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 Several years ago, I was speaking with an extremely successful investor who, I would say, is worth several hundred million dollars and has been through the stock wars going back to the '60s.
One thing he said that has always stuck in my mind is that you should always be alert for something unusual...and he added…you should always be careful of the obvious. Sounds like good "street smarts" to me.
Well, with that in mind, and while screening the stock market with the eSignal Market Scanner, I happened to come across two stocks that caught my eye. On further analysis of the fundamentals and other items, I happened to discover something very unusual: Both had been the subject of extremely heavy institutional buying by top-rated mutual funds.
With the stock market selling off in mid-April, I was looking for stocks (1) acting strong and still near a new high and (2) with solid earnings growth. In short, stocks with good technicals and fundamentals were bucking the market's downtrend.
To my surprise, the "unusual popped up. "With further research, I found that both stocks had been the subject of extremely heavy buying by some top mutual funds (aka smart money). True, the funds already did their buying, but I still regarded that as a very bullish omen.
The first stock was Patterson Cos. (PDCO), a distributor of dental products with annual sales of $2 million. PDCO was moving out of a seven-week base and hitting a new high at $51.68, on the same day the Dow was down 200 points. Talk about strong relative strength!
PDCO is a solid 20% earnings-growth stock that remains in an up trend. The company's revenue growth is running at 25% and benefiting from acquisitions. Profits are being aided by better margins. For the fiscal year ending April 30, 2005, earnings should climb 24% to $1.35 a share from $1.09 a year ago. The next fiscal year, they should be up 20%.
The stock looked fine. But, what really caught my attention was that the top fund holder was Fidelity Contrafund with a 5-star rating from Morningstar. And, not only that, the fund had a big 9% stake in PDCO. That is huge. Furthermore, Fidelity Contrafund was a recent buyer of 6.2 million shares (probable cost: $250 million).
That is some incredible buying for that stock. The next two largest fund holders were 5-star rated too. Neuberger Berman Genesis Fund had a 2.3% stake and Jensen Fund 2%.
So, what I was seeing were several "unusual" developments: A stock moving higher against a down market and some extremely heavy buying by a very well regarded fund. It could all add up to potential for more on the upside for PDCO.
Another stock that I thought was even more interesting was Euronet Worldwide Inc. (EEFT). It is based in Kansas and operates a network of some 6,000 automatic teller machines around the world. Annual revenues are approximately $380 million.
Institutions pay Euronet fees for transactions processed at the ATMs. The firm also has 10,000 point-of-sale terminals in Africa, Europe, India and the Middle East. In addition, it provides related electronic funds transfer services and products in 65 countries. The past two years, the stock has soared from 7 to 28. Most recently, it broke out from a base at 27 and appears to be resuming its up trend despite a weak general stock market.
EEFT's earnings for the first quarter should soar 115%. The Street expects a profit of 19 cents a share, up from 9 cents a year ago. The strong profit gains should extend into the second quarter when net is projected to be up 66%.
Revenue growth is running at 80%, reflecting higher income from prepaid processing. This year, EEFT's profits should soar 52% to 90 cents a share from 59 cents a year ago.
Now, here is the same unusual development as in PDCO. The largest fund holder in EEFT is 5-star-rated Waddell & Reed Advisor Science and Technology Fund with a giant 7.2% stake. It was a recent buyer of 164,000 shares. Also, 4-star-rated Vanguard Explorer Fund was a recent purchaser of 71,000 shares. So, again, we see a top fund "loading up."
The basic principle of looking for something unusual in a company or its stock could relate to more than just institutional buying. One should be alert, for instance, if some sharp new management takes over, or massive and unusual insider buying is being reported, or if a potential new product or market is developing.
One needs to be sensitive to these developments to see if they are the key that unlocks the door to a potentially lucrative investment.
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