Finding winning stocks is tough enough in an up market, let alone in a prolonged downturn like we have seen with the Nasdaq during its 2000-2001 bear run. The ongoing analyst downgrades of the past high-flyers leaves most of us shaking our heads at how a firm can downgrade a stock at 25 after it had traded at 200 just a few months before. We just assume that these analysts know nothing at that we're better off being our own analyst. 

While in many cases it is true that some of these analysts and their firms have ulterior motives (like landing new underwriting business), there are some that really do understand the companies they follow and some that make great calls. Likewise, there are some great stock pickers in the hedge fund and mutual fund arenas that consistently beat the Street. In fact, I sometimes trust the judgment of some of these institutional money managers much more than a underwriting-driven analyst on the buy side.

After all, with more than $7 trillion sitting in mutual funds (according to the Investment Company Institute, there are scores of top-notch investment pros in this extremely competitive industry. As in sports, every once in a while comes along a new prodigy that dominates the performance numbers for a year or more and then turns into a superstar portfolio manager. So you might ask yourself if there is there a way to find and follow some of the stocks that these institutional up-and-comers are buying. In addition, can keeping track of where the top portfolio managers are buying be profitable? I think the answer to both questions is yes, and in this article I will show you where to look.

I also like to cross check the stocks I already own or am interested in to see which institutions own them. Yes it takes time to do this, but I like very much knowing that Fidelity, Goldman Sachs, and Putnam Growth Funds are the biggest institutional owners of a tech stock I might be holding. This extra knowledge works both ways. If I own a stock and see that more institutions are buying it or adding to it, that is reassuring, and likewise, tracking the stocks of the best performing funds can also give you new ideas as to emerging sectors and individual issues. I think that this process is especially useful in tracking emerging technology growth leaders.

In recent years, you almost have to adopt the mindset of an engineer or programmer rather than a financial analyst in order to spot new winners because many of them are brand new companies without a financial track record. Rather than just guessing or relying solely on chart patterns, tracking institutional sponsorship just offers an extra edge as well as a little more piece of mind. So where is this information available?

Mutual funds are required by law to announce their portfolio holdings on a semiannual basis, and many even release quarterly information. Most funds are very closed-mouthed about what they are buying or selling, so once the information is released, it might be somewhat dated. Dated or not, some of this information can tip you off to new trends, and once a trend is started by a multi-billion dollar fund, it can sometimes have legs.

There are paid services that professionals use like AMG Data Services, Trim Tabs, or BigDough.com, and they offer extensive and up-to-date (daily or weekly) coverage of mutual fund flows and some even track hedge funds as well. These services are very comprehensive, and most professional money managers or institutions gladly pay the fees which can run into tens of thousands a year.

If that level of service is out of your price range, Morningstar Mutual Funds has a monthly service that tracks more than 12,000 mutual funds, and their very comprehensive monthly software updates cost $545 per year. They show the top holdings of each fund as well as whether certain stocks were being accumulated or sold. This type of service is great for anyone who would like to pour through the top quarterly or yearly performers and then quickly "look under the hood" at what stocks were likely behind the top performers.

One recent case where this theory of following institutional funds would have worked was in the case of Denver Colo.-based Janus Funds in 1997 through 1999. They were by far one of the hottest fund complexes during that run, and tracking their winners would have tipped you off early on that the "Internet thing" was for real. The Janus team was early on stocks like America Online (AOL | Quote | Chart | News | PowerRating), Yahoo! (YHOO | Quote | Chart | News | PowerRating), and Verisign (VRSN | Quote | Chart | News | PowerRating), and being alerted to the accumulation and then seeing the piling in of other funds "piggy-backing" would have assured you that institutions were falling in love with Net stocks.

As we now know the sad ending to the Net stock story, the main point is that by following the institutions you could have seen that big portfolio managers were just as crazy about the Net as any wild-eyed individual investor with an E-Trade account. The same thing happened with the B2B stocks and later the optical networkers. JDS Uniphase was an institutional favorite in 1998 when it was still just Uniphase (UNPH | Quote | Chart | News | PowerRating). What to watch out for is when a stock gets over-owned by funds because once everyone is in, there is simply no one else to do the buying, so a stock can sink.

If you're really not interested in paying for a service to help you track institutional money, you are probably wondering if there are free ways to accomplish this on the Internet. There most definitely are. Although many people already use free sites and are familiar with these information gems, I figured I would look at a couple examples anyway for anyone who might want a couple of examples. I am still absolutely amazed at the amount of financial information available for free at a moments notice.

You can start with any of the major portals or financial sites, and narrow your stock search from there. For this example, I figured I would look on Microsoft MoneyCentral Investor under the top-performing funds for the most recent quarter. Click here to see the top-performer list. From that list I wanted to look at top small cap growth funds, and in that list, two funds managed by one company immediately jumped out at me. The Wasatch Ultra Growth and Wasatch Small Cap Growth had fantastic looking performances for the last 3 months (up 13% and 6%) and last 12 months (up 49% and 37%), and anything that has done well in the last year is worth looking at. (Keep in mind some performance figures may cover the last complete quarter. i.e. 12/31/00.)

Clicking on the Wasatch Ultra's top ten holdings, two stocks immediately stand out. Peregrine (PRGN | Quote | Chart | News | PowerRating), and  DiD Corp. (DDIC | Quote | Chart | News | PowerRating), and clicking on the Wasatch Small Cap Growth top ten holdings I immediately notice the big addition of Microchip Technology (MCHP | Quote | Chart | News | PowerRating), of which Wasatch increased its holdings by nearly 200,000 shares. So even though this increase in those positions took place in the fourth quarter of 2000, I still have been alerted to some stocks that a highly paid group of fund mangers has felt was strong enough to buy despite a rough fourth quarter for stocks. Sure, they might have already dumped the shares, but the main point is I now have a company to look at like Microchip Technology which I had never even heard of before.

So for the purpose of showing you where I find research on Yahoo!, click the following link for the detailed information on Microchip Technology. Interesting that Prudential downgraded this $3.4 billion market cap company on March 5 despite the company has earnings and a fairly low PE of 22. Let's see what other institutions own it by clicking on the Yahoo! profile for the company. It's got a great lineup of institutional holders of Microchip that include the Capital Group, Aim, Putnam, Tech guru David Alger (Fred's Brother), and lower on the list Wasatch. Institutional ownership is very large which means that growth fund pros at these various firms own over a billion and a half dollars of this fund. Clicking on the individual funds shows yet an even more clear breakdown as to who is buying Microchip. 

While that much institutional ownership might seem like a plus for the stock, some analysts warn that too much institutional ownership (say above 40%) is too high and that it limits more upside potential because the stock is "over-discovered." On the other hand, some money mangers feel that institutional ownership has no correlation to future performance. I would say that if a market cap is relatively low, (in this case 3.4 billion) then it really hasn't had the chance yet to get over-owned.

Well this just gives a quick, basic, and inexpensive approach to how you can track institutional ownership of stocks in order to find potential winners, or to just reassure yourself that a stock has at least some sort of following among the pros. It's a qualitative approach that can help give some extra information to your trading style and can easily be used in conjunction with technical or quantitative analysis. The amount of information on the Net will no doubt keep increasing, so it pays to stay up to date with all the tools you have at your fingertips.

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