A Brief Guide to 13Fs and Other Guru Filings

Investors are always on the lookout for stocks that could present attractive investment opportunities. We find out about some of these opportunities from our friends, news articles or blogs we follow. We might even discover a stock by seeing that the business is popular and wondering to ourselves, “Is this company publicly traded?”

One way to discover potential investment opportunities is to look at the stocks that successful fund managers have been buying and selling. If investing greats such as

Warren Buffett (Trades, Portfolio) or
Bill Ackman (Trades, Portfolio) are buying into a stock, it might be a signal that a value opportunity is at hand.

The public receives some insight into what top fund managers have been buying and selling via their 13Fs and other regulatory filings. These important documents give us a snapshot of these firms’ holdings as long as the firm and/or trade meets specific criteria.

In this article, we will take a look at the regulatory filings that investing gurus report, how they can be useful (or sometimes misleading) for investors and how investors can find the data from these filings on the GuruFocus site.

13Fs provide quarterly updates

Any institutional investor with at least $100 million in assets under management must file a 13F with the Securities and Exchanges Commission for each quarter. This form is due within 45 days of the end of the calendar quarter in question (unless the 45^th day falls on a Saturday, Sunday or holiday, in which case the form is due the following Monday).

Congress created the 13F in 1975 in order to provide a public view of the holdings of the largest institutional investors in the U.S. The goal was to increase the public’s confidence in the integrity of the nation’s financial markets.

The 13F provides a snapshot of each firm’s equity holdings at a specific point in time. Investors should note that not every type of investment is detailed in the 13F – in fact, 13Fs are limited to common stock holdings listed on the U.S. stock exchanges, shares of closed-end investment companies and shares of exchange-traded funds.

Stocks that are only listed on foreign exchanges are not required to be reported on the 13F, and neither are preferred stocks, short positions or bonds. Some types of securities will only be reported on a 13F if the firm wishes to report them, such as certain convertible debt securities, equity options and warrants.

Despite these limitations, these reports can still be very useful as a reference for investors, since most individual investors in the U.S. are interested in U.S.-listed common stocks.

On GuruFocus, users can find the 13F portfolio updates of gurus on their “stock picks” page:

The Hot Picks page is another useful GuruFocus feature that can be used to screen for the stocks that have the highest number of guru buys or sells for the most recently reported quarter (see my article “The Most Popular Guru Buys of the 2^nd Quarter” for an example of this).

Aside from only reporting specific types of stocks, there are other pitfalls with 13Fs that investors should be aware of. For one, 13Fs do not disclose stakes in privately owned companies. If an institutional investor owns shares of a private company and that private company goes public, then it may create the mistaken impression that the guru has made a new buy when that might not necessarily be the case.

Additionally, 13Fs do not tell us why a guru has established a stake in a company. It could be a long-term holding or a short-term one. The firm might have negotiated a special deal with the company in question that makes the investment more profitable than it would be for a retail trader. We just don’t know, and that’s why regulatory filings should be taken with a grain of salt. They can be incredibly useful, but they have their limits, just like any data source.

See changes in 5%-plus stakes with 13Ds and 13Gs

If a person or group acquires more than 5% of any class of a company’s equity shares, or already owns more than 5% of any class of a company’s equity shares and changes their holding by 1% or more, they must submit a 13D or 13G filing, also known as a “beneficial ownership report,” detailing the position.

Whether a 13D or 13G is required depends on the filer. The 13G is the shorter of the two filings and can be filed in place of the 13D if the filer meets one of several exemptions detailed by the SEC, such as having no intention of using their 5%-plus stake to attempt to influence the issuer.

The other main difference between the 13D and the 13G is that the 13D must be filed within 10 days of the relevant transaction. The filing requirements for the 13G are a little less strict. Institutional investors are required to file the 13G within 45 days of the end of the year in which they finish above 5%, or within 10 days of first finishing a month above 10% (non-institutional investors must still file within 10 days of acquiring 5% or more of a security).

These forms are helpful because they let the public know when an investor that holds a significant percentage of a company’s shares outstanding has decided to make a change to their holding. Since these investors have a lot riding on these positions, the 13D and 13G filings can be worth paying particularly close attention to.

Trades reported in the 13D and 13G filings will show up on the GuruFocus Real-Time Picks page:

Just like with the positions reported on 13Fs, the positions on 13Ds and 13Gs might not necessarily be new trades (though this is the case the majority of the time). Sometimes, the position change may be due to a private company going public, a merger or some other change in company structure.

Funds are more likely to discuss these significant positions in their letters over the smaller positions that are only reported in 13Fs, which could provide additional insight. Activist investors in particular often write and talk extensively about the companies in which they own a significant stake, as these investors take large stakes in companies with the intention of influencing management to make changes that are beneficial for the company or shareholders.

Insider trading revealed with Form 4

When company insiders make a material change to their ownership of the company’s securities, they must file a Form 4 within two days following the transaction. This doesn’t just include common stock; insiders must also file a Form 4 for derivative securities such as options, warrants and convertible securities.

The group of people defined as the “insiders” of a company consists of the directors and officers, as well as any shareholders that own more than 10% of the company’s shares outstanding. The Form 4 reports both the transaction and the reporting person’s relationship to the company (i.e. Director, CEO, 10% owner, etc.).

Insiders typically have knowledge about their company that the public is not privy to, giving them a more accurate grasp of the company’s future prospects and financial condition as well as how undervalued or overvalued the stock is.

Just like 13D and 13G transactions, the Form 4 transactions made by gurus will also show up on the GuruFocus Real-Time Picks page. GuruFocus also has an Insider Trades page where you can search for insider trades based on your chosen criteria.

If you scroll down to the bottom of the Guru Trades tab on a stock summary page, you can also see the recent insider trades for that stock:

Not all insider trading provides useful information to the public. For example, among mega-cap stocks, the majority of insider selling is usually going to be performed when top executives are granted stocks or stock options as part of their compensation packages. When it is beneficial, executives will often sell some or all of these stocks for a cash profit.

Conclusion

The regulatory filings described above can each be a useful resource for investors in their own right. While there are pitfalls to watch out for with each of them, these pitfalls can be avoided by being aware of what is and is not disclosed in them, and by not jumping to unsupported conclusions. Instead of taking them at face value, investors will benefit the most from these filings by using them as a basis for further research.