Institutions Betting Big on Micro-Caps

by: Dr. Kris

tf #3

It’s been clear in doing my daily *Blue Plate Specials* that low-priced stocks have been leading the pack both in price appreciation and in trading volume. For many stocks, volume increases have been huge–on the order of five to as much as fifty times normal–which can only mean that institutions are gobbling them up.

This tactic was echoed by Henry McVey, the head of Global Macro and Asset Management at Morgan Stanley, who said in a CNBC interview last week that his firm is currently targeting undervalued companies with high growth potentials. (McVey defines “high growth” as companies with annual sales growth > 15% and top line growth > 5%.) Although “undervalued” does not necessarily equate to “low-priced,” the following discussion will show you that at least for right now, it’s the lower priced stocks that are stealing the limelight.

To find out more, I went to MSN MoneyCentral where they have a Power Screener that finds those stocks with increased institutional interest in the past month. (Note: I don’t have any affiliation with MSN and chose this screener because it’s free and available to everyone.) Below is a list of the top 50 stocks generated by the screener as of this writing (12/07/09).

Institutional Ownership up since last month ranked according to % price change:

Institutional Gains Table 12-07-09
Click to enlarge

Table Observations
All of these stocks are up at least 37% from their price a month ago with the top 23 stocks up more than 50%. So what, if anything, do these issues have in common?

1. Micro-Small cap stocks: Most of these companies fall into the micro (<$250 million) and small ($250 – $1 billion) market capitalization categories. Of the top fifty, only four are over $1 billion and then not by much.

2. Under $10. Obviously, low-cap stocks typically trade at low prices. Over half (27) of the above listed issues trade under $8; 47 trade under $20; and the other three trade below $40. It seems as if Wall Street is looking to make up for lost revenues just like the rest of us.

3. Sector specific: What’s interesting about this list is what sectors aren’t represented. The commodities (metals, mining, and basic materials) sector that has been on fire as of late is virtually absent from the list. The exceptions are the junior Canadian firms with the five letter stock symbols. Of these seven, three are involved in metal and mineral exploration (GBBRF, IPMLF, CPQRF), two are involved with pulp and timber (IFSPA and CFPUF which is a trust with a nice 5.2% dividend yield) and one is involved with oil and gas exploration (OTC:CDDRF). Perhaps these lesser known names still have price appreciation potential as compared with their higher-priced and more well-known compadres such as Freeport-McMoran (NYSE:FCX) and Rio Tinto (RTP). The other energy names on the list fall into the alternative energy category (wind, solar, biofuels) which is a sector with a large expected growth potential.

Institutions may also be buying on takeover speculation. The hot takeover sectors include biotech of which there are four in the $4-$6 range (SNTA, CYTX, NABI, KERX) and regional telecoms of which the two, CTEL and MXT, are foreign-owned and operated. Takeover speculation could also be a consideration factor in some of the other sectors especially the airlines and the semiconductors.

While the agricultural sector has been hot for the larger domestic companies, the Chinese equivalents may be greatly undervalued. Underestimated valuations could be one good reason for the presence of so many Chinese firms on the list.

For some, I couldn’t find any good reason why they should have made the list. Take for example La-Z-Boy (NYSE:LZB). Sure, the stock reclined more than it should have during the height of the recession but I’m wondering if there’s more to it than meets the eye–perhaps it’s a play on the aging of the baby boomer generation?

4. New companies: Roughly half of these companies have been trading on US exchanges for less than 5 years. (Some of them represent Chinese firms and have only recently begun to trade in the US.) Institutions know that it’s the nascent companies with exciting new products that typically offer the most room for growth.

5. Unfairly beaten down?: Skimming through the charts of these companies, I found many of them whose share prices suffered significantly during the recent recession. Money managers probably realized that many of them were more than unfairly beaten down and are now scooping these unloved orphans at still discounted prices.

Should we follow their lead?
Many of the stocks on the above table have been on my radar screen for a while and make frequent appearances on my daily Blue Plate Specials. Whether one should rush out and buy them is of course a personal decision to be made after doing your own research and analysis. Right now, the market seems to want to go higher but there’s been a definite lack of conviction. After the holidays the forecast might be clearer and then I, for one, will be much more confident of following in the footprints of the professionals.

Further thoughts
I’m sure there are other reasons for the pronounced institutional interest in the low-priced spreads but they’re not including me in on their reasoning. One thing, though, that they are letting us in on is their emphasis on commodities, especially metals. In his interview McVey said that he thinks that commodities are the new real-estate for that’s where the future price appreciation is going to take place due to increasing demands in the emerging markets as well as a hedge against the falling greenback. He’s certainly not alone in these views.