“I” – Institutional Sponsorship (CAN SLIM)

  • Increase in number of funds owning the stock in recent quarters
  • Ownership by funds that have outperformed the market over the last 3 years
  • Average daily trading volume of 400,000 or more

Why It’s Important

“Institutional sponsorship” simply refers to ownership of a stock by mutual funds, banks, pension funds and other large institutions. These professional investors have teams of analysts researching thousands of stocks, so it’s good confirmation to see them buying a stock you’re considering. It’s even better to see the number of funds rising quarter over quarter, since it indicates increasing demand for the stock.

What Else You Should Know

It Takes Time for Funds to Establish a Position

Since they’re often managing portfolios in the hundreds of millions or even billions of dollars, fund managers tend to take large positions in a stock. That could mean the fund needs to buy millions of shares in that one stock to become fully invested. If they tried to purchase all those shares in one day, their own buying would drive the share price up beyond what they’re willing to pay.

So it will often take weeks, even months, for an institutional investor to establish a full position. And that’s just one fund. If hundreds of funds are buying that stock, do the math! It could take many months or longer before the buying starts to ease up. That gives you the opportunity to ride their coattails and get into the same stocks, as large institutional investors continue to buy and push the share price higher.

Focus on More “Liquid” Stocks

Stocks that trade, on average, less than 400,000 shares a day are considered “thinly traded.” Institutional investors tend to avoid such stocks since it’s harder for them to establish a meaningful position, and it’s harder for them to get in and out of the stock without pushing the price too high or too low.

Thinly traded stocks can also be more volatile than larger, “liquid” stocks (those with high daily trading volumes). That’s because it takes less trading to dramatically move the price of a stock that trades 100,000 shares a day than one that trades 5 million shares.

So as a general rule, avoid thinly traded names and focus on the same liquid stocks the institutional investors are buying.

Read More At Investor’s Business Daily: http://education.investors.com/Lesson.aspx?id=735744#ixzz3uqSUGcIJ