The Pros Are Buying Up Large Blocks of These Stocks

risingarrow-stockphotoHave you ever noticed the abundance of articles with catchy titles?

“Five Favorite Stocks Of The 1%”

“Secret Money Management Tricks Of The Super-Wealthy?”

It’s easy to see the appeal of these articles for everyday investors. After all, that’s the whole purpose of investing — to build wealth.

Who better to assist with that aspiration than the rich? Surely, they know a few things we don’t.

[ad#Google Adsense 336×280-IA]I worked with affluent high net-worth clients for years, and while most are knowledgeable about business and industry, that doesn’t always mean they are financial gurus.

These articles are often entertaining and informative, but they typically don’t have a real impact on my portfolio.

But when a decorated portfolio manager, such as Mario Gabelli, says to avoid telecom and overweight commodities, or when Franklin Templeton’s Mark Mobius says it’s time to double down on emerging-market debt, I pay attention.

I’m a voracious reader of annual reports and other shareholder communiques where fund managers enlighten us with their commentary and outlooks.

But really, the simplest and most direct way to glean insights from Wall Street’s best and brightest money managers is to watch where they put their money.

On average, mutual funds hold approximately 16% of the outstanding shares for any given stock. I went out in search of coveted stocks whose mutual fund ownership is double that.

In other words, the pros are flocking to these stocks and buying up large blocks of shares.

They say that two heads are better than one, but what about 200 or 2,000?

As with many things in the investment world, the buying patterns of mutual fund managers have more predictive value when analyzed in relative terms, not absolute. The fact that 122 funds are buying a stock right now doesn’t tell us too much.

But if only 64 were buying last month and that number doubled this month, then there is likely a good reason.

With that in mind, I screened for high-yield stocks with unusually strong mutual fund ownership of 25% or more, as well as an increase in buying activity from last quarter. Here’s what I found.

CaptureThe most interesting candidate is RLI Corp. (NYSE: RLI). At last check, 308 mutual funds felt that RLI deserved a spot in their portfolio, up from 297 last quarter.

The list includes Franklin Rising Dividends, T. Rowe Price Small Cap and Columbia Acorn, which I happen to own in my own personal 401(K). Those are some solid backers — it would be wise to follow their lead.

RLI is a multi-line insurance group specializing in commercial property and casualty policies. The company is a member of my Special Dividend Payers Index (which I wrote about earlier this week) and a poster child for companies that share a cut of the profits with investors each year.

By nature, insurance underwriting is unpredictable and at the whim of hurricanes and other forces of nature. So claims payouts will be high in some years, low in others. That makes it difficult to maintain a lofty regular dividend around the clock.

The solution is to set regular dividends at a modest level that can be sustained in both good times and bad — and then after the year’s earnings have been tallied up, pay a bonus for the rest in December.

The regular quarterly dividend of $0.18 per share and yield of 1.8% are nothing exceptional — nearly in-line with the overall market average. But keep in mind, this dividend has increased for 39 years in a row. Few companies have paid uninterrupted dividends since the mid-1970s — let alone raised the payment every single year.

Good investing,

Nathan Slaughter


Source: Street Authority