Retail investors can learn a lot about which stocks to watch by looking at the activity of institutional investors. An institutional investor is defined as “a business or organization that invests money on behalf of other people”. So, although hedge funds and investment banks operate as different business entities, they both fall under the basket of institutional investors. Insurance companies, pension funds and endowments are also institutional investors. Today, institutional investors account for more than 90% of all equity trading activity.
Institutional investors are considered to have a strong advantage over retail investors. Why? Institutional investors have access to resources not available to your average retail investor. Take Capital of Whale Rock, a very successful hedge fund, for example. In an interview, CEO and Founder Alex Sacerdote explained that:
“We hold 1,000 face-to-face meetings a year, even though we are only a team of five people. I think we covered something like 250k miles last year. We go to Asia three or four times a year. We recently traveled to India to meet with 30 private and public Indian internet companies.
As a hedge fund with $24 billion in assets under management (AUM), Whale Rock can afford to visit each company and speak with its executives before making an investment. This offers enormous value, as company executives will most likely offer more detail in a face-to-face meeting with a potential billion-dollar investor than in a quarterly conference call.
So why should retail investors care about institutional investors if we can’t travel thousands of times a year to personally interview executives? This is where Forms 13D and 13G come in. Institutional investors must submit a 13D or 13G form when acquiring ownership of a company of 5% or more.
As retail investors, we can take advantage of Forms 13D and 13G by seeing what top performing institutions have bought, albeit with a slight lag.
With that in mind, here are five stocks to watch that institutional investors have been buying recently.
- carvana (NYSE:CVNA)
- GoodRx Holdings (NASDAQ:GDRX)
- South West Airlines (NYSE:LUV)
- hub-spot (NYSE:HUBS)
- Discovery Communication (NASDAQ:DISCA)
Stocks to watch: Carvana (CVNA)
Carvana had a below-average performance in 2021, down 3% and lagging the S&P 500 26% annual return by a wide margin. However, 2020 marked a bumper year for CVNA stock as it returned a stunning 160% return. Additionally, Carvana was a major beneficiary of Covid-19 as interested car buyers flocked to the Carvana app and website instead of physical dealerships. After Carvana virtually stagnated in 2021, two large billion-dollar institutions are now capitalizing on CVNA’s lackluster stock performance.
In an amended 13G filing received by the United States Securities and Exchange Commission (SEC) on January 12, Baillie Gifford increased its current position in Carvana by an additional 620,641 shares, or 6.8%. Baillie Gifford has assets under management (AUM) of $191 billion. Additionally, the fund is a long-term investor and holds each position for an average of 10.43 quarters. After the purchase, the UK-based institutional investor now owns 11.28% of all outstanding Carvana shares. It’s safe to say that Baillie Gifford is optimistic about the future of automotive e-commerce.
The second billion-dollar institutional investor to acquire shares of CVNA is Loyalty management and research. In an amended 13G filing received on January 10, FMR increased its current position in Carvana by a massive 2,302,683 shares, or approximately 33%. The fund now owns 10.86% of all outstanding Carvana shares. FMR manages $1.2 trillion in assets under management and holds each position in its portfolio for an average of 21.94 quarters.
GoodRx Holdings (GDRX)
Like Carvana, GoodRx had a disappointing 2021.
After hitting an all-time high of $59 in February, GDRX stock closed the year around $32. GoodRx operates as a consumer-facing digital healthcare platform. The platform is free and requires no registration. Instead, GoodRx collects revenue through referral fees and advertisements. Additionally, the platform helps consumers compare prescription drug prices and discounts from multiple providers to find the most beneficial selection. The GoodRx website notes that “the cost of a prescription can differ by more than $100 between pharmacies across the street!” Since its inception, GoodRx has helped consumers save $35 billion on health care and prescription drugs. Now GoodRx is attracting the attention of a major investment bank.
Morgan stanley (NYSE:MRS) filed a Form 13G on Jan. 7. The filing says the investment bank scooped up 11,556,961 shares of GDRX after previously holding no shares of the healthcare platform. Additionally, buying Morgan Stanley means ownership of 14.2% of all outstanding shares.
It should be noted that Morgan Stanley analyst Ricky Goldwasser has a price target of $41 for GDRX stock. This implies an increase of more than 50% compared to current prices.
Stocks to Watch: Southwest Airlines (LUV)
Airlines like Southwest Airlines have seen volatile price movements since the onset of Covid-19.
Now, with the appearance of the omicron variant, airlines have to cancel thousands of flights due to staff shortages and other extenuating circumstances, such as weather. From Jan. 4-5, Southwest Airlines canceled more than 1,200 flights, more than any other airline during that time. However, data from FlightAware shows that global air arrivals are up 10% this week compared to the previous week. It’s a little silver lining for an industry that has been hurt by the reduction in air travel. However, an established investment firm is now capitalizing on Southwest Airlines’ current predicament.
In an amended 13G file received on January 10, The vanguard group said it increased its existing position in Southwest Airlines by 10,227,315 shares, or almost 20%. After the purchase, The Vanguard Group now owns a 10.44% stake in LUV shares, which equals 61,814,978 shares.
According to the latest Form ADV, The Vanguard Group manages over $6.6 trillion in AUM. The investment firm holds each position in its portfolio for an average of 39.14 quarters. Therefore, Vanguard’s average holding period suggests that the company has a long-term commitment to LUV stocks.
Shares of HubSpot have been on a rampage since pandemic lows in March 2020. The marketing software solutions company gained more than 65% in 2021 amid a rush to boost digital marketing solutions.
However, a recent short report from a leading hedge fund sent shares of HubSpot to the niche. December 22, Kerrisdale Capital released a brief report alleging that HubSpot is overvalued relative to its peers and slowing growth with declining margins. Kerrisdale also pointed out that HubSpot’s competitors are gaining market share, such as Klaviyo and Mailchimp. Since then, HUBS stock has fallen 33%. Despite Kerrisdale’s short report, a reputable investment firm is now buying shares of HubSpot.
January 10, T price. Rowe (NASDAQ:TRUE) filed an amended Form 13G. The form showed that T. Rowe Price had acquired an additional 1,905,309 shares of HUB, increasing his current position by 63%. After the purchase, T. Rowe Price now owns a 10.40% stake in HubSpot, or 4,922,119 shares.
Stocks to Watch: Discovery Communications (DISCA)
The latest stock to watch is Discovery Communications, a multinational media company that engages in factual content across multiple distribution platforms. Last year, the media company was caught in the Archegos fiasco.
In 2021, DISCA shares hit $79, which investors attributed to Archegos upping the ante on leverage. Later that year, Archegos’ highly leveraged positions backfired and as a result, Archegos had to liquidate its entire DISCA position. DISCA’s shares have fallen rapidly and the company is now trading at $31 per share, a far cry from its 2021 highs.
Amid the sell-off, investment banks like Swiss credit (NYSE:CS) suffered a lot of damage. Indeed, Credit Suisse and other banks sold swaps to Archegos. Swaps allow funds like Archegos to gain exposure to stocks without owning them. The property falls into the hands of the bank which sells the swaps. Nevertheless, a New York-based hedge fund with more than $2 billion in assets under management is now profiting from the drop in DISCA stock price.
In a 13G filing received by the SEC on January 7, Capital of Brahman said it purchased 8,907,654 DISCA shares. The purchase represents a 5.26% stake in Discovery. Brahman Capital has an average holding period of 4.76 quarters, suggesting that Brahman believes DISCA stock will rebound higher this coming year.
As of the publication date, Eddie Pan does not hold (directly or indirectly) any position in any of the stocks mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.