From 1980 to 2007 the share of U.S. common equity held by institutions more than doubled - from 32% to 68% of total market value. With that in mind it is no wonder the trends of institutions have captured analyst attention over the years.
MoneyWatch reports on a 2010 study, Institutional Investors and the Limits of Arbitrage, which examined the performance and unique trading behaviors of institutions. The study began with a group of 500 in 1980 and ended with 2,700 in 2007.
Institutions, which include mutual funds, hedge funds, pensions, bank trust departments, and others, have been found to take on different investing techniques than the "Average Joe" stock picker. And because of their large share of the market, their decisions carry significantly more weight in shifting values.
The study concluded that institutions tend to do little stock picking, and more or less held onto their market portfolio. And those that traded the least seemed to do the best.
By doing so, the institutions generated less risk to the market and generated more revenue for their portfolio, a process known as generating alpha.
Risky stock picking
Among their findings they learned any Institutional stock-picking ability "was reliable only for smaller stocks, which made up a tiny fraction of holdings. For example, institutions' investment in micro-cap stocks (stocks below the NYSE 20th percentile) outperformed a value-weighted index of those stocks by a significant 0.57 percent quarterly, but represented just 1 percent of their total holdings."
Larry Swedroe of MoneyWatch argues that the stock picking skills that were exhibited with small cap stocks were similar to those of individual investors. "Many investors hope to strike it rich by purchasing low-priced stocks, stocks in bankruptcy and IPOs, essentially playing the lottery and hoping they'll come up with the winning ticket."
But these characteristics are risky, and Swedroe says that if institutions searched within the micro-cap market for stocks that do not exhibit these traits, they may be able to generate more alpha from the universe.
So, some may argue that micro-cap stocks are one of the last remaining areas that institutional investors can generate consistent alpha (add value to a portfolio's returns without adding risk).
With that in mind, we started with a universe of about 200 micro-cap stocks, with market caps between $100M - $300M.
We collected data on institutional money flows and identified a list of names that have seen significant institutional buying over the last quarter.
From this universe, we wanted to apply another sentiment screen. To find those companies, we collected data on short-selling, and identified a list of companies that have seen significant short covering over the last month.
Big money managers have boosted their holdings of these stocks over the last quarter, and short-sellers seem to think these stocks are ready to pop higher -- do you agree?
List sorted by average trading volume. (Click here to access free, interactive tools to analyze these ideas)
List compiled by Eben Esterhuizen, CFA:
1. The McClatchy Company
2. Camelot Information Systems
3. MIPS Technologies
4. Sify Technologies
7. Complete Genomics
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Institutional data sourced from Fidelity. Short data from Yahoo! Finance.
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