Score Great Deals at Wall Street's Expense

The end of the quarter is approaching. If you hurry, you have an opportunity to pick up great stocks at attractive prices -- and perhaps beat big institutional investors to the punch.

Right now, stock markets are on the verge of seeing their first positive quarterly performance since the third quarter of 2007. After an endless series of depressing results, stocks have moved up with a vengeance -- and no one wants to be seen as having missed out on the big rally.

Yet with many mutual funds having high cash levels, it's almost certain that some have missed out on the biggest winners of the past three months. To try to mask their bad decisions, money managers sometimes resort to a tricky practice that often leads investors to make the wrong conclusions about their funds.

Dress it up
Mutual funds and other institutional investors typically reveal what investments they hold in their quarterly filings to the SEC. That secrecy makes sense and actually has some benefits for fund investors; if others knew what stocks a fund was buying and selling, they could take advantage of that information to the detriment of fund shareholders.

However, it also makes the practice known as window dressing possible. Whatever holdings a fund owns at the end of the quarter will go on that fund's disclosure -- regardless of how long the fund actually owned those shares. So if you're a fund manager and want to look like you made some smart picks, you can buy shares of top-performing stocks toward the end of the quarter. Even if you buy them the day before the end of the quarter, they'll still appear on your official holdings report.

Obviously, buying stocks after they've already had big gains doesn't really help shareholders. But when investors make the mistake of inferring that the fund must have owned those shares throughout the quarter, then it can help money managers make a better impression on their shareholders.

Beat them to the punch
How can you take advantage of this practice? Well, some believe that many funds are waiting for a potential pullback -- like the one we've seen so far this week -- to put some of their cash to work. If fund managers have window dressing at the top of their minds, then they'll want to focus their buying on top-performing stocks during the quarter -- and they'll want to dump ones that lagged behind during the rally.

So looking at how various stocks have performed, here's a list of potential candidates that could benefit from window dressing:

Source: Yahoo! Finance.

On the other hand, the following stocks really haven't participated in the rally:

Source: Yahoo! Finance.

What happens next
Using window dressing to try to make short-term trades gets complicated, as you have to consider a number of different factors. Not only do you have to decide when funds will buy, but you also have to guess whether they'll hold onto their shares for a while or just dump them immediately after the new quarter begins.

Because of that uncertainty, it makes more sense to use window dressing as just one consideration in a buying decision. If you want to buy a stock that has done well, then you might want to pick up shares before the mad rush at the end of the quarter pushes its price higher. On the other hand, if you're looking at beaten-down stocks, waiting until July to buy may give you a slightly better bargain after all those institutions sell.

Window dressing shouldn't be your only reason for buying certain stocks. But if you've already set your sights on a stock, then taking advantage of this tiny market inefficiency can help you score some extra profits over the long haul.

For more on smart investing, read:

• Three strategies for superior returns.
• The top 10 depression stocks.
• What are you waiting for?