement”, “pump and dump”, etc. Some companies (e.g. Canadian Orebodies) will even issue press releases about their own paid promotion.  The disclaimers look something like this:

DISCLAIMER: This newsletter is a paid advertisement and is neither an offer nor recommendation to buy or sell any security. We hold no investment licenses and are thus neither licensed nor qualified to provide investment advice. The content in this report or email is not provided to any individual with a view toward their individual circumstances. Millionaire Media, LLC and Market Authority, LLC, have been compensated one hundred thousand dollars [emphasis added] by Sherwood Ventures for the distribution of this particular email. Any future email regarding a specific company will be the result of an advertising and promotional campaign for which Millionaire Media, LLC and Market Authority receives compensation. This compensation constitutes a conflict of interest, as to our ability to remain objective in our communication regarding the profiled company. Because of this conflict, individuals are strongly encouraged to not use this newsletter as the basis for any investment decision. Millionaire Media and Market Authority do not hold positions in the covered company.

While all information is believed to be reliable, it is not guaranteed by us to be accurate. Individuals should assume that all information contained in our newsletter is not trustworthy unless verified by their own independent research. Also, because events and circumstances frequently do not occur as expected, there will likely be differences between the any predictions and actual results. Always consult a real licensed investment professional before making any investment decision. Be extremely careful, investing in securities carries a high degree of risk; you may likely lose some or all of the investment.

Note that some promoters try to bury the disclaimers by making them unnecessarily long.  They will sometimes spell out dollar amounts in words instead of using dollar signs and numbers.

The shocking and surprising thing is that many publicly-traded companies do engage in paid stock promotion.  This practice is more common for mining companies (even seniors), independent oil & gas, Chinese reverse mergers (Chinese companies that became listed via a reverse merger with a shell company), OTC bulletin board, and Pink sheet stocks.

In the process of searching for sponsorships, you might discover that a company is sponsoring charities or charity events.  This could be a sign that the company is wasting money on frivolous spending.  In the case of Ebix, the charity that Ebix donates money to is a self-promotional vehicle for the CEO and is arguably an abuse of shareholder dollars.  Many fraudsters (e.g. Bernie Madoff) donate money to charity so I rarely see charity donations as a positive sign.

Find other writeups on a company

For Chinese reverse mergers, it is extremely helpful to scour Google for information that others have written up about that company as there may be evidence of fraud.  One way to find this information is to Google “(name of company) fraud”, “(name of company) pump and dump”, etc.

It is also worth looking for others’ writeup on a company simply to consider alternative viewpoints.  Value Investor’s Club and Seeking Alpha are places to look for writeups.  There’s also Sumzero but I don’t find the quality of writeups there to be very high.  And of course it is worthwhile to use Google to find writeups.

Court filings for class action lawsuits sometimes have excellent research and sometimes lay out the short thesis on a stock.  While I don’t like lawyers in general, court filings can contain very good and obscure information.  You can save a huge amount of time by simply reading the lawyers’ arguments against a company.

Company website

Obviously, you should start with a company’s website and look at any investor presentations and fact sheets.  The overall level of promotion in presentations is usually a good indicator for how promotional the company is overall.  Non-promotional companies tend to lack presentations, have ugly websites, don’t run conference calls, and don’t spend any money on graphic design for the annual report.

Press releases are worth reading to see how promotional they are.  However, this can sometimes be time-consuming as the most important information may be buried inside a press release.  They’re worth skimming to see how much spin and promotion is involved.

Conference calls

I find my time better spent reading transcripts rather than listening to the call.  CEOs will often provide information on their strategy.  This information often isn’t found in the 10-Ks.  The transcripts are sometimes worth reading because the CEO may be unusually evasive on certain topics.

Detecting fraud

Does the company seem to be operating a real business?

If the company is selling consumer products, then there should be lots of independent product reviews on the Internet.

Do the production facilities actually exist and operate at stated capacity?  When dealing with Chinese reverse mergers, visiting physical locations (without management) would likely give you a huge edge over other investors.  Many investors have discovered frauds this way as they realized that there is no operating business.  Unfortunately, I have never done this and don’t live in China.  I rely on other people posting their work online.

Does the company’s product actually make sense?

Go to the website and see if the website actually works.  Research the product vertical to see if the product actually makes sense.

Are the endorsements real?

Sometimes fraudsters will say that authorities (e.g. universities, newspapers like the New York Times, etc.) have endorsed or mentioned a product.  This may be a complete lie!  Go Google search the authority’s website to try to find these claims.

With pump and dump stocks, many university professors are often tricked into making a comment about a product or signing some document that allows the stock promoters to claim that the scientist is working for the company.

Do the financial statements make sense?  Does the level of R&D make sense?

Read the financial statements to figure out how much was spent on R&D over the years.  With blatant pump and dumps, it is common for R&D to be too low.


Official pages on Facebook

Almost all companies will have Facebook pages specific to that company.  The section for “Recent Posts by Others on (name of company)” is particularly useful as it contains unfiltered comments by a company’s customers.  You can quickly get a sense of what customers think about a company as there are a huge number of comments on Facebook.

While it is possible for companies to have shills/”sock puppets” post positive comments about a company on Facebook (via fake Facebook accounts or paying real people), I don’t believe that this is currently a common practice on Facebook.  Some companies will employ these tactics on online forums, Twitter and Wikipedia so you have to be careful about the credibility of information on the Internet.


On glassdoor.com, you can look up employee reviews of a company and compare those reviews to competitors.  This gives a sense of relative morale between different companies in a field.  However, I’ve never found this to be useful as morale doesn’t seem to have much of a correlation with a company’s performance.  Some of the most successful companies in the world work their employees very hard and have poor morale (e.g. Walmart, Stericycle, DaVita).

Where Glassdoor is more useful is to look at whether employees think that their employer is ethical.  This is one way to figure out if the company has unethical business practices (e.g. DaVita).

Online reviews

For most (though not all) companies, there are online reviews of their products. You can find these easily by Googling “(name of product) review”.  Yelp, Amazon and Youtube are other places to look for reviews.

You have to be slightly careful about shills.  Many companies will hire public relation firms to write newspaper articles so that lazy journalists will copy them (sometimes word for word).  This is why journalists talk about amazing food at Google’s campus, how app developers are making tons of money (this may be a lie), etc.  It is unlikely that journalists would come up with these ideas on their own (e.g. why would they visit Google’s campus, eat at the cafeteria, and decide to write about the food instead of technology?).  Paul Graham has an excellent article on the PR industry.  On the Internet, some companies will hire shills or have affiliate marketing programs that ultimately lead to affiliate marketers engaging in sleazy tactics.  If researching somewhat shady products such as those marketed via multi-level marketing, you need to be a little careful about misinformation.

For particular industries, online reviews can be misleading when only the unhappy customers will post reviews of a company.  You can try to get around this bias by comparing a company with its peers.  However, I don’t always find that customer satisfaction (relative to peers) corresponds to higher profitability.  Some companies are successful because they cut corners (e.g. DaVita).

Visiting stores

I usually don’t do this because I don’t like talking to strangers.  You can usually find honest customer opinions and pictures of store layouts online.  I also find that visiting a retail location can lead you in the wrong direction.  Normally I would consider long lines to be a good thing.  However, it could simply mean that a particular business isn’t very efficient at serving customers.  I am also dazzled by pretty decor and storefronts.  However, some of the most profitable businesses around don’t look very sexy.  Dollar stores can be extremely profitable but their decor is rarely impressive.  MTY Food Group owns the Canadian license to Taco Time.  Taco Time is a second-rate Taco Bell knockoff and never impressed me.  Unfortunately, my prejudices against Taco Time have kept me away from researching and buying MTY stock in the past.

Researching company insiders

Where has management worked in the past?  What is their track record?

You want to Google the insider’s names to figure out where they have worked in the past.  Oftentimes, the material filed with regulators will omit anything embarrassing or shady.  You especially want to know if management was previously involved in failed companies, pump and dump stocks, etc.  You also want to know if they were any good at their old job, if they have relevant experience, and if they are running other companies.  Many of the part-time CEOs of TSX Venture companies don’t have a lot of experience in their field and don’t know what they’re doing.  Many of the head geologists have never been part of a team that discovered an economic deposit.  Frank Smeenk of KWG Resources used to be a lawyer.  Ironically enough, he ran into trouble with the Ontario Securities Commission in the past.  He also has never discovered a mine in his life before he ran a junior exploration company.

On the other hand… sometimes a company with a bad CEO will discover a mega-deposit like Voisey’s Bay.  So, you shouldn’t get too hung up on management’s lack of skill and qualifications.

Did they lie about their degree?

I don’t go to this level of detail, but there have been cases of CEOs lying about their credentials.

Junior exploration stocks

Joint venture partners

In joint ventures, one partner may want to distance themselves from the other partner’s promotion as the partner may be promoting the deposit in a way that is barely legal.  You can gain a lot of information by looking at what the more conservative joint venture partner is saying.  Barrick for example is saying that it has no current plans to build the Donlin Creek project (in other words, it is currently uneconomic) while its partner Nova Gold is much more promotional.  As well, actions speak louder than words.  Oftentimes a joint venture partner will choose not to commit funds to a project.  This suggests that they expect a poor or negative return from investing more in the joint venture.

Read the local news

(I don’t do this.)

Some companies will not release material information right away (e.g. mine deaths, protests, dead protestors, kidnappings of company staff, etc.).  The IKN blog has many examples of this.  I don’t invest in companies exploring in exotic locations, but you can gain an edge by staying on top of the local news.

Investor presentations

Sometimes these presentations contain useful or interesting technical information on a deposit that isn’t part of the documents submitted to regulators.


Books can be very helpful in understanding a particular industry.  I’ve found books written by successful CEOs to be the most useful. Books written by somebody with a lot of access to the CEO are also helpful (e.g. The Snowball, Tap Dancing to Work, Steve Jobs, etc.).

Some of the most interesting books are “tell-all” books by people who have left a particular industry and don’t hold anything back in revealing the industry’s problems.  Trading with the Enemy (Nicholas W. Maier), Confessions of a Stock Analyst (Reingold), The Whistleblower: Confessions of a Health Care Hitman, and The Buy Side (Turney Duff) all have interesting insights on the illegal and unethical behaviours in particular industries.

Books written by full-time writers and journalists tend to be less helpful as the writers tend to have little real-world business experience.

Miscellaneous tools


This website is a good tool to look at historical copies of a website.

Google cache

Using Google’s cached version of a website will allow you to read content that would normally be hidden behind a “paywall”.  Very useful for the Wall Street Journal.

Site search for file types

You can search a company’s website for PDF files through Google’s advanced search.  Oftentimes, a company will keep analyst reports and internal documents on their website.  (Juniors do this a lot for analyst reports.  I don’t know if they are violating copyrights by disseminating those reports.)  If you find these reports, it is likely that the company is using them as promotional tools.

Tools I haven’t figured out


Tineye.com is an image search engine.  It can sometimes find instances of the same image on other websites.  You can use Tineye to figure out if the image used is a stock photo or an image stolen off another website.  I haven’t figured out a useful application of Tineye.

WHOIS, betterwhois.com

Webmasters will usually register a domain name for their clients.  In almost all cases, domain registrations will have real information (email, address, telephone number, etc.) for the person registering the domain.  This is a lot of information that can be used to stalk the person registering the domain.  There are tools on the Internet (e.g. domaintools.com) that allow you to figure out all other domains registered with similar information, previous domain history, etc.  You can find out an incredible amount of information on the webmaster and all the other companies he/she has built websites for.  If you Google their email, you can find their various online accounts and handles used online (which allows you to figure out their other accounts).  You can find the person on LinkedIn and figure out their employers, alma mater, and work history.

I haven’t figured out a useful application of this.

Networks of shady people and suppliers

There are groups of people out there who make a business out of continually running stock market scams.  I believe that these people all know one another and have a tendency to use the same investment banks (e.g. Rodman and Renshaw, Roth capital), the same investor relations firms (CCG IR), and the same auditors.

If you figure out these networks, you can put together lists of potential short selling candidates.  When I’ve tried this however, I end up finding too many crowded trades.  I tend to avoid crowded shorts as I have had bad experiences with them in the past.

5 thoughts on “Due diligence

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