Sleuthing your way to an informational edge

Much of what we write about on Stockopedia is about finding an analytical edge, such as using the Stock Report to get a quick initial assessment of a company, or a behavioural edge by using the Stock Ranks. Although it is much harder to do, investors can also get an informational edge by looking where others aren't.

Scuttlebutt & Sleuthing

Philip Fisher called the process of speaking with customers, employees, suppliers, and even competitors to gain a deeper understanding of a company, by a naval term: scuttlebutt. It typically involved gathering information about a company through informal conversations and direct interactions with stakeholders. In his 2007 book The Sleuth Investor, Avner Mandelman describes a similar approach, where he would hang out in popular lunch venues and strike up conversations with employees of the companies he was researching.

Famed short-seller Carson Block of Muddy Waters Research made his name shorting a number of fraudulent Chinese companies that had listed on foreign stock markets in the 2010s. His key advantage was going to the headquarters or factories of the companies (or paying a private detective to go) and seeing if they looked like somewhere that had the claimed scale of operations. In many cases, he found that the companies' buildings had very little activity, and he made money betting that investors would eventually find out that this was the case.

Sleuthing the easy way

Physically going to the company's offices or paying a private detective may be beyond the average individual investor unless they have a particular point to investigate and a significant position. However, the good news is that much of the research can be done remotely using freely available tools. Many investors forget to use these tools. Indeed, I often forget about them myself until I come to write a Stock Pitch article, or have to debate a stock as a panellist. Here are some of the ones I have found useful:

Glassdoor

Glassdoor is an independent employee review platform. Although it is freely available, gaining access can be a little convoluted. The site often asks for a review of an employer in return, which may be tricky for a full-time or retired investor. Still, it is worth persisting with, as the site gives investors an insight into how a key stakeholder, employees, view the business. The reviews employees leave can be enlightening. Glassdoor's summary gives an overview of the ratings, but perhaps more telling is how many people would recommend the company to a friend.

Take, for example, Gamma Communications (LON:GAMA) . Many investors rate this company highly, including the Stockopedia algorithms that give it a 99 Quality Rank:

However, employees view this more circumspectly, with only around half being willing to recommend working there to a friend:

The CEO and business outlook get a more positive view. Investors can also drill down to the areas of strength or weakness:

Investors can also look into the details of some of the reviews. In this case, there seems to have been a noted review deterioration in the last six months. This could be just due to economic conditions. However, a common complaint is lower-than-average pay and high staff turnover. Low compensation isn't necessarily a bad thing for an investor. In many cases, investors have the opposite problem, with high staff pay and bonuses taking the lion's share of returns. However, if many staff complain about low pay and high turnover, this may negatively impact the business. Specific reviews may also yield some more serious concerns, such as this one:

This may not be a true reflection of reality. However, it would certainly give investors in Gamma Communications (LON:GAMA) the impetus to investigate these issues further.

While Glassdoor reviews give an insight into a company, bad reviews don't always mean a poor investment. For example, the CEO of CMC Markets (LON:CMCX) has a terrible approval rating on Glassdoor:

Including some real humdingers of a review, such as this one:

This hasn't stopped the share price performing well since many of these negative reviews were written:

Warren Buffett famously said:

I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.

Perhaps CMC Markets (LON:CMCX) represents such an enterprise.

Shorttracker.co.uk

Investors who short stocks tend to be very savvy. The reason is that short-selling is incredibly hard. Short-sellers are betting against the general upward trend of the market, they have to pay an often significant borrowing fee for the shares they sell and are exposed to theoretically infinite losses when they get it wrong. With all this against them, the short-sellers that survive in the long term tend to know what they are doing. Therefore, investors should pay attention to their opinions. For long positions, the FCA requires firms to declare when they go above 3% of a company's issued share capital, and then at 1% increments. When shorting UK shares, the FCA requires disclosure at the 0.5% level updated for any subsequent change. Investors can download the FCA data and see larger short positions. However, a hedge fund called Castellain Capital has done the hard work for us by creating a website that summarises and tracks these declarations for investors. The URL is www.shorttracker.co.uk

Investors can look up an individual company or see a list of the most shorted. Here's the current one:

There are a few reasons why these shorts may not represent hedge funds taking a negative view of a company's prospects. The first is if there is some kind of special situation, such as a takeover. Some funds engage in what is known as merger arbitrage. When an offer has a stock component, funds buy shares in the acquiree and short shares in the acquirer, hoping to profit if the deal completes. Secondly, quant funds take positions based on their computer model. Typically, this will be based on a type of factor model similar to the Stockopedia StockRank system. While ignoring such a data-driven opinion may be unwise, such models often get it wrong for individual stocks. For example, Hargreaves Lansdown was one of the most shorted UK stocks in early 2024:

This was mainly due to quant funds, which had presumably picked up on the company's poor momentum and high price-to-book value. However, this didn't stop the company from receiving a takeover offer. With heavily shorted companies, it is always worth trying to work out why they are being bet against.

Google Trends

The trend is your friend, they say. While this maxim is usually applied to stock prices, the same is true of the underlying trends that drive consumer behaviour. Knowing the changes in desirability for products can help investors assess the investment case for the suppliers of those products. Thankfully, the largest search engine, Google, allows investors to see the trends in specific search terms. For example, here is the long-term chart for the search term "new homes" in the UK:

There is clear seasonality in the searches, but the overall trends are clear. Zooming in on the last two years:

Comparing this to the share price chart of one of the large UK housebuilders, £TW is enlightening:

The investor enthusiasm for housebuilders in October 2024 was not matched by the same enthusiasm within Google searches. However, this year, the searches are up, but the share price is down. This type of mismatch may represent an investment opportunity.

Looking wider, Crocs has been one of the most volatile global fashion trends over the years. They initially soared in popularity in the mid-2000s before becoming a pariah and then became trendy again in more recent years. This is reflected in the Google trend graph:

And even more viscerally in the share price chart:

On the surface, the company looks like an excellent investment with a StockRank of 97:

However, that downturn in search popularity for a fashion stock should give investors pause for thought.

Google Maps

While investors will struggle to do the kind of direct research that Carson Block did in China, there is often no need to visit a location physically to get a feel for its scale or upkeep. Investors can use the street view function on Google Maps to visit virtually. Even short-sellers these days use the Google map view of locations to see if they match up to expectations.

In a more benign way, I used Google Maps to confirm that there looked to be nothing untoward when RWS Holdings (LON:RWS) wrote down the value of their registered office earlier this year. In this case, a virtual drive-by revealed a fairly modern office block in a good state of repair:

The write-down here appears to be due to the general demand for office space in this location rather than a broader issue with RWS's assets.

Free Research

Finally, many investors know that Research Tree provides access to brokers' notes on many companies. While access to some research requires a paid subscription, much of it is available for free. Given that Research Tree provides the back end for almost all research providers, if investors register for free on the website of the provider, they get access on the Research Tree site, too. Since many companies provide their brokers more "colour" on trading updates and results, reading these can give investors an edge. In a worrying recent trend, some companies have started to issue profits warnings via closet broker downgrades instead of RNS. Although this is probably not the sort of company investors will want to hold anyway, it is another reason to check all freely available sources of information.

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Good luck sleuthing. If anyone has found any other useful sources of "scuttlebutt", please do share them.

Disclosure: Mark owns shares in RWS Holdings (LON:RWS) ]