Backed by the Big Boys

Includes: DLTR, GCI, INT
by: John P. Reese

It's no secret that individual investors have been taking big chunks of money out of stocks since the market turned downward in late April -- according to the Investment Company Institute, investors removed a net of more than $46 billion from U.S. equity mutual funds from the beginning of May through mid-August. (Mutual fund flows serve as a pretty good proxy for individual investors; at the end of 2009, more than 91% of U.S. equity mutual fund assets belonged to individual investors, according to ICI.)

Interestingly, however, individual investors as a group weren't even all that keen on stocks during the big rally that began in March 2009. In fact, investors collectively were net sellers of U.S. equity funds from the beginning of April 2009 through April 2010, pulling a net of about $6.8 billion from the funds, according to ICI's data. During the same period, the S&P 500 was gaining almost 50%.

Those numbers indicate that institutional investors -- hedge funds, endowments, etc. -- led the rally that followed the deep bear market of 2007-09. And institutions have continued to buy stocks this summer while the market has struggled. According to the research group Lipper, institutional investors added more than $13 billion to world equity funds in June and July while many individual investors were running from stocks.

It's no surprise, really. The bear market that accompanied the 2008 financial crisis and "Great Recession" was one of the harshest in the U.S.'s history. Given the depth of the bear and the pain it caused, it's to be expected that individual investors would remain skittish for a lengthy period, even after the market bounced back. Institutional investors, meanwhile -- either because they are required to have a certain amount of their portfolio in stocks, or because they have more experience in dealing with major market turbulence -- should be more likely to buy up shares amid lingering fear.

While the skepticism of individual investors has hurt the market in the past year or two, the silver lining is that there should be plenty of fresh powder left to spark future rallies when average investors finally are ready to dive back into stocks. When that will happen, of course, is anyone's guess.

In the meantime, there's certainly a decent chance that institutional investors will continue to have a greater-than-usual impact on stocks. With that in mind, I thought I'd look to see which stocks that get approval from my Guru Strategies -- each of which is based on the approach of a different investing great -- are getting a lot of love from institutions these days. Here are a few that make the grade.

Gannett Co., Inc. (NYSE:GCI): This Virginia-based media giant publishes more than 80 daily U.S. newspapers, including USA Today, and more than 650 magazines and non-dailies. It also operates numerous television stations, and a variety of web sites. About 99.8% of its shares are owned by institutions -- far more than competitors like News Corporation (5.2%) and New York Times Company (70.5%). (All ownership figures are from Morningstar.)

With the world of print media struggling to adjust to the Internet age, stocks like Gannett have really struggled in recent years. But my David Dreman-based contrarian model, which targets strong firms whose shares have been beaten down because of fear or apathy, thinks Gannett's a diamond in the rough. The model considers Gannett a contrarian pick because both its price/earnings and price/cash flow ratios fall into the market's bottom 20%. But while investors are avoiding it, my Dreman-based approach sees a lot to like about Gannett, including its 31.1% return on equity, 13.7% pre-tax profit margins, and the fact that it upped earnings per share from $0.48 in the first quarter to $0.72 in the second quarter.

World Fuel Services Corp. (NYSE:INT): Based in Miami, World Fuel provides fuel and services to aircraft, petroleum distributors, and ships at more than 2,500 locations around the world. It has a market cap of just $1.6 billion, but has taken in more than $15 billion in sales in the past year. Institutions own almost 99% of its shares.

World Fuel gets approval from two of my models. My Peter Lynch-based model considers the stock a "fast-grower" -- Lynch's favorite type of investment -- because of its impressive 24.4% long-term growth rate. (I use an average of the three-, four-, and five-year EPS growth rates to determine a long-term rate.)

Lynch famously used the P/E/Growth ratio (which divides a stock's price/earnings ratio by its growth rate) to find good stocks selling on the cheap, and the model I base on his writings likes P/E/Gs below 1.0. When we divide World Fuel's 11.9 P/E (using trailing 12-month earnings) by its growth rate, we get a P/E/G of just 0.49. This model also likes World Fuel's 1.37% debt/equity ratio.

My James O'Shaughnessy-based growth model, meanwhile, looks for firms that have upped EPS in each year of the past five-year period, and World Fuel fits the bill. The model also likes World Fuel's 67 relative strength (a sign it's being embraced by the market) and 0.1 price/sales ratio (a sign it hasn't gotten too pricey).

Dollar Tree, Inc. (NASDAQ:DLTR): Based in Virginia, Dollar Tree's stores offer a wide variety of discount merchandise, ranging from food items to household goods to toys to lawn- and garden-related items. Institutions own more than 97% of its shares.

Dollar Tree gets approval from the same tandem of strategies that like World Fuel. My Lynch-based model likes the fast-grower's (21.2% long-term EPS growth rate) 0.84 P/E/G ratio and 19.3% debt/equity ratio. The O'Shaughnessy growth model likes its seven straight years of increasing EPS, as well as its 1.08 price/sales ratio and 81 relative strength.

Disclosure: I'm long DLTR.