Individual investors who pattern their stock purchases on the portfolios of the big institutional buyers such as mutual and pension funds, insurance companies, colleges, banks, labor unions and corporate profit-sharing plans have one thing in common.
They know they're in good company -- that the stocks that become institutional favorites have been selected by skilled personnel who choose their investments wisely.
However, there is a potential problem in owning stocks that are favorites of the institutions. If an institution decides to sell part or all of one of its holdings, the share price may well become depressed for a period of time, although sometimes only briefly.
Just this week, for example, Hunt Valley-based McCormick & Co. reported a more than 16 percent gain in earnings for the third quarter, on a more than 6 percent sales rise. It was a very good report but the earnings increase was well under those in each of the first two quarters, although McCormick officials had said that the quarterly gains would not continue in such a strong fashion. In relatively heavy trading last Monday, the day of the report, McCormick's share price soon fell 1 1/2 points but recovered to a 1-point loss.
In continued heavy trading this week, the price fell another 4 1/4 points before moving back upward. About half of McCormick's 40 million shares are institutionally owned, therefore the heavy trading of nearly 200,000 shares on the day of the earnings announcement, or more than double usual daily trading volume, indicated that institutions were the big sellers.
Institutions often tend to sell on reports of good news as well as bad news whereas less-informed individuals are less likely to respond to fluctuations in a company's fortunes. The individual investor, however, must often go with the flow and be captive at certain periods to the buying and selling wishes of major shareholders of a company, and those major holders are generally institutions.
In 1989, when the Marriott Corp. had yet to experience the massive loan problems associated with commercial real estate, more than a third of the company's shares were held by institutions who liked Marriott's growth record. The shares of the Bethesda-headquartered company were selling then in the lower Since then, Marriott's share price has shed half its value and institutional ownership has dropped below one-third.
These days, institutional buying and selling of stocks constitutes by far the majority of shares that are traded, sometimes amounting to 80 percent of total trading. Individuals, many still shaken by the sharp selloff in the stock market back in 1987, tend more often than in prior years to put their resources into managed funds. The typical individual stockholder often buys an interest in an institution, such as a mutual or pension fund, rather than striking out on his own.
However, institutional ownership of shares in companies enables individual investors to see rather extensive lists of worthy stocks. In effect, institutional traders can do a good deal of your thinking for you simply by providing a summary of securities they own.
Another advantage of dealing in stocks that have heavy institutional ownership is the liquidity of shares of these companies. Institutions are more likely to own shares of larger firms than they are of smaller ones.