Institutional Support is Important

I can't emphazise enough how important institutional support is for a company/stock. Most of the big moves in the stock market (except for the pump and dump stocks) are made when institution is involved (either buying or selling). Retail investors can impact the stock price to some degree but if you want a bigger move, you will need institution to be involved. Obviuosly, institution will only buy if they believe the company has great future and that the stock will go higher. I still encourage people to look at the company business result and prospect before looking at other metrics like the institutional support etc.

Of course, many people will say that after the fact information is no good to us (and that hindsight is always 20/20). However, I will give some example where stock that has gone up due to the institution buying can continue to go up for some more. But ultimately, I want to show that predicting (and buying) stocks that institution will buy in the future will give much higher potential return (with greater risk also of course) .

I will give 2 examples today. Both of them are the stocks that I have mentioned before. The first one is AOB. When I found AOB about 2 years ago, it was a $1 stock listed at a bulletin board which institution probably will not touch. But the business is healthy (making $.15 EPS) and balance sheet is also nice with enough cash and sharehodler equity. The stock went to AMEX. Then it went up to $4-$5 after several quarters of outstanding growth and smart acquisitions (HSPL, GLP, HQPL). Some private placement made to fund acquisitions below $2, which can be argued that some accredited investor (and not only retail investors) help the stock price to go up. But the big break didn't come until Morgan Stanley bought $25M worth of AOB stock at $4.8 per share (and also got the warrant to purchase more stocks at about $6.35). Other institutions have also bought the stocks since then. The rest as they say is history (ten-bagger at $10+ and 25% institutional holding as of recently). Even if one had bought together with Morgan Stanley (as the SEC filing by Morgan Stanley was made public), you would still make some good returns. AOB is listed in NYSE now.

CXTI has similar story with AOB in terms of great business and great growth. The stock price was on a roller coaster ride with one mistakes made by the management (by accepting floorless deal, some people called it toxic financing), but the CEO explained in the last earning call that he didn't have much choice and he has learned the lesson and will not do such things again. As new contracts are signed and backlog increases to record level, the stock started to increase in price. At one time the trailing PE was below 3. (when the price dip to 80 cents last year, and was below 80 cents less than 2 years ago). Institution started buying as it goes up to $3, and at about $4.5-$5.5, JLF asset management bought almost two million shares (pushing their total holding above 5M shares according to the form 4 filings). Since then the stock price has been above $5+ range.

I think these two examples show how powerful institutional holding (or to be exact, the increase in institutional holding) can be. However, I will refer back to my investing strategy which is fundamental/value investing. I do believe that this is the key in predicting future increase in institutional holding: Companies which has good business results (sustainable profit), good prospect/future growth and at a reasonable/cheap valuation.

All the best finding those good companies that institution might/will be buying in the future.

Sidarta Tanu