There are a number of factors that influence stock prices. In this year of volatility, investors are well acquainted with the global and domestic events shaping the progress in markets. In addition to global and domestic events, economic data also play a crucial role. Also, stocks move based on their fundamental and technical aspects. However, there is another major mover, which we often overlook.
In many cases, stocks may be guided up or down based on institutional transactions, including that of mutual funds. Stock prices typically get impacted by institutional buying or selling. This is because, the size of such a transaction is massive. The effect on stock movement can be for the short or the long term. In fact, the interesting institutional herding approach also moves stocks.
Moreover, mutual funds’ interest in a stock after their intensive research indicates its potential to appreciate. Similarly, when an institution targets offloading a stock, it might be a signal for investors to drop it from their portfolios as well.
However one must remember that fund managers may not be always correct. They may bet on the wrong stocks, and blindly following their actions might lead to a loss as well. Investors also need to look at other criteria alongside the institutional actions. To help investors pick the right plays, we will highlight 5 stocks that carry a favorable Zacks Rank.
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How the Markets Performed in 2015
The performance of the broader markets (funds and stocks) has followed the same direction in 2015. This is obvious and expected due to the intertwined nature of the financial instruments. For the stock markets, amid high volatility, the Dow had failed to end in the green in 1H 2015, while the S&P 500 managed to gain just 0.2%. The Nasdaq however appreciated 5.3%.
Thereafter in the third quarter, China-led global growth fears, uncertainty about the Fed rate hike followed by the no liftoff decision, sell-off in biotech stocks and tumbling commodity prices among other factors resulted in the worst quarter in four years. Only 17% of the mutual funds managed to finish in the green in the third quarter. The stocks too had a torrid time in the quarter, particularly so because of the August tragedy. The Dow, S&P 500 and Nasdaq declined 7.6%, 7% and 7.4%, respectively.
Institutional Transaction Effects
Immediate Effect:Activity of institutional holders often leaves a palpable and immediate impact on stock prices. A stock moves south when a mutual fund liquidates its entire holdings and the supply is greater than the demand. The action will thus reveal a bearish sentiment. Similarly, mutual fund adding up to a good amount of a stock will move the stock price up, as total demand will outdo total supply.
Long-Term Effect: The magnitude of institutional holdings is such that when they own a stock over a long period they create a bullish trend. The sustained impact of institutional transaction is long term, and when they decide to gradually keep increasing the stake, the stock price further appreciate. The buy-and-hold strategy over the long term may also influence retail investors, as they may speculate further appreciation in a stock since the funds have chosen to stick to it. In fact, other fund managers may follow suit, leading to institutional herding.
Institutional Herding: The term ‘herding’ actually explains the trend. In many cases a big institutional transaction may spur other fund managers to wonder whether they are missing out on an opportunity. So, the fear of losing out may compel others to either bet big or offload holdings if their competitor has done so. Eventually, this will intensify the price fluctuations.
4 Stocks with Increasing Institutional Transaction Trend
As already stated, institutional trading activity may not be correct every time. Don’t we have innumerable examples of Equity Mutual Funds lurking in the red? So, investors must also look into other aspects alongside institutional activities.
Below we present 4 stocks that are not only seeing increased institutional transaction, but also carry a favorable Zacks Rank.
Arista Networks, Inc. ANET is engaged in providing cloud networking solutions for data center and cloud computing environments. It offers ethernet switches, pass-through cards, transceivers, cards, and enhanced operating systems, host adapter solutions and networking services.
Arista Networks carries a Zacks Rank #2 and is up 4.3% over the last one month. Year to date, it has gained 18.2%. In the prior quarter to latest quarter, net institutional share purchases were 5,563,360 and change in institutional shares held was 16.52%. Among other positives, Arista Networks’ current quarter and current year growth estimates are 28.4% and 63.7%.
Nevro Corp. NVRO is a medical device company. It engages in developing and commercializing a neuromodulation platform for the treatment of chronic pain.
Nevro carries a Zacks Rank #2 and is up 33.7% over the last one month. Year to date, it has gained 63.7%. In the prior quarter to latest quarter, net institutional share purchases were 3,960,380 and change in institutional shares held was 20.85%. Among other positives, Nevro’s current year growth estimate is 61.9%. Current quarter loss estimate has narrowed from 67 cents to loss of 56 cents.
TrovaGene, Inc. TROV is a molecular diagnostic company. Its technology uses safe and simple urine collection and can be applied to a broad range of applications, including prenatal testing.
Nevro carries a Zacks Rank #2 and is up 6.9% over the last one month. Year to date, it has gained 23.3%. In the prior quarter to latest quarter, net institutional share purchases were 1,514,210 and change in institutional shares held was 14.77%. Among other positives, TrovaGene’s current quarter and current year estimates were revised up 1.7% and 5%, respectively, over the last 30 days.
ServisFirst Bancshares, Inc. SFBS is a bank holding company. Through its subsidiary, ServisFirst Bank, it provides business and personal financial services.
ServisFirst Bancshares carries a Zacks Rank #2 and is up just 1% over the last one month, but year to date it has gained 43.7%. In the prior quarter to latest quarter, net institutional share purchases were 1,290,680 and change in institutional shares held was 16.24%. Among other positives, ServisFirst Bancshares’s current quarter and current year growth estimates are 8.6% and 8.4%, respectively.
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