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At any given moment, retail investors can instantaneously enter and exit any stock out of the thousands that are publicly traded. Because of the internet, commission-free trading, and more information accessible than ever in human history, small, individual investors are empowered more than ever before. However, the positives mentioned above also come with a caveat. With so much power at their fingertips, retail investors often fall victim to psychological errors, overtrading, and paralysis by analysis.
A Solution: Seek Institutional Quality Stocks
The first step to fighting the “retail investor dilemma” described above is to gravitate toward institutional quality stocks – that is stocks that mutual funds, pension funds, and other large investment firms favor. There are 3 main reasons retail investors should select institutional quality stocks, including:
High Liquidity, Low Beta
All else equal being equal, institutional quality stocks are much easier to hold onto and trade smoother than illiquid. For example, an illiquid stock trading 50,000 shares daily can tank on bad news and be difficult to exit if just a few mid-size investors jump ship. Conversely, a liquid stock like Apple ((AAPL - Free Report) ), which trades close to 100 million shares a day on average, can absorb such “tape bombs.” In fact, AAPL has a beta of 1.28, meaning that based on its historical volatility it is only 28% more volatile than the S&P 500 Index.
Image Source: Zacks Investment Research
Due Diligence
One of the key benefits of being an institutional investor is that mutual funds have large research teams, the best platforms, and some of the brightest minds. In other words, if an investor like Warren Buffet owns a stock, you can bet he has done his research. Using Apple as an example once more, the tech juggernaut has beaten earnings expectations in 20 of the past 21 quarters.
Image Source: Zacks Investment Research
Time Horizon
While institutions have an advantage in research, retail investors have the advantage of flexibility and execution. It can take months, and in some instances, years for a large institution to build a position. On the other hand, retail investors can purchase all the shares they desire in a single day and piggyback on the institutional catalyst (retail investors can also exit rapidly if things go wrong). Remember, large investors cannot hide – their accumulation footprints can be observed by examining a price and volume chart.
Zacks Rank #1 (Strong Buy) stock PANW is a leader in the cyber-security space. The company benefits from increased adoption in its next-generation security platforms as the rise in remote work spurs demand for more robust security. PANW has the ingredients of an institutional leader. Last quarter’s earnings rose 83% year-over-year, it is part of a top 25% ranked industry, and analysts anticipate robust double-digit earnings growth for the remainder of 2023.
Wednesday, shares of Microsoft retreated after the company reported fourth-quarter fiscal 2023 earnings that improved 20.6% year-over-year and beat Zacks Consensus Estimates by 5.91%. Why did the stock pull back?
1. MSFT shares recovered all of the losses from the 2022 bear market and are returning to all-time highs. Often, the first test of a big resistance zone is a cause for a pullback.
2. The strong earnings were likely priced into shares – remember, even the strongest stocks pull back.
3. Management tempered AI expectations and said revenue derived from AI would be a “slow ramp up”.
Investors would be wise to treat Microsoft’s earnings retreat as normal action. The company was strong before its AI rollout, and any AI revenues next quarter, mixed with tempered expectations, should propel the stock higher into year-end. Also, MSFT is the third largest holding in Zacks Rank #1 mutual fund Fidelity Contra Fund ((FCNTX - Free Report) ). Managed by legendary investor Will Danoff, FCNTX is one of Wall Street’s largest and most successful funds.
Though iconic CEO Jeff Bezos is no longer at the helm, Amazon continues to benefit from solid e-commerce sales (recently recorded record “Prime Day” sales) and its dominance in the cloud space (AWS). Unlike MSFT, AMZN shares may be attractive to bargain hunters. The stock remains well off its all-time highs while its price-to-sales ratio hovers near all-time lows.
Image Source: Zacks Investment Research
Conclusion
The three stocks mentioned above are true market leaders with institutional backing. The pullbacks seen in PANW, MSFT, and AMZN should not cloud investor judgement - each has robust fundamentals and a plethora of catalysts. Furthermore, the first pullback to the 10-week moving average after a significant breakout tends to be an area where institutions step in to buy shares.
Image Source: TradingView
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3 "Hedge Fund Hotels" Pulling into Support
The Retail Investor Dilemma
At any given moment, retail investors can instantaneously enter and exit any stock out of the thousands that are publicly traded. Because of the internet, commission-free trading, and more information accessible than ever in human history, small, individual investors are empowered more than ever before. However, the positives mentioned above also come with a caveat. With so much power at their fingertips, retail investors often fall victim to psychological errors, overtrading, and paralysis by analysis.
A Solution: Seek Institutional Quality Stocks
The first step to fighting the “retail investor dilemma” described above is to gravitate toward institutional quality stocks – that is stocks that mutual funds, pension funds, and other large investment firms favor. There are 3 main reasons retail investors should select institutional quality stocks, including:
High Liquidity, Low Beta
All else equal being equal, institutional quality stocks are much easier to hold onto and trade smoother than illiquid. For example, an illiquid stock trading 50,000 shares daily can tank on bad news and be difficult to exit if just a few mid-size investors jump ship. Conversely, a liquid stock like Apple ((AAPL - Free Report) ), which trades close to 100 million shares a day on average, can absorb such “tape bombs.” In fact, AAPL has a beta of 1.28, meaning that based on its historical volatility it is only 28% more volatile than the S&P 500 Index.
Image Source: Zacks Investment Research
Due Diligence
One of the key benefits of being an institutional investor is that mutual funds have large research teams, the best platforms, and some of the brightest minds. In other words, if an investor like Warren Buffet owns a stock, you can bet he has done his research. Using Apple as an example once more, the tech juggernaut has beaten earnings expectations in 20 of the past 21 quarters.
Image Source: Zacks Investment Research
Time Horizon
While institutions have an advantage in research, retail investors have the advantage of flexibility and execution. It can take months, and in some instances, years for a large institution to build a position. On the other hand, retail investors can purchase all the shares they desire in a single day and piggyback on the institutional catalyst (retail investors can also exit rapidly if things go wrong). Remember, large investors cannot hide – their accumulation footprints can be observed by examining a price and volume chart.
3 Institutional-Quality Stocks Pulling Back
Palo Alto Networks ((PANW - Free Report) )
Zacks Rank #1 (Strong Buy) stock PANW is a leader in the cyber-security space. The company benefits from increased adoption in its next-generation security platforms as the rise in remote work spurs demand for more robust security. PANW has the ingredients of an institutional leader. Last quarter’s earnings rose 83% year-over-year, it is part of a top 25% ranked industry, and analysts anticipate robust double-digit earnings growth for the remainder of 2023.
Image Source: Zacks Investment Research
Microsoft ((MSFT - Free Report) )
Wednesday, shares of Microsoft retreated after the company reported fourth-quarter fiscal 2023 earnings that improved 20.6% year-over-year and beat Zacks Consensus Estimates by 5.91%. Why did the stock pull back?
1. MSFT shares recovered all of the losses from the 2022 bear market and are returning to all-time highs. Often, the first test of a big resistance zone is a cause for a pullback.
2. The strong earnings were likely priced into shares – remember, even the strongest stocks pull back.
3. Management tempered AI expectations and said revenue derived from AI would be a “slow ramp up”.
Investors would be wise to treat Microsoft’s earnings retreat as normal action. The company was strong before its AI rollout, and any AI revenues next quarter, mixed with tempered expectations, should propel the stock higher into year-end. Also, MSFT is the third largest holding in Zacks Rank #1 mutual fund Fidelity Contra Fund ((FCNTX - Free Report) ). Managed by legendary investor Will Danoff, FCNTX is one of Wall Street’s largest and most successful funds.
Image Source: Zacks Investment Research
Amazon ((AMZN - Free Report) )
Though iconic CEO Jeff Bezos is no longer at the helm, Amazon continues to benefit from solid e-commerce sales (recently recorded record “Prime Day” sales) and its dominance in the cloud space (AWS). Unlike MSFT, AMZN shares may be attractive to bargain hunters. The stock remains well off its all-time highs while its price-to-sales ratio hovers near all-time lows.
Image Source: Zacks Investment Research
Conclusion
The three stocks mentioned above are true market leaders with institutional backing. The pullbacks seen in PANW, MSFT, and AMZN should not cloud investor judgement - each has robust fundamentals and a plethora of catalysts. Furthermore, the first pullback to the 10-week moving average after a significant breakout tends to be an area where institutions step in to buy shares.
Image Source: TradingView