Who buys your stock can be more important than how much of it they bought!
The idea is simple. If a powerful institution is buying up a stock, then others are likely to follow. Those institutions that follow will drive the stock price higher.
But sometimes a big purchase may not work out. That's because those big investments are often times the ones that precede a proxy fight for control of the company. Those tend to be long, drawn out battles that do not always have a positive outcome for shareholders. Investors that follow those false leads do not get what they were hoping for.
However, lately there have been a number of big moves by stocks due to institutional investors and their purchases. Most go unnoticed by investors and the media.
In this article, I will share with you specifics on three different types of institutional investors. I will show some examples of each, how to spot them, and then tell you how to profit from this knowledge.
The Obvious Institution
How would you know the agenda of the buyer based solely on the name of the firm?
Not all investments are as transparent as the activist variety. The activists make it clear to the company and investors that they want to enact some radical changes. Press coverage generally follows, some getting more than others. The activist is generally the easiest to spot. Examples of activists include Carl Ichan, Pershing Square and Third Point.
Carl Ichan has been the subject of numerous shareholder activist campaigns and has emerged as both the victor and loser. Pershing Square recently forced change at the top of Canadian Pacific (CP) via a proxy fight. And Dan Loeb recently won his way onto the board at Yahoo! and has already made a big impact. These public battles are easy to follow as the media loves a boardroom struggle.
You can generally see the activist coming even if they don't announce it to the press. They will file a 13D, not a 13G. The D in the filing signifies that the investor is looking for some sort of control.
Big institutional plans and funds try hard to keep others from spotting their key stock moves too soon. They move their assets slowly and want to buy in at the lowest prices.
Now a Zacks research breakthrough can alert you to the very best of this "smart money" at the first sniff. Even through downturns and corrections, these gains are expected to easily surpass the Zacks #1 Strong Buys average of +26% per year. Access to this strategy is limited, and will close to new investors in just a matter of days.
The Less Obvious Institutional Buyer
The opposite of the activist is the passive investor. The passive investor does much of what the name implies. They invest without the notion of imposing their will on the board of directors. They put their money in the stock and let the company do the hard work of maximizing shareholder value.
This category comprises most institutional investors. They run the gambit from FMR (Fidelity Management & Research), Vanguard Group and Dimensional Funds on the big side to the smallest investment managers that run only about $100 million.
The 13G is the filing of choice for these institutions. They generally are just there to invest, but if push comes to shove, they can change their minds.
The Quick Hitters
Another type of investor is the one that is synonymous with a hit and run. The quick hitters of the investing world are called hedge funds. They can move into a position with great speed and often move out even faster. They can place much larger bets on specific stocks than other institutions due to their investment goals and short term investing horizon.
The category can be equally profitable and dangerous. Here are some examples:
- If Greenlight Capital's David Einhorn suddenly shows up on the company's conference call, it would be a red flag. He is a now famous short seller.
- If Kynikos Associates has taken an interest in your stock, you may be in Jim Chanos' crosshairs, and that isn't the best spot to be.
- But maybe you learn that S.A.C. Capital's Steve Cohen has warmed up to your stock; his investment can easily bring other hedge funds to the party.
Hedge funds are not that easy to spot, unless you know the players in the game. You could search the SEC.gov database for the 13F filings from these firms. They are released up to 135 days after the fact, but show what the firms held at the end of the quarter. Unfortunately, that information is stale. Often, positions are unwound close to the quarter end to make sure the strategies are sheltered from competitive eyes.
How To Profit
There are dozens and sometimes even hundreds of filings from institutions every day. They are buried under an even greater mountain of other mandatory forms. Finding the institutions' large trading positions can easily get lost in the mix.
Sifting through all the other forms to find the ones you want is a monumental job in itself, much less translating the information contained within each filing. Make no mistake, these forms and filings are filled out in a manner that is meant to deceive. The key is to know what type of institution is buying your stock.
Activists can work for you but patience is an absolute must. Not all activists are successful, and most power struggles take time. Hedge funds can be your friend for quick pops, but they can sell out (or even short) in the blink of an eye. Being nimble is the key to playing the hedge fund institution. Passive investors are generally your best bet, and keeping track of which institution most commonly sees big gains can improve your odds of beating the market!
Can individual investors see what institutions are buying and what styles they are using to manage your portfolio?
Yes, but it requires plenty of time and a trained eye to find the large trades of the activists, passive investors and hedge funds.
Fortunately, Zacks now does all of that work for you with its trading alert service, Follow the Money Trader. Now, you can follow what the institutions are buying and selling – before the rest of the market figures it out – and share in their big potential gains.
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Good Investing,
Brian Bolan
