Whether you are a contrarian investor or like to follow the money, institutional and insider ownership can tell you a lot about a stock. These two groups have access to management and operations that can uncover information before it reaches the market. The stocks below have some of the lowest ownership and highest short interest among large-cap tech companies. If the smart money does not like the outlook, you might want to reevaluate your own position.
Follow the Money
Institutional and insider ownership are two of my favorite statistics to watch for in stocks. Few have a better grasp of the company and its outlook than those on the board of directors or the money managers with millions to invest. If these players are willing to put their own money on the table, it is usually a good sign for the company's fundamentals or outlook. Conversely, it could be a sign of weakness if a large-cap company is widely neglected by institutions and its own insiders.
Institutional investors are often referred to as the, "smart money," not necessarily because their returns spectacularly beat the market but because of the resources and personnel they have to analyze a company. In fact, most of these managers and funds barely beat their own index returns after subtracting fees.
Still, even benchmark returns minus fees are better than those earned by individual investors. Over the last 20 years, the average individual investor has posted an annual negative real return of -0.4% compared to a return after adjusting for inflation of 5.3% in the S&P500.
Average institutional ownership is just above 60% for companies in the S&P500 so an ownership around 40% or less is usually a sign of neglect. Insider ownership varies more but I like to see at least 5% owned by the people running the company. Besides information on institutional and insider ownership, I like to look at short interest for sentiment on the shares of a company. The three companies below have some of the lowest smart money ownership and highest short interest among large cap stocks.
Low ownership and weak fundamentals
Workday Incorporated (WDAY) provides cloud-based enterprise solutions, primarily for human resources and procurement management. Institutional ownership is 38.6% while insiders own less than half a percent (0.41%) of the shares outstanding. Short sellers control 18.7% of the float with 4.8 million shares.
The shares are up almost 50% since the IPO last year and the company is not expected to post a profit for years to come. This could explain much of the institutional sentiment and short interest. I would expect a company in the widely-loved cloud space to get more attention from institutional players looking for growth. The company's net loss makes valuation comparables difficult and ratios like price-earnings not applicable. Sales are growing, with an increase of 72% in the second quarter compared to the same period last year, but it may not be enough to justify the near-term valuation.
Garmin Limited (GRMN) designs, manufactures and markets global positioning systems (GPS) in five segments: automotive, outdoor, fitness, marine and general aviation. Institutional ownership is 41.3% while insiders own fewer than 5% of the shares outstanding. Short sellers control 9.5% of the float with 11.6 million shares. The price multiple of 15.1 times trailing earnings is not relatively expensive versus an average of 27.5 times for peers in the industry but revenue growth has been volatile over the last couple of years.
The company cut prices for its applications significantly over the last quarter, resulting in a surge of sales and bringing them to the ninth highest iOS revenue generator. The increase could be short-lived as estimates for the current quarter are for a 24% drop in earnings over the prior quarter. Despite a strong bounce off of the April low, shares are flat over the last year.
Zynga Incorporated (ZNGA) develops and markets online social games. Institutional ownership is 46.7% while insiders own less than a fifth of a percent (0.19%) of the shares outstanding. Short sellers control 5.3% of the float with 30.7 million shares. The company recently announced that it would cut 18% of its staff and discontinue many of its games in a restructuring effort.
Many investors were hoping on a rebound in the shares with entry into the real-money gambling games but the company reversed plans to enter the space earlier this year. The company lost 13% of its users over the last quarter alone and is not expected to post a profit this year or next. As with Workday, the company's net loss and poor earnings outlook make valuation difficult. The earnings multiple is not calculable and the shares are largely a speculative bet on a turnaround or a strategic alternative.
Avoid, sell or contrarian
Low ownership and high short interest is not a guarantee of poor future performance, it can actually be a ticket for a rebound if good news hits the stock. A short squeeze and new institutional interest could come in to drive the shares higher. I do not rely on ownership data completely but use it along with information on company fundamentals to find stocks with a weak outlook.
You can use this information in several ways. The majority of investors will simply want to avoid owning the shares in case the stock's performance lives up to low expectations. You may also want to join the short interest and profit from a decline in the share price. Conversely, contrarian investors with a more positive outlook on the shares might buy them and wait for the rest of the market to be proven wrong.