When it comes to fundamental investment research, the 80 / 20 rule, or Pareto principle, regarding cause and effect might not be as applicable as in other industries. The notion that, “80% of an investment thesis comes from 20% of the research” is invalidated by many instances when a single piece of information can completely change investors’ perception of the stock. Thus it is vital to have all of the publicly available information on a company in order to prevent a costly mistake.
To do this, investors gather valuable intel about competitors and gauge the perception the business world has of the company. While Google and other search alternatives might be able to help out with some aspects of this, they can’t find all the information that an intelligent research engine, such as AlphaSense, can provide. AlphaSense enables investors to efficiently sift through thousands of companies’ filings, presentations and transcripts in a matter of seconds.
AlphaSense allows users to easily search beyond their investment universe by using the reverse search technique to look at what others are saying about a company, the relevant macro trends and to understand how other companies use the same accounting method. This can lead to new opportunities and efficient comparative analysis, but most importantly it eliminates uncertainty from the research process.
How to Use Reverse Search
The following searches have become permanent steps in my research process:
The Company and Directors Search
The most straightforward way to fully understand the competitive landscape and the perception of the researched company by the wider public is to simply see where and how the company is being mentioned. In order to do so, I enter the company name into the AlphaSense keyword search box, and enter a ‘minus’ sign before typing the company ticker into the ticker search box.
This will show us all of the mentions of the company’s name in other companies’ filings, press releases, transcripts, as well as news articles and industry journals.
For this example, I researched Spark Energy ($SPKE). The search results show that a significant portion of their top management were affiliated with Azure Midstream Partners ($AZURQ), a company that has been mired with poor corporate governance – which might have played a role in the bankruptcy of Azure.
These findings through AlphaSense helped to raised questions that I might have not otherwise asked myself had I run the same research on a different platform.
Apart from searching for the company’s name, I also search for the names of the board directors and their top management, which can sometimes lead to revealing their past performance or experience that would be otherwise buried.
Business Keyword Search
Another way to learn about a company’s competitive landscape is by searching relevant industry keywords. Many times industries and individual firms use words that are relevant only for them and searching for these specific keywords can show what the investment universe and other companies are saying about it.
One example is my recent research connected to Paradise Inc. ($PARF), a company which produces candied fruit and controls most of the U.S. market share for this product. Because there are not many public companies operating in the same business, it was challenging to find any relevant information until I searched for the term candied fruit on AlphaSense.
The search yielded an interesting piece of information – Seneca Foods ($SENEA) acquired two companies focused on the same product as Paradise in 2016.
This might lead an investor to look further into Seneca in order to assess the threat they pose to Paradise or even try to contact the management of Seneca to better understand if they are seeking to further expand in this area. It could even mean that Paradise could be an attractive acquisition target for Seneca. At the very least, it gives you material information for your investment thesis.
But, what happens when you run a keyword search on a larger industry with many key terms used in disparate ways? AlphaSense can aid those searches, too, by using a proprietary feature called Smart SynonymsTM, which automatically expands user’s keyword searches to include related industry terms. This allows users to search on a basic term and receive results with related synonyms.
Accounting Method Search
Whether companies follow U.S. Generally Accepted Accounting Principles (GAAP), or International Financial Reporting Standards (IFRS), accounting standards are complex and sometimes arcane. This makes it time-consuming for investors to understand the way companies are presenting its numbers.
Using the reverse search method in AlphaSense, I gain a clearer understanding of these accounting principles by looking at how other companies utilize the same method through a reverse search.
For example, I recently came upon “accretable yield”  when researching Great Ajax ($AJX), a U.S. mREIT structure. This is a peculiar way to account for loans with deteriorated credit quality and has been utilized for many subprime loans after the financial crisis.
In essence, this accounting method allows the management to forecast the payments of interest and principle and recognize income on the basis of this forecast, not on the actual real payments of interest and principal. Given the obvious risk involved (it leaves the management with a significant amount of discretion), I had to research the method as much as possible.
A Google search returns only roughly 12,400 results for the term accretable yield, which ends up being only roughly 240 links after duplicates, etc. This does include several helpful links, but it does not provide the whole overview of the situation. I turned to AlphaSense and found that despite its relative obscurity, accretable yield is used by many financial service companies as seen below.
I was able to find many similar mREITs that have used accretable yield almost as significantly as Great Ajax. This allowed me to compare disclosure and description of the accounting method and I was able to grasp the concept within a few hours – instead of days. Furthermore, this search allowed me to enlarge my list of competing companies operating a similar business model to Great Ajax.
By utilizing reverse search in AlphaSense, and many of its connected alternatives, one can stumble upon new relevant information that would be otherwise hidden in the haystack. AlphaSense helps find information that would otherwise be laborsome or impossible to find anywhere else. Most importantly, using Alphasense for this purpose takes away uncertainty from the research process and investment thesis, which is what matters the most.
1. Accretable Yield – Accounting Magic?
Jan Svenda is an independent equity analyst focused on the U.S. Small / Micro-cap space where he searches for long ideas trading around Net Current Assets Value (NCAV) and for short ideas which showcase a significant potential for aggressive or manipulative accounting. Most of his research can be seen on his Seeking Alpha profile alongside a monthly performance of his ideas.