Jubak's Journal
10 stocks the big money is buying
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I looked at stocks that major money managers have been buying lately and found a diverse group of 10 stocks that have what looks like the right stuff.
By Jim Jubak
It’s that time of year again when the big boys make big moves in their portfolios to get ready for year end. Some managers of big portfolios for mutual funds, institutions and pension funds will spend the next month piling into the stocks that have done best this year in the hope of catching a few extra percentage points of performance. Others, having sold their losers and taken profits in a few winners, will be busy rotating into sectors that they think will star in 2004. And everybody is getting ready for the flood of year-end cash coming their way in January from retirement accounts such as 401Ks and IRAs.
So what are the big boys buying now? And are any of these stocks attractive to individual investors who care only about profits and not dressing up a portfolio to impress a client?Money 2004.
Smarter, faster and easier
than ever.
Here are 10 Big Boy Buys that have the fundamental right stuff to be more than just an end-of-the-year flash in the pan.
How I built my list
Using MSN Money’s Stock Screener, I built a screen that identified stocks that have seen a big increase in ownership by institutional investors in October, the month when most mutual funds typically close out their books. And I only searched for stocks where institutions already owned at least 30% of the company.
The stocks have moved up in price to cross above their 50-day-moving averages, often an important technical “buy” signal for institutional investors. But they’re still selling for a price below their 52-week high, something likely to encourage buying by institutions that are worried about valuations in this market.
They all have gained momentum in the last few months compared with stocks as a whole. Their three-month relative strength is higher than their relative strength for the last six months. (Relative strength compares a stock’s price performance with that of all other stocks over the specified period. The higher a stock’s relative strength, the larger the percentage of its peers that it has outperformed. I required all stocks to have a minimum three-month relative strength of 40 to make this list.)
And as a double-check on the judgment of institutional buyers, none of these stocks have seen net insider selling in the last month. Some, in fact, have seen substantial net insider buying.
(Two final rules to ensure enough liquidity so retail investors can get in and out without being completely at the mercy of big institutions: I required stocks in this screen to trade for more than $10 a share and to have market capitalizations above $250 million.)
That produced a list of 58 stocks on Dec. 3. (You can get the full list and the rules for building this screen on our Stock Screener here.)
From that list, I culled 10 Big Boy Buys with the positive fundamentals to back up their institutional momentum.
10 Big Boy Buys
Company Industry Dec. 3 price 52-week high Institutional ownership % 3-month relative Strength
Arkansas Best (ABFS, news, msgs) Trucking $32.08 $34.73 82 63
CNF (CNF, news, msgs) Freight transportation 34.08 35.77 91 63
eCollege.com (ECLG, news, msgs) Internet software and services 22.97 26.71 56 96
Emulux (ELX, news, msgs) Computer peripherals 29.15 29.94 79 73
John H. Harland (JH, news, msgs) Business services 27.33 29.04 78 48
Lamar Advertising (LAMR, news, msgs) Outdoor advertising 35.5 38.04 76 43
MicroStrategy (MSTR, news, msgs) Business software and services 55.11 57.1 61 76
Nektar Therapeutics (NKTR, news, msgs) Drug delivery 13.61 15.43 79 72
Peabody Energy (BTU, news, msgs) Coal 34.89 35.11 91 66
ProLogis Trust (PLD, news, msgs) Industrial real estate investment trust 31.03 31.99 93 50
My winners show good fundamentals
Why these 10 instead from the 58 that the screen originally surfaced?
Because these stocks have strong fundamental winds at their backs to go along with the recent momentum provided by institutional investors.
For example, trucking and logistics companies such as Arkansas Best (ABFS, news, msgs) and CNF (CNF, news, msgs) will see freight volumes pick up as the U.S. economic recovery leads to increases in manufacturing activity, inventory restocking, and retail shipments. Other companies on the list such as Lamar Advertising (LAMR, news, msgs), John H. Harland (JH, news, msgs), Peabody Energy (BTU, news, msgs) and ProLogis Trust (PLD, news, msgs) also are leveraged to the economic recovery.
The current economic recovery isn’t limited to the United States. And several stocks in this group give an investor exposure to growth in the global economy as well as to the U.S. recovery. ProLogis Trust, for example, which owns or manages distribution facilities totaling more than 200 million square feet in the United States, just signed a letter of intent to build 400,000-square-feet of distribution space in Shanghai. CNF is truly a global logistics company: it can provide everything from less-than-truckload ground shipping in the U.S. to over-night air express around the world using CNF’s Emory airfreight subsidiary.
As the recovery gains strength, it will convince CEOs that they can invest safely in capital equipment -- and, in fact, that they absolutely must in order to keep up with demand. That finally should produce the long-awaited up-tick in corporate spending and that should increase revenue and earnings at companies such as Emulux (ELX, news, msgs) and MicroStrategy (MSTR, news, msgs). Emulux is the world’s largest supplier of storage networking switches and host bus adapters to storage and server makers such as Cisco Systems (CSCO, news, msgs). MicroStrategy sells software that lets companies analyze their raw data to find trends in such areas as sales, costs and product development time.
The current U.S. recovery is a work in progress as companies continue to restructure in order to cut costs to keep pace with low-cost producers overseas. Some of the companies on this list, such as John H. Harland and Arkansas Best, are in the midst of their own cost-cutting and restructuring programs designed to improve margins. At Arkansas Best, that has involved selling off the lagging less-than-truckload business of its Clipper Exxpress unit. At John H. Harlan, the cost-cutting is designed to fend off competitors seeking to take share in the financial forms and check printing market that remains an important core business for the company even as it bulks up its electronic product offerings.
Nektar Therapeutics (NKTR, news, msgs) is involved in a different kind of restructuring, one that sees drug companies anxious to extend the life of patented products by developing new and improved methods for delivering those drugs. That’s the specialty of Nektar Therapeutics. The company has partnerships with Pfizer (PFE, news, msgs), Schering-Plough (SGP, news, msgs) and Chiron (CHIR, news, msgs), among others, for products that use the company’s delivery systems. Nektar has five products approved for the U.S. market and four more in advanced testing trials.
And finally, there’s eCollege.com (ECLG, news, msgs), which plays into another kind of restructuring demanded by the current recovery: The need for re-training and additional education for workers who have lost their jobs or who are in danger of losing them. eCollege.com sells the “tools” that let traditional colleges and the new generation of for-profit colleges put their courses on line. The company now has 284 customers and sells services and products that range from marketing to attract new students to software to administrative support.
Do your own research
A list like this is always just the starting point for an investor. This screen isn’t designed to pick up all of a company’s flaws -- such as the problems that ProLogis Trust is facing in getting rid of its underperforming cold storage operations.
And no screen will tell you much of anything about company strengths that can’t be quantified, such as the quality of the current management team and the quality of the company’s corporate governance. That’s not a minor issue for a company such as eCollege.com, where CEO Oakleigh Thorne and investment partners associated with him owned 55% of the company’s stock as of the end of 2002.
And no screen tells you much about the company’s prospects for the future. This screen, for example, doesn’t alert an investor to ProLogis Trust’s extensive inventory of land in Europe that’s available for expansion in that market, or evaluate the prospects for John H. Harland’s software business.
That’s where your own due diligence has to pick up the slack. Even when the big boys are rushing to buy.
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