I = Institutional Sponsorship: A Little Goes a Long Way

It takes big demand to move supply up, and the largest source of
demand for stocks is by far the institutional buyer. A stock certainly
does not need a large number of institutional owners, but it should have
at least a few such sponsors. Three to ten might be a minimum or rea-
sonable number of mutual fund sponsors, although some stocks might
have a good deal more.

The would-be winning investor should learn to sort through and rec-
ognize that certain institutional sponsors are more savvy, have a
stronger performance record, and are better at choosing stocks than
others are. I call it analyzing the quality of sponsorship.

What Is Institutional
Sponsorship?

Sponsorship may take the form of mutual funds; corporate pension
funds; insurance companies; large investment counselors; hedge funds;
bank trust departments; or state, charitable, and educational institutions.
For measurement purposes, I do not consider brokerage firm
research department reports as institutional sponsorship, although a
few exert influence on certain securities. Investment advisory services
and market letter writers are also not considered to be institutional or
professional sponsorship in this definition.

Financial services such as Vickers and Arthur Weisenberger & Co. pub-
lish fund holdings and investment performance records of various insti-
tutions. In the past, mutual funds have tended to be slightly more
aggressive in the market, but banks have managed larger amounts of
money. More recently, numerous new "entrepreneurial type" investment
counseling firms have been organized to manage institutional monies.
Performance figures for the latest 12 months plus the last three- to
five-year period are usually the most relevant. However, results may
change significantly as key portfolio managers leave one money man-
agement organization and go to another. The institutional leaders con-
tinually rotate and change.

For example, Security Pacific Bank (now merged into Bank America)
had somewhat modest performance in its trust investment division up
to 1981. But with the addition of new management and more realistic
concepts in the investment area, it polished up its act to the point that
it ranked at the very top in performance in 1982. In 1984, the top man-
ager of Security Pacific left and formed his own company, Nicolas
Applegate of San Diego.

If a stock has no professional sponsorship, chances are that its perfor-
mance will be more run-of-the-mill. The odds are that at least several of
the more than 1000 institutional investors have looked at the stock and
passed it over. Even if they are wrong, it still takes large buying to stimu-
late an important price increase in a security.

Also, sponsorship provides buying support when you want to get out of
your investment. If there is no sponsorship and you try to sell your stock
in a poor market, you may have problems finding someone to buy it.
Daily marketability is one of the great advantages of owning stock.
(Real estate is far less liquid and commissions and fees are much high-
er.) Institutional sponsorship helps provide continuous marketability
and liquidity.

Is It "Overowned" by
Institutions?

A stock can also have too much sponsorship and become "overowned."
Overowned is a term we coined and began using in 1969 to describe a
stock whose institutional ownership had become excessive. In any case,
excessive sponsorship can be adverse since it merely represents large
potential selling if anything goes wrong in the company or the general
market. On the other hand, Snapple, in April 1993, was underowned.
The "favorite 50" and other lists of the most widely owned institu-
tional stocks can be rather poor, and potentially risky, prospect lists. By
the time performance is so obvious that almost all institutions own a
stock, it is probably too late. The heart is already out of the watermelon.

An Unassailable Institutional
Growth Stock Tops

In June 1974, we put Xerox on our institutional sell list at $115. We
received unbelievable flack because Xerox was then one of the most
widely held institutional stocks and had been amazingly successful up to
that point. However, our research indicated it had topped and was
headed down in price.

Institutions made Xerox their most widely purchased stock for that
year. Of course that didn't stop it from tumbling in price. What it did
prove was how sick the stock really was at that time, since it declined
steadily in spite of such buying. The episode did bring us our first large
insurance company account in New York City in 1974.

They had been buying Xerox on the way down in the $80s until we
persuaded them they should be selling instead of buying.

Famous Last Words "We'll
Never Sell Avon Products"

We tried that same year to get another well-known eastern insurance
company to sell Avon Products at $105, and I recall the head of their
investment organization pounding the table and saying, "We'll never
sell Avon Products; it's such an outstanding company." I wonder if they
still have it?

Professionals, like the public, love to buy on declines. They also make
mistakes and incur losses. In many ways, some institutions are like the
public. Money management organizations have their experienced and
realistic decision makers, as well as their less seasoned or unrealistic
portfolio managers and analysts.

It is, therefore, not always as crucial to know how many institutions
own a stock as it is to know which of the better ones own or have pur-
chased a particular stock in the last quarter. The only important thing
about the number of institutional owners is to note the recent quarterly
trend. Is the number of sponsors increasing or decreasing?

Note New Stock Positions
Bought in the Last Quarter

New institutional positions acquired in the last quarter are more rele-
vent. Many investors find that disclosures of a fund's new commitments are
published after the fact, too late to be of any real value. This is riot true.
These reports are available publicly about six weeks after the end of a
fund's quarter. The records are very helpful to those who can single out
the wiser selections and understand correct timing and the proper use
of charts.

Additionally, half of all institutional buying that shows up on the New
York Stock Exchange ticker tape may be in humdrum stocks and much
of the buying may be wrong. However, out of the other half you may
have some truly phenomenal selections.

Your task, then, is to weed through and separate the intelligent, high-
ly informed institutional buying from the poor, faulty buying. Though
difficult, this will become easier as you learn to apply and follow the
rules, guidelines, and principles presented in this book.

Institutional trades usually show up oil the stock exchange ticker tape
in most brokers' offices in transactions of 1000 shares up to 100,000
shares or more. Institutional buying and selling accounts for more than
70% of the activity in most leading companies. I estimate that close to
80% or 90% of the important price movements of stocks on the New
York Stock Exchange are caused by institutional orders.

As background information, it may be valuable to find out the invest-
ment philosophy and techniques used by certain funds. For example,
Pioneer Fund in Boston has always emphasized buying supposedly
undervalued stocks selling at low P/E ratios, and its portfolio contains a
larger number of OTC stocks. A chartist probably would not buy many
of Pioneer's stocks. On the other hand, Keystone S-4 usually remains
fully invested in the most aggressive growth stocks it can find. Evergreen
Fund, run by Steve Lieber, does a fine job of uncovering fundamentally
sound, small companies.

Jim Stower's Twentieth Century Ultra and his Growth Investors funds
use computer screening to buy volatile, aggressive stocks that show the
greatest percentage increase in recent sales and earnings.
Magellan and Contra Fund in Boston scours the country to get in
early on every new concept or story in a stock. Some other manage-
ments worth tracking might be AIM Management, Nicolas Applegate,
Thomson, Brandywine, Berger, and CGM. Some funds buy on new
highs, others try to buy around lows and may sell on new highs.

In a capsule, buy stocks that have at least a few institutional sponsors
with better-than-average recent performance records.

(Excerpt from 'How To Make Money in Stocks')

Crossroads