Money
& Investing 
Need a "Rubber Stamp" to Verify Your Pick?
Check the Quality of a Stock's Institutional Holders
When I was a young fellow in college, I used to go to the track with friends and watch the harness horse races. It was fun. I made some bets, of course. But, after awhile, I began to notice that, in certain races, the odds on a horse would drop sharply near the end of the betting.
Often, the horse would run well. He might not win every time, but it seemed like he was trying. Of course, the lingo at the track was that the "hot money" was being bet on the horse.
In a way, the stock market and investing is a bit like that, too. There are just some investment managers who are really good. They do their research well and many times can get on board early with a good stock.
The average investor can too if he or she gets to know some of the better fund managers.
Generally, one cannot get on board the stock pick of a top-performing fund when the fund managers do. It is not until after certain reporting periods that their holdings are disclosed. However, it can still be very useful information when it does come out. The idea is to find strong stocks and then give them the "rubber stamp" of approval or no approval by noting who the institutional holders are and what are they doing.
You can get the information for institutional holders of a stock through various websites such as Morningstar.com and NASDAQ.com. There are others.
As an example of how to use institutional sponsorship, we give the stock of Green Mountain Coffee Roasters, Inc. (GMCR), a leader in the current market rally. The stock climbed from 23 (at the start of the year) to 74. Earnings that fiscal year ended September 30 should (as of the original writing of this article) have soared 95 percent, and then, in fiscal 2010, earnings should climb another 57 percent. 
When studying a stock's institutional sponsorship, there are five key factors to look at, especially if they are funds:
1. Quality of the sponsorship
2. Amount of sponsorship
3. New stock purchases
4. Increases in stock purchases
5. Investment strategy of the funds
Obviously, one wants a stock with a high quality of sponsorship. That would be funds with a high-performance ranking. Morningstar uses the five-star approach, with five stars being best. The five stars tell us that those funds are good performers and their managers are good stock pickers.
If the funds holding the stock have a low rating, it means, in simple terms, that they have not been good stock pickers. That should set off a caution signal.
The amount of sponsorship should also not be too low. That would mean that many fund managers looked at the stock and passed on it for one reason or another.
On the other hand, you do not want a stock with a lot of sponsorship. That may mean the funds have already "loaded up on the stock". There may not be much more buying to be done. Also, the stock could be susceptible to a top, especially if earnings growth slows significantly.
The ideal stock would have a modest amount of sponsorship with room for more buyers.
You should check new stock purchases by funds as well. If lower-quality funds are buying now, it could mean the stock is getting close to the end of its move. However, if top-quality funds are doing new buying, there could be more to go.
Likewise, if a top fund is continuing to increase its holdings, that would also be bullish. It would indicate that the fund believes there is more to go in the stock. Conversely, if the top fund is starting to sell heavily, that would be a caution sign.
Finally, it would be important to know the investment strategy of the funds. That can be found via Morningstar. Obviously, a growth fund would chase stocks higher while a value fund would not.
In the case of Green Mountain, the quality of fund sponsorship is good. The largest fund holder is four-star-rated Fidelity Growth Company Fund. It is a big holder with a 10 percent stake. It was also a recent buyer of 400,000 shares.
Also, notice that the small Brown Capital Management Small Co. Fund is five-star-rated and was a recent buyer of 67,000 shares. It is also among the large holders. So, the quality and new stock purchases are bullish signs for Green Mountain. Notice, too, that none of the top fund holders did any selling.
Morningstar reports that 166 funds hold Green Mountain stock. They have 9.6 million shares of the 37 million outstanding. The funds hold 26 percent of the stock. That is a large stake.
NASDAQ reports that total institutional ownership, funds and other entities hold 71 percent of the stock of Green Mountain. That percentage is high and would indicate that the stock is heavily owned.
Also, 95 institutions increased their positions while 141 decreased their stake. That is tricky, in that the amount of stock that increased or decreased is not given.
In any case, one would have to surmise that GMCR is still an institutional favorite and still held by top funds. But, one still needs to be watchful and careful. Any earnings disappointment and the stock could be vulnerable to the down side.
Although the data for institutional holdings takes a few weeks to be distributed, it is still of value. As one top market analyst noted, each stock has a certain personality. By studying the holders of the stock, one can get an idea of that personality.
Growth institutions want earnings growth, and if they do not get it, they could be important sellers. Value investors, in most cases, are willing to be patient as long as they see progress at the company.
So, when looking to buy a stock, always look at the institutional sponsorship. If it fits with your analysis, that is a plus -- if it does not, be careful.Mr. Fasciocco is the publisher of Ticker Tape Digest at www.tickertapedigest.com. He is a contributing writer for several publications. Mr. Fasciocco can be reached at leo@tickertapedigest.com.
