A metric I like to look at is what the professional traders and money managers are doing. Some call this “following the money,” as the belief is that they know the story about a company better 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 it has been tearing up the price charts to new historical highs. In its second quarter, Apple did not disappoint and easily beat EPS and revenue estimates. The company also offered higher revenue guidance. Earnings surged 78% year-over-year (yoy) to $3.51 per diluted share, well above the $3.11 estimate. Revenue growth was 61% yoy, which is what traders want to see from companies. Apple reported that it sold 8.4 million “iPhones” in the quarter, up 60% yoy, and 3.27 million of its new “iPads” since the product’s launch in April.
The company is hot now and is also tearing it up in the PDA market, as it takes market share from Research In Motion Limited (NASDAQ/RIMM). The who’s who of the financial world own Apple, including FMR, State Street, Vanguard, BlackRock, and Janus Capital.
The concern with Apple will be if the buying pattern reverses and we see a decline in buying and instead see institutional selling. This
would be a sign to perhaps take some profits. Take a look at the institutional holdings, which declined 1.49%, or 9.64 million shares quarter to quarter. This indicates some profit-taking, but it’s not a big deal, as there are 910 million shares outstanding.
Online books and music retailer Amazon.com, Inc. (NASDAQ/AMZN) has been sliding since trading at its 52-week high at over $150.00, but has subsequently been attracting some selling. Institutional holdings fell 2.71%, or about 7.78 million shares, quarter to quarter. The pros are taking some profits, which could foreshadow additional weakness ahead.
Google Inc. (NASDAQ/GOOG) recently fell after reporting disappointing growth. The company also is dealing with censorship in the world’s largest Internet market in China. The pros appear to be negative, as demonstrated by the cautious trading and the selling of 3.24 million shares, or 1.27% quarter to quarter.
The bottom line is that, as an investor, you need to monitor what the pros are doing as a complement to your own analysis.