One of the first things I look at when investigating a potential stock is whether insiders are buying or selling and what institutional investors and money managers are doing. The concept of following the money of institutional investors is the belief these experts are likely to understand the company’s situation more than anyone outside of the executive management group.
By looking at the flow of money from institutional investors and monitoring what stocks they are buying, you can get a much better sense of what stocks may be in favor at a certain time. This especially holds true for the top-ranked institutional investors and money managers, because they are the very best and produce the highest returns.
The reality is that institutional investors control vast sums of capital and can sway the direction of any stock it buys or sells. These institutional investors are also extremely accountable to their investors and hence there is a high level of quality research and due diligence before taking a position that far exceeds the research of retail investors.
If you adhere to this belief, then following the money trail would make a whole lot of sense.
For instance, Apple Inc. (NASDAQ/AAPL) has been firing on all cylinders and broke the $500.00 price level to become the world’s largest company based on market capitalization. The company is hot and it has been tearing up the price charts to reach new historical highs. In its fiscal first quarter, Apple did not disappoint and easily beat earnings per share and revenue estimates. Earnings surged to $13.87 per diluted share, well above the $10.16 estimate. Sales of “iPads” and “iPhones” are driving profits.
Apple is hot now and is tearing it up in the PDA market, as it takes market share from Research In Motion Limited (NASDAQ/RIMM) and other rivals. But, at over $500.00, is Apple an opportunity? The consensus one-year target based on 49 estimates is $569.51, while the range is from $270.00 to $700.00 a share. Take a look at the internals. Insiders are taking some profits, with 2.67 million shares purchased in one transaction, but a whopping 91.49 million shares sold in 19 transactions over the last six months. On the other hand, institutional investors are buying to the tune of 110.65 million shares quarter to quarter, which is a bullish signal of professional money. The who’s who of the financial world owns Apple, including FMR, State Street, Vanguard, BlackRock, JP Morgan, and Janus Capital. If the pattern reverses and institutional investors begin to shave their positions, then it may be a signal to take some profits.
Other high-flying stocks, such as Amazon.com, Inc. (NASDAQ/AMZN), priceline.com Incorporated (NASDAQ/PCLN), Chipotle Mexican Grill, Inc. (NYSE/CMG), and McDonald’s Corporation (NYSE/MCD), are seeing some selling by institutional investors.
An interesting mid-cap that is attracting some institutional money is Internet radio company Pandora Media, Inc. (NYSE/P), which saw a 6.72% rise in institutional buying quarter to quarter.
The bottom line as an investor is that you need to monitor what institutional investors are doing as a complement to your own analysis.
I’m encouraged by the jobs growth, as it will help to drive spending the country’s economic renewal. Read what I have to say in Jobs: Are They Headed Down the Right Path?