U.S. Markets closed

Stock-Picking Secrets of the Whales

Kevin Cook

Now that the broad market has probably seen its peak for a quarter or two - and entered its biggest corrective phase of the year - careful stock-picking has become more crucial than ever.

The bull market is not over, which means select industries and companies will definitely outperform as institutional investors - those with at least $100 million in assets under management (:AUM) - will continue to put money to work in stocks.

These big money players are often called 'the whales' of the market. Here are 5 currents to follow them in...

1) In a Market of Stocks, Winning = Following the Big Money

What drives stocks higher? Earnings growth. Investors buy companies or shares to capture a future stream of growing cash flows at some discount today. Earnings matter as the primary motivation, but really it's the actual buying of a stock that is required to move its price higher as demand outstrips supply.

And who does the kind of buying where demand outstrips supply? Institutions like mutual funds, pension funds, insurance companies, endowments, hedge funds, private equity, and sovereign wealth funds. All these bigger players are also 'fed' money by smaller ones like banks, brokerage and independent wealth managers, and family offices.

When you pick a good stock, you are rewarded when what you saw as a growth or value opportunity is slowly (or suddenly) recognized by these 'whales' of the investing ocean.

2) Go Where No One Has Gone Before

As the whales search for stocks they want to gobble up, they like to do it under the radar. After all, they are spending a lot of time and money researching companies with the best prospects.

So when they decide to take a significant position of 1-20% in a name, they want time to buy their shares before others notice the opportunity they found. And this is especially true with one of their favorite targets: the growing small or mid-cap company.

This is where the earnings growth is to be found. And it's also where the undiscovered opportunities often lie. But as the whales seek to accumulate 500,000, 1 million shares or sometimes much more, they have to do it slowly over time so they don't attract attention.

I have a way to track some of the best investment opportunities while they are still under accumulation. I'll share it with you in a moment after we cover the other 'currents.'

More. . .


9 Stocks the Whales Are Hiding

Big funds and pension plans try hard to keep others from spotting their key moves too soon. They need time to go all in, drive up the prices, and make big profits in any market condition.

Until now, you could only catch the first hints of their moves if you had the time, will, and expertise to comb through obscure SEC filings. Starting today, you can get in early and easily on the best of these 'smart money stocks' - and also see buys and sells from all of Zacks other services - for the total sum of $1.

See stocks now >>


3) They Have to Buy, and They Don't Have to Sell

One thing you have to realize about the whales is that they are continuously given money that is earmarked for one thing: buying stocks. In a sense, 'they have to buy.' It is their job. This is why the bull market has been so amazingly strong in the past few years after roaring back from the 2008 meltdown.

Another 'secret of Wall Street' is that 'they don't have to sell.' Often it's not the portfolio manager's money and while year-to-year returns matter to many investors, a lot of the money in their hands has a longer-term focus on finding extraordinary opportunities.

Since I've been running a portfolio this year that tracks institutional buys and sells every day, I've come across some interesting whales with deep focus, lots of cash and long time horizons.

Of course I see BlackRock and Fidelity just about every day in my screening. But what is often more interesting and rewarding is the names I see that the average investor probably won't recognize: TPG Capital, GTCR or Baker Brothers, who specialize in biotech with Tisch family money.

4) They Do Deep Homework and Hang On

Since lots of whales do their own research, they get to know companies inside and out. After a starter position of 1-2% of a company they really like, they'll make another trip to visit with the CEO, walk the facilities, and talk to suppliers and customers.

Then they plunk down another 1-2%, what we call the 'follow-on' investment. When they break above the 5% mark of ownership in a company, a special SEC document must be filed and that information is made publicly available. I pay close attention every day to those SEC filings and a few others.

And if you think about it, you can see why the whales are true investors and not 'swing traders' or even 'position traders' with time horizons measured in months. They take significant stakes in companies at early stages because they know that small and mid-cap enterprises are the ones with the biggest growth potential, where they can ride the opportunity to double or triple in value.

We just want to take a piece of that growth trajectory. And we make sure our timing is sound with the Zacks Rank on our side. Whale-sized interest plus earnings momentum is a big win-win.

5) The SEC Data Mountain and Its Secret Money Trail

There are thousands of SEC institutional filings published every month. There is no way to sort through all the 13F, 13D and 13G filings and find whales to follow. If you took the time to scan over a few forms, your eyes would soon start to glaze over. I think the SEC purposely makes these forms hard to interpret, even cryptic.

The solution is having an automated screen that can receive all the filings from the SEC and then filter and sort all the data into the essentials we want to see: the who, what, when and how much of every big money acquisition or sale.

We have such a screen and I run it every day, looking to see what the big money is up to. And we also built our screen to match significant buying or selling against the Zacks Rank. This has given us nice winners in the past few months like Zillow (Z), Lions Gate (LGF), Conn's (CONN) and Salix Pharmaceuticals (SLXP).

Who's Buying Your Stocks?

But our screen doesn't just spit out stock picks for us. We still have to do our homework once we have some names. I always want to know who the whale is and what he or she is up to. Is it a big-name activist investor like Carl Icahn or Bill Ackman? What are they really after and do we want to be a part of it?

And I also like to know what the size (:AUM), overall goals and investing history is of the whale. Many times I find big 'under the radar' private equity players like TPG with excellent research processes and results. Other times I find the smaller institutions like GTCR or Baker Brothers with unique expertise, focus and remarkable success.

What's always rewarding is when I start to see more than one whale coming to nibble on a stock. Then I know good things are going to happen. In fact, some little whales specialize in following the giants of the market ocean.

Add it all up, and combining our earnings momentum model with 'whale watching' is a killer combination.

How to Take Advantage

Zacks Follow the Money Trader monitors a vast, ever-changing database to track those institutional whales from their earliest filings. We want to get in on their best stocks before they fully build their positions and before other institutions join in and drive up the prices. Then we filter those moves down even further through our proprietary indicators. Right now, only 9 stocks make the grade.

That's how FTM beats the market, in fact nearly doubling it last quarter. Starting today, for a full month, I'm inviting you to see its real-time buys and sells, plus those of all other Zacks services, for the total sum of $1.

Get details on Follow the Money Trader now >>

Good Investing,

Kevin Cook

Kevin, a Senior Stock Strategist at Zacks, is a recognized authority in global markets and noted for predicting and tracking the movement of smart money. He provides commentary and recommendations for the Zacks Follow the Money Trader.

Zacks Investment Research

More From Zacks.com