Hi cazz69 - this is it (I posted in the SYR thread ...
The issue of whether or not institutional support is a good/bad thing was discussed previously on the SYR thread here -
16082190. It was also kindly re-posted by moloch on the TON thread here -
16082525.
So there are different lines of thought on the issue, and as mentioned in the "bottom line" below........"
Before you depend on the assumption that smart money is the leader in judging fundamentals, make sure you determine whether the institutions are investing for the same reason you are"
With regard to NAB entering, they are trading in and out of many stocks, sometimes holding not much longer than a couple of days. I doubt they are investing for the same reason that you, Prime1, are but if you convince yourself that they are, that's your affair.
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When the Dependability Becomes Instability
Of course, you can have too much of a good thing. O'Neil is careful to point out that while institutional sponsorship is attractive, a lot of institutional ownership can be a sign of danger. If something goes wrong with a company and all the institutions holding it sell
en masse, the stock's valuation can tank - regardless of fundamentals
Think of a stock as a swimming pool. The water level is analogous to the stock price, and elephants represent institutional investors. If the elephants suddenly start stepping into the pool (buy the stock), the water level (the price of the stock) will rise very quickly. However, if the elephants get spooked and leap out of that pool (or sell the stock), then the water level (price of the stock) will fall rapidly.
Remember, institutions are not only investors but also traders. In principle, they will put money into stocks only after lots of fundamental analysis, identifying where the stock price should be and compare that to where it is. In practice, however, they often forego fundamental analysis for the signals emitted by
technical indicators. Because their main worry is whether the stock price is going up or down, institutions will often concentrate on whether the price direction has any momentum."
A stock with a lot of institutional support may be close to the peak of its valuation, or full of elephants. When every mutual and pension fund in the land owns a chunk of a particular stock, it may have nowhere to go but down. Look at the meltdown of technology stocks in 2000 and 2001. Companies like Cisco, Intel, Amazon and others had an unprecedented amount of institutional sponsorship, but as the subsequent collapse of their share price demonstrated, they also had unattractive fundamentals.
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The Bottom Line
Although logic and statistics show that institutional sponsorship is a good indicator of a good company, investors should be aware that institutional investing is not always driven by quality fundamentals. Before you depend on the assumption that smart money is the leader in judging fundamentals, make sure you determine whether the institutions are investing for the same reason you are.
Read more:
Institutional Investors And Fundamentals: What's The Link?http://www.investopedia.com/articles/fundamental/03/101503.asp#ixzz3n6l7aTg3
