With billions of investor dollars under management, mutual funds can be some of the stock market's biggest movers and shakers. Major funds can send prices rising or falling when they decide to buy or sell a given stock. On The Motley Fool's Twitter feed, curious Fool follower @jimithec asked: "When funds start buying stocks in large volumes again, what five stocks will increase the most in value?"
We posed that question to four Fools, who weighed in with their ideas on stocks that might benefit from a mutual fund boost -- or not, depending on whom you ask.
The Apple of funds' eye
April Taylor, Fool contributor
Since equity mutual funds have more cash inflows to invest, I believe fund managers will plow money into large-cap stocks. I'd put megacap Apple
Apple has multiple well-established opportunities to sustain its growth. The smartphone market continues to grow at a rapid pace, and with the addition of mobile carrier Verizon Wireless in the U.S. and distribution through 165 mobile carriers abroad, the iPhone is positioned to be one of the winners. Apple has created a new product category with its launch of the iPad, selling more than 4 million devices in only its second quarter on the market.
As with the iPhone, the combination of Apple's superior hardware design and the company's App Store makes the iPad more valuable to consumers than similar devices entering the tablet market. Plus, consumers aren't the only ones picking up the iPad and iPhone; enterprises have increasingly adopted the devices. In addition, despite superior growth prospects, Apple's valuation is a reasonable 14.4 times 2011 earnings estimates, even without netting out its cash hoard.
The other large-cap stock that should be popular with mutual funds is PepsiCo
Follow the money
Nathan Parmelee, co-lead analyst for Motley Fool Global Gains
Recent data from the Investment Company Institute (ICI), the standard for assessing mutual fund cash flows, shows that funds' cash levels are below normal. To get more cash to put to work, funds need investors to either deposit new cash or move their money from other assets into equities.
Fortunately, according to ICI, that's been happening over the past month; investors have sold bond investments and moved most of that cash into equities. More specifically, that money has been moving mostly into foreign equities, since except for a few blips, domestic equity funds have consistently seen outflows lately.
This should make the question easy: Just buy foreign equities, right? Not so fast. Fund flows can and do change direction quickly -- in just the most recent week, domestic equities beat out foreign stock funds for inflows. If the dollar strengthens for just a month or two, it's possible the trend will reverse, and investors will start consistently pushing money into domestic equities again.
The only conclusive takeaway I see in fund flows lies in funds' below-average cash levels. That's a good reason to be a little bit cautious. But I do think investors are on the right path by favoring foreign equities. In our Global Gains international investing service, we have often noted that many other countries have much more favorable debt levels and growth potential than we do stateside. So while there is some short-term risk that cash might flow out of foreign equities, their long-term odds of outperforming and attracting additional investment funds are very strong.
The conservative way to play this trend is to buy attractively valued multinationals such as Pepsi and Unilever
No one ever said Wall Street was smart
Tim Beyers, Fool.com and Motley Fool Rule Breakers contributor
Talk about an interesting question. You'd think that fund managers would be buying cheap or unloved stocks, but that's rarely the case. Stocks tend to get institutional interest merely because they're big enough to buy.
Consider large caps. Some 216 companies worth at least $15 billion in market value are listed on major U.S. exchanges. Of those, 139, or 64%, are 70% or more owned by institutions. By contrast, Capital IQ finds that only 41% of small caps worth between $250 million and $2 billion in market cap attract similar interest from the big money. If you aim to profit from the sort of institutional buying that has propelled Las Vegas Sands and other fast movers, you want companies not yet 70% owned by institutions, but whose stocks are rallying due to fundamentally excellent performance.
Who to buy? My favorite among the candidates is also one of my more recent picks for our market-beating Motley Fool Rule Breakers service: Qlik Technologies
And now, for something completely different...
Seth Jayson, co-lead analyst for Motley Fool Hidden Gems
Such questions are unanswerable, so anyone looking for such a list is either playing for fun (OK, but not advisable with real money) or doesn't know how much he doesn't know -- and that's an even better way to get poor. If anyone could reliably choose the five top-performing stocks every year, based on any macro inflow or outflow thesis, he'd have no need to spend time writing stock commentary or reading Twitter feeds.
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Qlik Technologies is a Motley Fool Rule Breakers selection. Unilever is a Motley Fool Global Gains recommendation. Petroleo Brasileiro, PepsiCo, and Unilever are Motley Fool Income Investor picks. The Fool has written puts on Apple, which is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Apple and Petroleo Brasileiro. Try any of our Foolish newsletter services free for 30 days.
April Taylor owns shares of Apple, but none of the other contributors hold any financial position in the stocks they wrote about. Fool online editor and lead Tweeter Nathan Alderman holds no financial position in any of the stocks mentioned here, either. Seth Jayson just gets a little cranky sometimes. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.