The Smart Money Is Betting Big on These Stocks
Institutions are going all-in...
We made it through October.
It wasn’t so bad, right?
Fed Chair Jerome Powell spoke Wednesday about the economy, saying we need to remain humble and understand the world is still very COVID-affected. He also wants to see further development in the labor market before making any decisions about raising interest rates, as the U.S. reaching “maximum employment” would trigger such increases.
So strong jobs numbers Friday may be putting us closer to rate hikes, but not until 2022.
Markets liked the news, with the Dow Jones Industrial Average rising more than 5% and the Nasdaq more than 10% for the month.
November is historically when hedge funds double down on the trends that they see continuing through the end of the year — probably why Peloton (NASDAQ: PTON) got smoked Friday, losing 35% of its value.
And remember that large hedge funds control trillions of dollars, so they prefer to wait for market corrections and make their entries at a discount. If you see funds buying up stock, there’s a good chance they believe the stock's undervalued.
So following the smart money can certainly produce outsized returns before year end if you know where to look...
But how do you identify what institutions are buying and when?
Following the Smart Money
First, you can retroactively view recent hedge fund activity (buys, sells, changes in shares, etc.) by sifting through Form 13F filings with the Securities and Exchange Commission (SEC).
The form states that a fund manager with at least $100 million in assets under management must file a Form 13F within 45 days after the end of the first three calendar quarters and the end of each calendar year.
Say you’re a fan of fund managers like Warren Buffett and Cathy Wood. This strategy should give you security and confidence in knowing that you’re following in the footsteps of two intelligent, reasonable, and experienced businesspeople who are doing all the research and taking the initial risk.
Not to mention, funds are investing millions and even billions of dollars, so they have the ability to move the market.
You can look at 13 D/G filings as well, which are submitted to the SEC within 10 days by anyone who acquires ownership of more than 5% of any publicly traded security. These filings are typically indicative of an activist investor, which is a shareholder who buys large amounts of a company’s stock with the intention of influencing management to make specific changes.
Now, just like following the insiders (top-level executives and directors), I would never recommend trading based solely on institutional ownership. But it’s a great place to start because institutions aren’t in the business of losing money. So high institutional ownership shows confidence in the future prospects of a company.
If you’re investing for the long term in companies with high institutional ownership, a good rule of thumb is to find ownership of 70% and above. Anything greater than 85% is considered exceptional.
Visa (NYSE: V) has 96.5% institutional ownership. This means very large financial institutions control the company and make impactful financial decisions.
Now, low institutional ownership doesn’t mean a company isn’t good; it just means that fund managers have passed on it or the market cap is too small. But this bodes well for retail investors who can get in before the smart money does.
You can also identify institutional buying using chart patterns. I don’t consider myself a charting expert, but here’s what you need to know to quickly spot this trend...
The first sign of institutional buying is a big spike in volume. Retail traders just don’t have the kind of buying power to create large volume swells, so that’s a big clue.
The second sign is if the price moves quickly in either direction. You can spot this using candlestick formations. If there’s a long consolidation period in price, it’s a sign of regular retail trading. Once the price moves quickly, it’s a sign institutions are moving in.
And lastly, if you can determine an “institutional base” or “institutional value zone,” you can use that number to confidently enter a trade. When large buckets of money enter the market, the chart forms a so-called support level and the share price can correct.
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For example, in April 2020, Ford (NYSE: F) developed a base around $4. We can see that the price corrected after large volume spikes, which indicates institutional buying.
But chart patterns only represent price tendencies, not guaranteed moves. So always take chart analysis with a grain of salt.
The Next Tesla
Wall Street loves disruption, and the car market still needs more of it, as carmakers have been out of touch with reality for years, selling overpriced vehicles and using predatory lending practices.
That’s why Tesla (NASDAQ: TSLA) is the Street's new darling and being hailed as the blue chip EV maker.
Sure, the company’s cornered the EV sedan market, but it hasn’t cornered sports cars or trucks. And with so many EV companies coming online, it’s hard not to place some bets on the next big thing.
Ford’s electrified F-150 Lightning looks nice and has a lot of preorders, but it’s too expensive. Ford says the truck starts at $39,974 and goes up to around $90,474. There’s a reason hedge funds are mixed on the company, with just 55% institutional ownership. And management doesn’t like the stock at the current price either, with just 0.1% insider ownership right now.
Then you’ve got Amazon-backed Rivian, with its base truck starting at $73,000. In the company’s IPO prospectus filed last week, it’s seeking a $54.6 billion valuation, offering 135 million shares priced between $57 and $62.
That’s a nice idea, but you know us... We like thinking outside the box, not blindly following the media hype.
The little-known EV maker Canoo (NASDAQ: GOEV) started marketing its “lifestyle vehicles” to capture the attention of a younger audience, one that doesn’t want to pay sky-high rental prices or take on a mortgage.
A close friend of mine travels around the country with his girlfriend while they work remotely. Believe me, they are raking in the dough. This is the #vanlife trend in action.
Canoo’s vehicles are also popular for food truck owners and delivery drivers. And the company’s building an affordable $30,000 truck to boot.
Call volume is directionally bullish, as Canoo just announced a battery deal with Panasonic (OTC: PCRFY). Vanguard, Blackrock, Bank of America, and Citadel have all increased their positions this year. In total, hedge funds have increased their positions by 100% in the second quarter of 2021.
As you can see, by following the smart money, you can gather critical information before making investment decisions so you can invest only in things you understand.
My colleague Jimmy Mengel has identified a handful of stocks with heavy institutional buying in an industry that’s been making a comeback, seemingly overnight.
But you need to check out these stocks before $516 billion worth of smart money moves in.
Don’t gamble with your financial future — get positioned today.
To your wealth,
Editor, Outsider Club
After Alex’s passion for economics and investing drew him to one of the largest financial publishers in the world, where he rubbed elbows with former Chicago Board Options Exchange floor traders, Wall Street hedge fund managers, and International Monetary Fund analysts, he decided to take up the pen and guide others through this new age of investing. Check out his editor's page here.
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