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The stock market hasn’t changed much over the years. When there are more buyers than sellers, stocks go up, and vice versa. It’s not that complicated.
But in today’s markets, the numbers of buyers and sellers are getting fewer. As more and more investors turn their money over to mutual funds, hedge funds and other institutional investors, the buying and selling decisions, and therefore which stocks go up and which go down, rests in the hands of fewer and fewer people.
It’s a trend you can’t avoid. But you can sit back and complain about it or just do what they do…before they do it. Beat them to the punch. After all, with more than $10 trillion in investment capital to throw around at stocks of their choosing, you don’t want to get caught on the wrong side of them.
Their power base is only increasing. Just last week, another $4.12 billion flowed into the hands of institutional money managers. The week before, another $13.26 billion worth of checks were sent to institutional investors. They’re not going away. But in this case, we should be thanking them.
You see, individual investors have to do what institutional investors do before they do it to win big in today’s market. And what do institutional investors look at, you ask? To be honest, they look at everything. But over the past few years, they’ve been focusing on two key factors.
Wall Street’s throngs of over-paid, under-performing analysts are pretty predictable creatures. When they find something that works, they do that until it doesn’t work anymore.
Over the last few years, the institutional investor community has focused on just two factors. I know it’s hard to believe, but price-to-earnings, price-to-sales, price-to-book, etc. are pretty much completely useless unless the big money is using them.
And if you’ve bought any stocks because of a low P/E ratio or high book value over the past few years, you probably understand all too well. The majority of them have been lagging behind the overall markets. Meanwhile, other stocks that appear overvalued under traditional measures have been steadily climbing.
Here’s why. The two most important things that institutional investors look at today are earnings surprises and analyst revisions. Those are certainly not the hard number ratios we’ve become accustomed to analyzing, but they’re not working. And for the time being, it’s best to throw them on the scrap heap.
It’s absolutely important to look at analyst revisions. Professional analysts have the advantage of spending all day looking at different companies within an industry. And when one of them catches something that no one else has, he revises his official expectations. Inevitably, the rest of the analysts find that new information and revise their estimates too. That’s why analysts estimate revisions are so closely watched.
In addition to that, earnings surprises are almost as important. It’s rare that a company beats or misses expectations just once in a year. When they beat expectations once, they tend to do it at least one more time over the next year.
For now, institutional investors have been closely watching these two considerations to make their buying and selling decision. And if the institutions do it, we’ve got to do it too. In any given day, they control 70% of trading volume and more than half of the cash ready for investment in the United States.
And it’s because of these two factors that the tech sector is poised to be the top place to have your money over the next three to six months. The bellwethers are leading the way and they’re about to attract a lot of institutional money.
Since the start of 2007, there have been 21 companies in the tech sector that have beaten analysts’ estimates twice, and analysts have bumped up their estimates for the rest of the year. That’s more than any other sector, including the red-hot gold, oil, and energy sectors.
But what’s important here is that the big players in the industry are doing well, and we haven’t seen big runs in their stock values…yet. Tech bellwethers like Corning, L-3 Communications, Brocade Communications, and Qualcomm have met both qualifications.
But the leadership isn’t all from the top. There’s plenty of second-tier tech companies getting upward revisions and beating expectations twice this year. Smaller tech companies, like Netgear (NGTR) and ADC Telecommunications (ADCT), have been firing on all cylinders.
Heck, even one of Motorola’s biggest embarrassments, Gilat Satellite (GILT), which it lost billions on when it founded it more than 20 years ago, is getting in on the act.
Again, I’m not saying that beating earnings estimates and getting positive earnings revisions are signs that a company is doing well. They’re just signs of a good stock. There is a drastic difference most of the time. But, for now, we’ve got to pay attention to these two metrics because the big money is.
The writing is on the wall and tech is poised to lead the markets over the next few months.
Of course, when an entire sector is rising, it’s pretty easy to pick winners. A rising tide lifts all boats. However, to win big in today’s volatile tech sector, we’ve got to focus on the absolutely fastest-growing opportunities.
And the biggest opportunities are those sub-sectors of technology that are facing the most rapid growth and expected demand. But this is nothing new. We’ve seen it many times before with each technological innovation.
Whether it’s booming demand for fiber optics, cell phones, computers, satellite TV, or HDTV, there’s always a massive trend in technology and opportunity. With institutional investors still in the early stages of warming up to technology, there aren’t too many other sectors nearly as appealing. Close out your year strong and invest in technology now before $10 trillion of institutional capital flows in.
But you don’t have to take my word for it. According to Credit Suisse, “Electronics retailers are indicating there will be healthy demand for [this technology] during the holidays. The gadgets are clearly expected to be top sellers.”
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