There have been some impressive gains in the stock markets over the past several years. A metric I like to monitor is what the professional traders and money managers are doing.
I call this “following the professional money,” as the common belief is that these investors know the story about a company more than the layperson.
This is generally true, but is not always the case. Yet, by looking at the institutional holdings of companies and watching what they are buying, you can get some sense of what stocks may be in favor. It is just another analysis tool you can use to analyze what to buy.
Institutions control vast sums of capital and can sway the direction of a stock if it buys or sells. These institutions are also extremely accountable to their investors and hence there is a high level of quality research and due diligence before taking a position; much more than the retail investor. So, if you adhere to this belief, then following the money trail would make a whole lot of sense.
Take a look at Apple Inc. (NASDAQ/AAPL), for instance. The company is hot and tearing up the price charts with a sustainable rally to new historical highs.
Jefferies & Co. just increased its target price on Apple to a whopping $450.00 from the previous $365.00, citing that the company will benefit from the 4G wireless network and the selling of its hugely popular “iPad” tablet. Yes, there is a host of upcoming tablets from Samsung, Research In Motion Limited (NASDAQ/RIMM), Dell Inc. (NASDAQ/DELL), Microsoft Corporation (NASDAQ/MSFT) and others, but I feel that AAPL remains the “best of breed.”
Take a look at who owns Apple.
The who’s who of the financial world owns Apple stock, including FMR, State Street, Vanguard, BlackRock, and Janus Capital. The institutional holdings did decline 2.4% or 15.17 million shares quarter to quarter, but I feel this was just absorbing some profits.
The concern with Apple will be that, if the buying pattern continues to see institutional selling, it may then be a sign to perhaps take some profits.
Case in point: online travel operator priceline.com Incorporated (NASDAQ/PCLN) has more than doubled from its 52-week low, but is currently attracting heavy selling. Net institutional holdings fell a whopping 23.11% or about 9.25 million shares quarter to quarter. The pros are taking some profits, which could foreshadow additional weakness ahead.
Netflix, Inc. (NASDAQ/NFLX) is currently stuck below $190.00, with mounting concerns regarding the stock’s valuation at 48X FY11 earnings per share. And the pros are running to the exits, as demonstrated by the net selling of 16.98 million shares or 56.82% quarter to quarter. Maybe the pros know that the hefty valuation assigned by the market is false?
You can see what I mean by following the professional money. It’s not hard and takes just a bit of work, but does help in evaluating the upside of stocks.
The bottom line is that, as an investor, you need to monitor what the pros are doing as a complement to your own analysis.