Institutional Sponsorship

Can Be A Good Tip Off

Every year a large number of stocks go public.

Analyzing a recent new issue as a possible buy requires the normal fundamental and technical approaches - and some special analysis.

On fundamentals, one should study the profit and sales trends of the company, its new products and the background of management, etc. Technically, an ideal time to buy is on a pullback or when the stock emerges from a price base of at least seven weeks.

But one important consideration an investor should check is the "quality of institutional sponsorship" of the stock.

Orthodontic Centers of America Inc. (OCAI) is a case in point. The company, trying to develop a nationwide network of dental practices, came public in late 1994 at 5 1/2, adjusted for a split.

Their timing was perfect. That was when the stock market began its big bull market run in 1995, which carried it ahead sharply during the next several months.

Orthodontic did spectacularly well too. It soared to a peak of 16 in September - almost a 200% gain. Then the stock pulled back a bit.

At the time of its run up, Orthodontic showed sales growing at an accelerating rate. During the most recent three quarters, they rose from 39% to 54% to 61%. That was due to the firm's aggressive acquisition policy.

The Street projected a 50% jump in earnings to $1.20 a share from an expected 80 cents a share.

Technically, the stock dipped below its rising 50-day moving average line. That would indicate it may spend more time basing. However, the big jump in up tick volume on a daily basis as spotted by Ticker Tape Digest at the time showed bargain hunting in the stock was taking place. That was very bullish.

But, what made Orthodontic intriguing for an investor was the quality of institutional sponsorship. When the company went public, eight mutual funds took a position. Later that leaped to 14 funds.

The Kaufman Fund, one of the top growth funds in the country, held 300,000 shares. Orthodontic had 10.4 million shares outstanding with a float of 6.5 million shares. So, the stake by Kaufman was significant.

Kaufman fund had an "A" performance rating from various rating services. That meant the fund was one of the top performers. They were hot. The logical assumption was Kaufman did its homework in Orthodontic. It liked the stock. So much so, it was willing to plunk down at least $4 million.

Other mutual funds holding Orthodontic were Berger Small Growth Fund and MFS Emerging Growth Fund. Berger Small Growth had 155,000 shares. MFS Emerging Growth had 225,000 shares. Both are high rated funds.qp

Investors can get information on mutual funds and institutional holders in a stock in several ways. The simplest is to call the company you are interested in and ask for a list of the funds holding the stock and their position. Also, Standard & Poor's gives a list.

Next, check the funds holding the stock and their performance rating. What you want is a stock that has "smart money" riding on it in the form of top performing mutual funds holding a stake.

Good stock investors must learn what funds are the best. They should also become acquainted with which funds are good in certain areas. For instance, the Brandywine Fund, has been a top fund. It's usually right when picking technology stocks.

Fidelity Magellan Fund is great at loading up on key sectors. They did terrific with in 1995 with tech stocks. In the past, they nailed the savings and loans stocks, when Peter Lynch was running the show.

Another way to get information on mutual fund holdings is to check "The Companies in the News Section" of Investor's Business Daily. Each day IBD has a large chart on the company featured. It lists major funds holding the stock. It's a good idea to save those stories for reference, especially if they are on a small growth stock.

The absence of key institutional sponsorship can be an important clue to stay away from a new growth stock. You can bet your bottom dollar that the top mutual funds have looked at that new stock. If they turn thumbs down on it. You should too.


Copyright Ticker Tape Digest August 12, 1996