Stuart Shaw, CFA

When a stock is owned and loved by everyone, it may be time to sell. Likewise, take a hard look at stocks that everyone hates. You might find your best ideas in the rubble pile.

Knowing a stock’s Street sponsorship, or what I call the buying power behind a stock, can give you the edge to move out ahead of the crowd. Here’s how.

Consider two stocks at opposite ends of a spectrum. Stock A has broad research coverage on the Street. Every analyst following the stock is recommending purchase. Institutional investors own the vast majority of outstanding shares. Stock B does not have any following on the Street, let alone any purchase recommendations, and no institutional ownership. Both companies have similarly sound fundamentals. Stock A has no room for error. The company must deliver results that at least meet and probably beat investor expectations. Because investor sentiment is so positive, any change has to be negative. There is no more buying power behind stock A. Whereas, stock B has plenty of room for positive change, and a lot of potential buying power behind it, since investors have yet to discover the idea.

Look for stocks that have little or no following and interest among Wall Street analysts and institutional investors. While not easy, you may find an undiscovered gem that the Street is ignoring. Here, there is plenty of room for positive change in investor sentiment, which may even have yet to be established. Be patient and wait for it to happen. If you have discovered a gem going unnoticed by the Street, it will happen.

Look in the rubble pile. These stocks may once have been the darlings of Wall Street, but have fallen out of favor due to souring fundamentals. Having turned their backs on these stocks, investors now have low or no expectations about future prospects for these companies. You may find a stock in the rubble pile poised for positive surprises, as all the negatives are already on the table. Any good news would catch the Street off-guard driving the stock price higher as those sell/hold ratings begin to shift to hold/buy. As always, make sure that the balance sheet is solid and the core business is intact and sound. While stocks from the rubble pile may come with higher risk, the potential reward may be worth it.

Avoid the love fest. Stocks that everyone loves, owns, and most, if not all, analysts rate buy /strong buy have used up their buying power. That is, every investor who is going to own these stocks already owns them. Investor expectations are so high there is no room for error. Everything, sales, earnings, and whatever else, must go right. These companies’ fundamentals are vulnerable to something going wrong relative to investor sentiment, which can go only in one direction – down. Investors are at times dismayed when a company reports great earnings and the stock price goes nowhere, or even declines. There is no more buying power, which could be the signal that the love fest is about to end.

Gauge a stock’s Street sponsorship by taking the pulse of analyst and portfolio manager interest. How many Street analysts are following and recommending the stock? What is the percentage of the outstanding shares owned by institutional investors? You can easily find this information on the Internet. One source is Yahoo! Finance. Go to http://finance.yahoo.com. Enter the symbol for the stock you are researching at Get Quotes. Click on Analyst Opinion under Analyst Coverage on the left sidebar. Scroll down to Recommendation Trends to find the number of analysts following the stock. Their recommendations are divided by strong buy, buy, hold, sell and strong sell. Check out the portfolio managers by clicking on Major Holders under Ownership, also on the left sidebar. Here you will find the percentage of shares held by institutional investors, including mutual funds.

When considering a stock for purchase, I like to see more than half of the analysts following the stock recommending hold or sell, and less than half of the outstanding shares owned by institutional investors. A red flag goes up when all the analysts are carrying strong buy and buy ratings and institutional investors are holding the vast majority of the outstanding shares.

Assessing a stock’s sponsorship on the Street should be an integral part of the stock research process. It can give you an investing edge by providing insight into the buying power behind a stock, and thereby the potential for change in investor sentiment.