Author: RACHEL FOX
Source
Investing in the right growth stocks at the right time is a highly profitable endeavor, especially during a confirmed market uptrend. Indeed, focusing on a tight selection of stock picks has always been a cornerstone of the CAN SLIM investing model.
X
Among these core components, the I in CAN SLIM speaks to the importance of choosing stocks that are well-supported by big funds, i.e., institutional investors.
Follow The Big Money
The “I” in CAN SLIM stands for institutional sponsorship, or how much of a stock is owned by mutual funds, university endowments and other investors with massive portfolios.
We label the major institutions as “smart money” because they have the deepest pockets and greatest impact of all the players in the market. Institutions, which invest billions of dollars on behalf of their clients, exert a heavy influence on a stock’s supply and demand. Thus, they can easily push prices higher once they commit to a stock.
It’s even better when top-performing funds buy a stock.
“Buy only those stocks that have at least a few institutional sponsors with better-than-average recent performance records and that have added institutional owners in recent quarters,” IBD founder William J. O’Neil wrote in “How to Make Money in Stocks.”
How can the individual investor tell if a stock has strong institutional support? Luckily, mutual funds report their portfolio holdings to the Securities and Exchange Commission every quarter.
One of the simplest ways to find this info is by looking at a stock’s Accumulation/Distribution Rating, which can be found in IBD’s Stock Checkup tool. Stocks are given a rating from A to E. A indicates strong net buying by big money over the past 13 weeks. E indicates strong net selling over that same period. Ratings of A or B are best.
Finding Growth Stocks With Institutional Support
To dig a little deeper, MarketSmith provides a more detailed table on the left hand side of the stock’s weekly chart. The table displays the percentage of shares owned by funds, banks and management. For comparison, it also shows the number of funds that owned the stock in each of the four most recent quarters.
Ideally, you want to see that number increasing from quarter to quarter. If it’s decreasing, this might be a red flag.
You can get an even more detailed picture of fund ownership by clicking on the “Related Information” tab on the right side. Select the “Owners & Funds” tab, then hit the “Show Fund Ownership” button near the bottom. It will provide a list of the funds that own the stock.
This lets you gauge the quality of the institutional buyers in a stock. As you parse through the list, identify any notable funds with outstanding long-term track records. If you can’t find any, then take it as warning sign and tread with caution. It’s the job of fund managers to investigate every aspect of a business. This includes everything from industry forecasts to company management to suppliers to customers. If they’re not interested in a given stock, there’s likely a good reason for it.
This article was originally published July 16, 2021, and has been updated.
YOU MIGHT ALSO LIKE:
Get Free IBD Newsletters: Market Prep | Tech Report | How To Invest
In A Flat Base, Dull Trade Can Be Positive Action
Get Notifications For Live IBD Videos By Subscribing On YouTube
MarketSmith’s Tools Can Help The Individual Investor
The post The I in CAN SLIM: How Institutional Investors Make Or Break Growth Stocks; A Key To Profitable Investing appeared first on Investor’s Business Daily.