Bad 10-Ks vs. Good 10-Ks: 11 Annual Reports I Recommend Reading

by Geoff Gannon

In the most recent podcast episode, Andrew and I were asked what was the easiest thing about investing. I answered: reading 10-Ks and coming up with an appraisal value for the business. I realize that not many people think reading 10-Ks is all that easy.


Well, they might be reading the wrong 10-Ks.   

Some 10-Ks are bad. Andrew and I meet each week to go over a specific stock. He’s a big fan of Apple products. So, this past week, we went over Apple (AAPL). Now, Apple is a company everyone knows. You know how people use their phones – chances are, you have a phone made by Apple or a competitor of Apple. There are analyst reports and news articles trying to guess what the company’s gross margin is on its latest iPhones. You don’t need to read the 10-K to learn about the business. However, I have read Apple’s 10-K and I can tell you it’s bad. It would be difficult for me to ever guess how Apple’s business works, why phone users might or might not be “sticky”, why service revenue would grow over time, etc. just from reading that 10-K.

Contrast this with the annual report of Howden Joinery. Howden Joinery has one of the best annual reports you will ever read. Anyone can read Howden’s 10-K and get something out of it.

The degree of difficulty in analyzing some businesses may be a reason why I’ve had a hard time convincing investors to focus their research on micro cap stocks. With a small stock, there is usually no what I’ll call “silver platter” public information about the business other than what’s in the 10-K. There is still public information about the company, but you’d have to hunt for it. You’d have to act like a reporter preparing to write an article on the company. This is not something most investors want to do. Most investors probably don’t really want to read the 10-K either. But, if you’re reading this blog, you’re at least one of those investors who will admit he should be reading the 10-K.

So, what’s a good 10-K? Someone recently asked me to send him a list of 10-Ks I’d recommend reading. Here’s the reply I sent:

“For educational purposes, here are some 10-Ks I'd suggest reading:

·  Coda Octopus (CODA)

·  Transcat (TRNS)

·  Copart (CPRT)

·  Ball (BLL)

·  Exponent (EXPO)

·  Waters (WAT)

·  iRobot (IRBT)

·  Morningstar (MORN)

You can find all of those on EDGAR.

If you're willing to read annual reports from other countries, I'd also suggest:

·  Bunzl

·  Hilton Foods and

·  Aggreko

Those are all good 10-Ks/annual reports. Most of them have more information about the business model, strategy, etc. than the average 10-K.”

Does this difference between good and bad 10-Ks introduce a bias into my stock picking?

Other things equal, am I more likely to buy the shares of a company with a good 10-K than a bad 10-K?


I’m definitely biased toward investing in companies with good 10-Ks.

And I honestly don’t know how to correct this bias.

I need to know a certain amount before I buy a stock. Depending on the price I’m paying, there are different levels of what I need to know. However, if I’m paying a double-digit P/E for a stock – I need to know it’s a durable enough business and a good enough business. I have to believe it’s going to be competitive in its industry 5 years from now.

So, it can be more difficult to invest in a good business if it’s a micro cap, because the company may not provide information in the 10-K that would help me know why it’s a good business.

With bigger businesses – like Apple – it doesn’t matter what the company says in its 10-K. There’s enough information out there to know why it’s a good business. I have an iPhone, I’ve talked to people with iPhones about what the next phone they buy is going to be, I’ve been in Verizon and AT&T stores that sell iPhones and seen what salesmen play up and play down and how customers think or don’t think during the sales process. So – just by living my life – I’ve done the sort of research that would be my next step after reading the 10-K of a small stock.

Most investors are going to feel more confident investing in Apple than in any small stock. They know Apple’s business well. They don’t know the small stock’s business well. But, if you want to be a good stock picker, you need to learn how to get a lot of the information you’d need just from the 10-K. It’s always good to know whether a business is durable, good, has a wide moat, etc. But, if you can figure out that a business is durable, good, has a wide moat, etc. from something (a 10-K) that most investors don’t even read – that’s even better.

Regardless of whether you’re investing in Apple or Transcat, you don’t just need to be right about the business. You need to be right about the business in a way other investors aren’t.

You can reach Geoff by emailing him:, following him on Twitter: @GeoffGannon, or listening to his podcast. His stock specific write-ups appear on a subscriber supported website: Focused Compounding.