Knowing what to look for when buying stocks can make the difference between a devastating loss and a life-changing windfall. There are a handful of key components in finding growth stocks, including robust earnings and sales. But another critical element to watch for is increasing institutional sponsorship.
Institutions include big money managers such as mutual funds, pension funds, hedge funds, insurance companies and universities.
Large institutions have the funds and resources to do the deep analysis and find winning growth stocks.
They are also the main buying and selling force in the market. Investment managers buy large lots with conviction when building or increasing a position. And it may take months or years to get to the desired level. Moreover, institutional buying and selling accounts for up to 70% of activity in most of the leading growth stocks, according to IBD research.
Investors can spot if a stock is an institutional darling or being dumped, if they know where to look.
It Matters Which Funds Are Buying Stocks
Increasing demand — as shown by higher volume while a stock's price is rising — pushes up its value even more. In addition, a benefit of strong institutional ownership is liquidity. This allows you to easily sell shares when you decide to get out, even in a weak market.
The IBD Accumulation/Distribution Rating is a quick way to see if institutions are buying or selling a stock. This is found on MarketSmith's weekly chart or in IBD's Stock Checkup tool. Stocks are rated from A+ to E, with A+ being the best and E being the worst. An A+ rating indicates heavy institutional net buying over the last 13 weeks, while an E indicates a barrage of selling over that same period. Look for A+ or B ratings, although C ratings are acceptable.
Investors can check the percentage of mutual fund ownership of a stock on MarketSmith. In researching stocks to buy, you should look for a significant increase in fund ownership in its most recent quarter and over the last several quarters. These quarterly numbers are listed on the weekly charts in MarketSmith.
Next, consider the quality of those funds that own the stock. Look for top-performing funds with a recent track record of better-than-average performance.
How To Find Owners Of Growth Stocks
To get an even more detailed picture of fund ownership, click on the "Related Information" slide-out tab on MarketSmith charts. Open the "Owners & Funds" tab, the click on "Show Fund Ownership." That will show all funds that own the stock, including the IBD fund rating.
Also listed is the percentage that the stock makes up of each of the funds. Now you have one more tool in your toolbox to find winning stocks.
The Owners & Funds tab also shows the number of shares owned by the funds in each of the last eight quarters. If it's decreasing, it could mean large money managers are unloading the stock.
The IBD Stock Checkup includes the percentage change in the number of funds owning the stock since the previous quarter, and the number of consecutive quarters with rising fund ownership totals.
Follow Kimberley Koenig for more stock market news on X/Twitter @IBD_KKoenig.
