You might often come across investment ideas from analysts to
mimic institutional investors at the time of picking stocks. Such
ideas are targeted at helping you benefit from the power of
institutional investors (mutual funds, pension plans, money
managers, etc.) who are seasoned players in the stock market and
have access to valuable research reports.
But this might not be a profitable strategy for you. You may even
incur a huge loss by doing so.
How so?
Primarily, the time between institutional buying and your
consequent action will not allow you to buy an institution favorite
stock at an attractive price. If institutional investors target a
particular stock, they spend millions of dollars to buy it. This
pushes the stock to its peak, making it overvalued for you. Now, if
you still pick that stock, it could be risky as institutions may
book their profits before you realize some gain.
Also, institutional investment managers (managing more than $100
million) are required to disclose their holdings by filing Form 13F
with the SEC once per quarter. And this is the primary source of
information that you get on which stocks are attracting big money
investors.
Now the problem is, institutional investors get up to 45 days to
submit these quarterly filings, and they may change their portfolio
position during that period. So the information from the 13F could
be dated. Your chosen stock may have already been sold off by the
institutional investor. And this information will be made public in
its next quarterly filing.
Another major drawback of tracking the 13F filing is the absence of
disclosure on short equity positions. This could mislead you as the
number of shares of a particular stock held by the institutions
might be part of their large net short position.
So, would it be a smart decision to mimic big money
investments?
Some may say that analyzing institutional holdings may give an idea
about their past performances which may help you make money, but
strong performances in the past do not guarantee future results.
Moreover, as an individual and small investor, it would be
difficult for you to adequately diversify holdings and hold
positions for an extended period of time.
What should you do?
Since buying a big money favorite stock could turn out to be
dangerous, it's better you take a look at the valuation of the
stock to see if it is still undervalued. If a stock is attracting
institutional investments during the current quarter and is
undervalued, you can gain by buying this stock as it may continue
to witness buying pressure until it reaches fair value or becomes
overvalued.
A smart way to pick stocks backed by institutional buying is to
analyze whether or not these are trading at a discount to their
book value. You should focus on the price-to-book ratio or P/B
ratio (stock's current price per share/last quarter's book value
per share), which is a measure of how cheap a stock is. If P/B
ratio of a stock is less than 1, it is cheaper than its accounting
value. This is only one among many metrics used to find undervalued
stocks.
Not that this is a foolproof strategy. You need to do an extensive
homework to select stocks that will help you make money. But you
can use this strategy as a starting point.
Big Money Favorite Undervalued Stocks
While there are several institution favorite stocks that you may
add to your portfolio based on the above analysis, we believe the
following four would be good additions to your portfolio:
Whirlpool Corp.
(
WHR
): Well-known manufacturer and marketer of a full line of major
appliances and related products, primarily for home use.
Float
: 75.98 million
Institutional Ownership
: 95.60%
P/B Ratio
: 0.82
Meadowbrook Insurance Group Inc.
(
MIG
): Through subsidiaries, engaged primarily in developing and
managing Alternative Market risk management programs for defined
client groups and their members.
Float
: 47.51 million
Institutional Ownership
: 90.99%
P/B Ratio
: 0.94
Digital Generation, Inc.
(
DGIT
): Provider of digital technology services that enable the
electronic delivery of advertisements, syndicated programs, and
video news releases to traditional broadcasters, online publishers
and other media outlets. The company also provides digital
advertising campaign management solutions to media agencies and
advertisers.
Float
: 23.73 million
Institutional Ownership
: 67.05%
P/B Ratio
: 0.66
Resolute Forest Products
(
ABH
): Engaged in the production of newsprint and coated and specialty
papers. The company also operates as a retailer of market pulp and
wood products.
Float
: 79.45 million
Institutional Ownership
: 60.20%
P/B Ratio
: 0.38
Bottom Line
Institutional investors are widely experienced, and their actions
may appear attractive or dependable in theory. In practice, it's
difficult to reap profits if you don't do your own research on
reasons other than the fact that these are endorsed by
institutional investors before buying a particular stock.
It's always better to focus more on the valuation of a company
before choosing it for your portfolio. This way, even if you are
unable to gain in the near term, there would still be a fair chance
to benefit in the long run.
Disclosure: The author has no positions in any stocks
mentioned.
DIGITAL GENERTN (
DGIT
): Free Stock Analysis Report
MEADOWBROOK INS (
MIG
): Free Stock Analysis Report
WHIRLPOOL CORP (
WHR
): Free Stock Analysis Report
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