5 Stock-Picking Secrets of the Whales

The big, sideways "meat grinder" trading range this year is setting up some terrific opportunities in certain stocks and sectors. Because I still think we are headed to my target of S&P 2250 by year end.

But the path will not be a straight line and, more importantly, not all boats will rise with the tide.

Many stocks will be mercilessly shorted at these valuations, while select industries and companies will shine bright as institutional investors - those with at least $100 million in assets under management (AUM) - continue to put money to work in their best ideas.

These big money players are often called "the whales" of the market. Below are 5 currents to follow them in -- plus an inside peak at a powerful "whale" strategy I've used all year to beat the S&P 500.

1) In a Market of Stocks, Winning = Following the Big Money

What drives stocks higher? Earnings growth. Investors buy companies or shares to capture a future stream of growing cash flows at some discount today. Earnings matter as the primary motivation, but really it's the actual buying of a stock that is required to move its price higher as demand outstrips supply.

And who does the kind of buying where demand outstrips supply? Institutions like mutual funds, pension funds, insurance companies, endowments, hedge funds, private equity, and sovereign wealth funds. All these bigger players are also "fed" money by smaller ones like banks, brokerage and independent wealth managers, and family offices.

When you pick a good stock, you are rewarded when what you saw as a growth or value opportunity is slowly (or suddenly) recognized by these "whales" of the investing ocean.

More . . .

------------------------------------------------------------------------------------------------------

7 "Whale Stocks" to Buy Monday

Zacks is closely tracking Dalio at Bridgewater, Halvorsen of Viking Global, Mandel of Lone Pine Capital, and dozens of lesser-known, but enormously successful financial titans. During the first half of 2015 this Follow the Money approach has blown past the S&P 500's +1.2% with a gain of more than +17%.

Before now, you could only catch early whiffs of the smart money if you had the time, will, and expertise to comb through obscure SEC filings. Today you can see our selected tickers that big funds and plans are moving into.

See these exciting stocks right now >>

------------------------------------------------------------------------------------------------------

2) Go Where No One Has Gone Before

As the whales search for stocks they want to gobble up, they like to do it under the radar. After all, they are spending a lot of time and money researching companies with the best prospects.

So when they decide to take a significant position of 1-20% in a name, they want time to buy their shares before others notice the opportunity they found. And this is especially true with one of their favorite targets: the growing small or mid-cap company.

This is where the earnings growth is to be found. And it's also where the undiscovered opportunities often lie. But as the whales seek to accumulate 500,000, 1 million shares, or sometimes much more, they have to do it slowly over time so they don't attract attention.

I have a way to track some of the best investment opportunities while they are still under accumulation. I'll share it with you in a moment after we cover the other "currents."

3) They Have to Buy, and They Don't Have to Sell

One thing you have to realize about the whales is that they are continuously given money that is earmarked for one thing: buying stocks. In a sense, "they have to buy." It is their job and they are competing against each other and the S&P 500 to outperform. This is why the bull market has been so amazingly strong in the past few years after roaring back from the 2008 meltdown.

Another "secret of Wall Street" is that "they don't have to sell." Often it's not the portfolio manager's money and while year-to-year returns matter to many investors, a lot of the money in their hands has a longer-term focus on finding extraordinary opportunities.

Since early 2013, I've been running a portfolio that tracks institutional buys and sells every day and I've come across some interesting whales with deep focus, lots of cash, and long time horizons.

Of course I see BlackRock, Fidelity, and Wellington just about every day in my screening. But what is often more interesting and rewarding is the names I see that the average investor probably won't recognize: TPG Capital, Renaissance Technologies, or Baker Brothers Advisors, who specialize in biotech with Tisch family money.

4) They Do Deep Homework and Hang On

Since lots of whales do their own research, they get to know companies inside and out. After a starter position of 1-2% of a company they really like, they'll make another trip to visit with the CEO, walk the facilities, and talk to suppliers and customers.

Then they plunk down another 1-2%, what we call the "follow-on" investment. When they break above the 5% mark of ownership in a company, a special SEC document must be filed and that information is made publicly available. I pay close attention every day to those SEC filings and a few others.

And if you think about it, you can see why the whales are true investors and not "swing traders" or even "position traders" with time horizons measured in months. They take significant stakes in companies at early stages because they know that small and mid-cap enterprises are the ones with the biggest growth potential, where they can ride the opportunity to a double or triple in value.

We just want to take a piece of that growth trajectory. And we make sure our timing is sound with the Zacks Rank on our side. Whale-sized interest plus earnings momentum is a big win-win.

5) The SEC Data Mountain and Its Secret Money Trail

There are thousands of SEC institutional filings published every month. There is no humanly way to sort through all the 13F, 13D, and 13G filings and find whales to follow. If you took the time to scan over a few forms, your eyes would soon start to glaze over. I think the SEC purposely makes these forms hard to interpret, even cryptic.

The solution is having an automated screen that can receive all the filings from the SEC and then filter and sort all the data into the essentials we want to see: the who, what, when, and how much of every big money acquisition or sale.

We have such a screen and I run it every day, looking to see what the big money is up to. And we also built our screen to match significant buying or selling against the Zacks Rank. This has given us nice winners in the past 2 years like Valeant Pharmaceuticals (VRX), Synaptics (SYNA), Medivation (MDVN), Pharmacyclics (PCYC), Avago Technologies (AVGO), Skyworks Solutions (SWKS), Acadia Healthcare (ACHC), and Mobileye (EYE).

Who's Buying Your Stocks?

But our screen doesn't just spit out stock picks for us. We still have to do our homework once we have some names. I always want to know who the whale is and what he or she is up to. Is it a big-name activist investor like Carl Icahn or Bill Ackman - what are they really after and do we want to be a part of it?

And I also like to know what the size (AUM), overall goals, and investing history is of the whale. Many times I find big "under the radar" private equity players like TPG with excellent research processes and results. Other times I find the smaller institutions like Eminence Capital or Baker Brothers with unique expertise, focus, and remarkable success.

What's always rewarding is when I start to see more than one whale coming to nibble on a stock. Then I know good things are going to happen. In fact, some little whales specialize in following the giants of the market ocean.

Add it all up, and combining our earnings momentum model with "whale watching" is a killer deal.

Here's How You Can Do It

Most individual investors don't have the time and resources to comb through all the filings to catch where the smart money is starting to go, and then jump aboard the best stocks for a full profit ride.

That's why I invite you to look into my Zacks Follow the Money Trader.

As I mentioned, we start by exploring a vast, ever-changing database to detect the best trades before funds and plans fully build their positions. Then we distill those moves even further through our proprietary fundamental and technical indicators. Finally, we issue "buy" alerts before other institutions join in and drive up the prices. Currently, only 7 stocks make the grade as FTM recommendations.

In the first half of this year, FTM has far outpaced the market +17.4% to +1.2%. Another reason to check it out now is that you are also invited to download our best short-term stocks through a free Special Report, Zacks' 7 Must-Own Stocks for September, 2015. But please note that this opportunity ends midnight Sunday, August 16.

See Follow the Money Trades and the Free September Stocks >>

Good Investing,

Kevin Cook

Kevin, a Senior Stock Strategist at Zacks, is a recognized authority on global markets and noted for predicting and tracking the movement of smart money. He provides commentary and recommendations for the Zacks Follow the Money Trader.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.