Page 317 - How to Make Money in Stocks Trilogy

194 A WINNING SYSTEM

Look for Both Quality and Increasing
Numbers of Buyers
Diligent investors dig down yet another level. They want to know not
only how many institutional sponsors a stock has, but whether that num-
ber has steadily increased in recent quarters, and, more important,
whether the most recent quarter showed a materially larger increase in
the number of owners. They also want to know who those sponsors are,
as shown by services reporting this information. They look for stocks that
are held by at least one or two of the more savvy portfolio managers who
have the best performance records. This is referred to as analyzing the
quality of sponsorship.
In analyzing the recorded quality of a stock’s institutional sponsorship,
the latest 12 months plus the last three years of the investment performance
of mutual fund sponsors are usually most relevant. A quick and easy way to
get this information is by checking a mutual fund’s 36-Month Performance
Rating in Investor’s Business Daily. An A+ rating indicates that a fund is in
the top 5% in terms of performance. Funds with ratings of B+ or higher are
considered the better performers. Keep in mind that the rating of a good
growth stock mutual fund may be a little lower during a bear market, when
most growth stocks will definitely correct.
Results may change significantly, however, if key portfolio managers leave
one money-management firm and go to another. The leaders in the ratings
of top institutional mutual funds generally rotate and change slowly as the
years go by.
Several financial services publish fund holdings and the investment per-
formance records of various institutions. For example, you can learn the top
25 holdings of each fund plus other data at Morningstar.com. In the past,
mutual funds tended to be more aggressive in the market. More recently,
new “entrepreneurial-type” investment-counseling firms have cropped up
to manage public and institutional money.

Buy Companies That Show Increasing Sponsorship

As mentioned earlier, it’s less crucial to know how many institutions own a
stock than to know which of the limited number of better-performing insti-
tutions own a stock or have bought it recently. It’s also key to know whether
the total number of sponsors is increasing or decreasing. The main thing to
look for is the recent quarterly trend. It’s always best to buy stocks showing
strong earnings and sales and an increasing number of institutional owners
over several recent quarters.