Stock market investing is often a game of follow the
Large investors and institutions begin to purchase a
particular stock or sector, creating a bullish upswing in price.
In turn, this upward momentum attracts more investors who
purchase shares, pushing the price even higher. This is the
essence of the popular investing concept known as trend
Trend-following investors wait for shares to break out above a
certain level before they purchase, in the belief the upward
momentum will continue as additional investors buy shares.
The trend-following strategy has been successful over time,
but it has a fatal flaw. The big-trend funds that espouse this
technique are diversified across dozens -- sometimes hundreds --
of instruments. These funds often use algorithms to slash their
losses and let the winners run. It's an intensive hands-on
investing method that is often very difficult for individual
investors to replicate.
The primary flaw is the fact that no one knows when the trend
will change. In other words, like a game of musical chairs, will
you be one of the last bullish investors to purchase shares
before the leaders start to sell?
While I am not averse to using the trend-following strategy if
fundamental factors indicate true value, I prefer to purchase
shares on weakness rather than strength.
With that said, I also like to follow the big-money players --
but not based on price breakouts. I particularly enjoy following
the big money if share prices aren't currently reflecting their
I know this flies in the face of what many investors believe,
but let me explain.
Large investors have ways of carefully buying shares over time
in order to avoid moving the price much. In other words, large
investors buy stock in anticipation of an upward move. They also
often take profits on sharp upward moves, which results in many
trend-following investors getting burned by buying powerful price
Here's How I Do It
My strategy is to watch carefully what large institutions and big
investors are doing, then follow them into the sectors or
individual stocks. Not only do I watch their official filings as
to what was bought or sold, but I listen to what they say.
Reading news articles and seeking out the big investors'
statements can be a good way to figure out what they're
The theory behind this strategy is that the big players are
privy to information and ideas that individual investors simply
I have found that this strategy becomes particularly powerful
when two or more diverse big players enter a particular stock or
sector. This means that despite differing personalities,
philosophies and investing ideas, both see value in the
It is this strategy that attracts me to the beaten-down
This money-losing, near-death business has attracted players
as diverse as
Amazon.com (Nasdaq: AMZN)
founder Jeff Bezos, Warren Buffett, and John W. Henry, owner of
baseball's Boston Red Sox. A deep value investor like Buffett, an
Internet visionary like Bezos, and a trend-follower like Henry
all see value in the sector.
Bezo recently announced his plans to pay $250 million for
The Washington Post Co. (
. He intends on taking the company private. Shares of WPO have
nearly doubled from a low of near $300 in October 2011 to a
Warren Buffett believes strongly in the local
reach and community reporting of hometown newspapers as
they adopt new ways to capitalize on Internet
At the same time, Buffett's
Berkshire Hathaway (NYSE: BRK)
has purchased 28 daily newspapers over the past 15 months for
$344 million. Buffett believes strongly in the local reach and
community reporting of hometown newspapers, noting in his recent
letter to shareholders that he and his longtime business partner,
Berkshire Vice Chairman Charlie Munger, "believe that papers
delivering comprehensive and reliable information to tightly
bound communities and having a sensible Internet strategy will
remain viable for a long time."
In addition, Henry recently announced his purchase of the
Boston Globe for $70 million. This incredibly low price is far
from the $1.1 billion paid for the Globe and its local media
properties back in 1993. This illustrates how much many
newspapers have plunged in value.
Other bullish signals include the fact that
The New York Times Co. (
recently declared a dividend of $0.04 a share, its first since
2008. CEO and President Mark Thompson said, "The strength of the
balance sheet justified the restoration of the dividend."
These diverse endorsements of the newspaper business triggered
my research into the sector. My favorite stock in the industry is
the third-largest U.S. newspaper company,
The company operates 30 daily newspapers and various
niche-type publications. It also owns 15% of CareerBuilder.com,
more than 25% of Classified Ventures and 33% of HomeFinder.com,
as well as interests in other popular Internet-based companies.
This mix of print and Internet is exactly what Buffett was
McClatchy derives 24% of its advertising revenue from digital
sources. It posted total revenue last year of more than $1.2
billion, of which $200 million was from digital operations.
McClatchy has slashed its workforce by more than 50% since 2007
and has seen revenue drop more than $1 billion during that
However, the company has expanded its digital business with a
larger sales force and more incentives. Christian Hendricks, vice
president of McClatchy's interactive media division, strongly
believes that digital will return the company to its former glory
days. At the at the Local Media Association's fall conference, he
said, "Newspapers need to move beyond the giant suck of print to
find a sustainable future -- and digital is the only path
Shares of MNI are currently trading at $3, directly below the
50-day simple moving average.
Risks to Consider:
This is a low-priced stock that is prone to extreme
volatility. While the newspaper business is exhibiting bullish
signals, it remains an industry in decline. It's also important
to note that Warren Buffett recently dumped his holdings in
, the largest newspaper publisher in the United States. Always
use stops and position size properly when investing.
Action to Take -->
I like shares of McClatchy right now in the $3 area. I think it
may become a buyout candidate; I would not be surprised if a
large investor shows interest in this company sometime in the
future. If not, its aggressive digital campaign is the right
track to organic growth. Buying now with a 12-month target of
$5-plus and stops right below the 200-day simple moving average
at $2.80 makes solid sense.
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