Reading in between the lines of press releases is a necessary part of the investment research process to avoid getting tricked by management into buying their stocks. One of the worst feelings as an investor is losing money on an impulsive purchase of a stock, when you later realize you could have easily avoided a loss.
Management of public companies use quarterly press releases to provide transparency to investors through well-crafted commentary sections that surely get appropriately spun by their legal teams. While some investors may find the commentary to be helpful, companies do have a lot of other options when it comes to important disclosures about business conditions and future prospects.
I like to keep a list of companies that have a habit of omitting positive or negative information from their press release that they later discuss in SEC filings and conference calls. This allows me to profit ahead of other investors who will eventually find the positive information after you have already digested it. Buying the stock as quick as you can is the key, before everyone else.
Realizing these omissions can also help you avoid losses by looking beyond some of the fluff. Overtime you will learn how to sniff out press release fluff and start to ask yourself the right “detectivesque” questions as you read press releases.
The importance of developing these research skills is one of the first things we stress upon new additions to GeoInvesting’s research team.
This is a benefit we transfer over to Premium members.
Quick Case Study
Cosmos Hldgs Inc (OOTC:COSM) Can serve as a quick example. The company is an international pharmaceutical wholesaler that imports, exports and distributes pharmaceutical products of brand-name and generic pharmaceuticals, over-the-counter (OTC) medicines, a variety of vitamins, and dietary supplements.
On November 14, 2018 COSM issued its 2018 third quarter press release.
Here is a copy of the entire release (I’m using green to emphasize certain sentences):
Net Profit improved 1,718% to $3.2 million compared to the three months ended September 30, 2017
CHICAGO, Nov. 14, 2018 (GLOBE NEWSWIRE) — Cosmos Holdings, Inc. (“the Company”) (OTCQB: COSM), an international pharmaceutical company, announced consolidated financial results for the quarter ended and nine-months ended September 30, 2018.
Nine months (first quarter through third quarter)
* Operating revenues were $29.3 million for the nine months ended September 30, 2018, a 48% increase, as compared to $19.8 million for the same period the prior year.
* For the three months ended September 30, 2018, the gross profit margin increased to 9.3% from 8.1% for the same period in 2017.
* For the nine months ended September 30, 2018 gross profit increased 30% to $2.1 million from $1.6 million for the same period the prior year.
* Total operating expenses decreased to $2.3 million for the nine months ended September 30, 2018, from $4.4 million for the same period in 2017, which corresponds to a 48% drop year over year.
* Total comprehensive gain was $4.5 million for the three months ended September 30, 2018, a 1,907% increase, as compared to a loss of $250 thousand for the same period in 2017.
Three Months (third quarter)
* Net profit increased to $3.2 million for the three months ended September 30, 2018, a 1,718% increase, as compared to a loss of $198 thousand for the same period in 2017.
* For the three months ended September 30, 2018, net income per share was $0.24, as compared to a $0.02 net loss per share on a fully diluted basis for the same period of the prior year.
Commenting on the Company’s quarterly performance, Grigorios Siokas, Chief Executive Officer of Cosmos Holdings Inc., stated,
“I am delighted to announce that the Company delivered record quarterly net profit and increased gross profit margins. In addition, during this quarter the Company has strengthened its balance sheet and improved stockholders’ equity. We continue to work towards uplisting onto a national securities exchange. We maintain our strong focus on organic growth and strategic acquisitions, starting with the pending closing of Cosmofarm LLC and continuing to look towards acquisition targets in Central Europe and North America.”
The stock was trading near $5.00 at the time of the release. So, an EPS of $0.24 scrolling across our headline news filter immediately intrigued us, especially when the press release bullets showed that the company reversed loss of 2 cents over the prior year. Then the red flags began to emerge.
The release did not contain income statement or balance sheet tables, something most companies include. These tables often offer a quick glimpse of the existence of any unusual and non-recurring items that favorably impacted quarterly sales, net income and earnings per share. On the surface, management was conveying a message that the company reached a net income and EPS milestone by stressing that net quarterly profit achieved a record-breaking increasing of 1718%. However, management did not provide much color on the factors that led to an increase.
The next thing we observed was that management highlighted the 48% increase in revenues for the first nine months of 2018 but did not discuss revenues for the third quarter.
We felt it was unnecessary that the company highlighted that:
“Total comprehensive gain was $4.5 million for the three months ended September 30, 2018, a 1,907% increase, as compared to a loss of $250 thousand for the same period in 2017.”
Although not included in the EPS calculation, comprehensive income includes foreign currency adjustments (positive or negative) that can be fairly large and volatile.
Closer Look Reveals Substantially Different Picture
We began our detective work. First, we dug up the company’s second quarter 2018 earnings press release (which also includes results for the first six months of 2018). In this release, management highlighted the large year over year increase in sales for both its second quarter and six-month time frames. So, why did management omit a revenue breakdown for its third quarter in the November 14 release?
Next, the actual quarterly report (10Q) filed with the SEC provided us with the answers we needed to conclude that the company’s third quarter was not nearly as good as they conveyed, in our opinion. The third quarter income statement compared 2018 to 2017:
- Sales for the quarter were down for the quarter 
- Several line items are present in the other income (expense) area that should be subtracted or added from the 2018 net profit to get a better indication of the true operating performance the company delivered for the 2018 third quarter. Without getting too technical, and after reviewing SEC filings (foot notes and cashflow statements), these are items that could distort the true earning power of the company on a recurring basis, but GAAP (Generally Accepted Accounting Principles) accounting rules require that they be included.
- Non-cash interest expense of $1.2 million  should be added back to net profit
- Gain on exchange of equity investments, and gain on change in fair value of $4.4 million  should be subtracted from net profit
- Gain on sale of Amplerissimo of $146 thousand  should be subtracted from net profit
So, performing the calculation for net profit…
$3.2M + $1.2M -$4.4M – $146K = -146K
…reveals a basically break even quarter. We are not forming an opinion on COSM’s overall business. However, this exercise paints a much different picture than what was portrayed in the company’s 2018 third quarter press release and underscores three major themes GeoInvesting recognizes in an effort to save our Premium Members time by mitigating management’s lack of transparency.
- It’s of vital importance to cross check company information across multiple sources.
- Familiarize yourself with the press release that need to be crosschecked
- Understand that the often media-criticized non-GAAP EPS (aka adjusted EPS) can be a better measure of financial performance than EPS driven by GAAP principles to which regulators require companies to adhere.
If you want to learn more about the GAAP vs. non-GAAP battle, please read this article.
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The work we have done to bring transparency in financial markets has been featured at venues like CNBC, Barron’s, The Wall Street Journal and many other well-respected publications. I am a regular speaker at leading microcap investment conferences, where I participate on panels, and discuss strategies and educational topics. In October of 2018, I presented an elevator pitch on the bullish theme of a Big Data software company, Datawatch Corporation (NASDAQ:DWCH), that recently agreed to be acquired at a 30% premium from its price at the time of the conference. If you would like a copy of the DWCH report please go here to request a copy or link.