5/11/2007

Revisiting float

6 out of 10 emails I get are about float. There seems to be enormous amount of confusion about float.


The above screen shot shows stocks up 50% or more in a month sorted by float in Telechart. DRYS does not have float data in Telechart, but it has a float of 5.37 million. Barring DJ all the stocks have below 25 million float. Which you will find to be true for 70% of the stocks in this list over a long period of time.

Now why is float important, essentially there are four types of stocks which make sharp moves in short time frames.

  1. Stock with high earnings or sales
  2. Volatile or high beta stocks like biotechnology and technology stocks
  3. Neglected and beaten down stocks
  4. Low float stocks
After analyzing the 50% and 100% list for years, I have found these are the four main characteristics which increase probability of a stock making big move in short time frames. In all the 3 factors mentioned above if there is low float, there is further move accentuation.

In 1998, when AMZN, IPOed, it had a float of 3 million. Part of the reason it moved so rapidly was small float. By 1999, it still had float below 25 million. It soon had number of stock splits and today has a float of 304 million . YHOO float in 1998 ranged between 12 to 18 million. That after a 3 for 2 split in 1997. Currently it has a float of 1.22 billion. In both the cases, there spectacular price growth happened when they were in their low float stages plus they had growing earnings or sales. The formula more or less remains constant, low float plus earnings or sales growth is equal to rapid runaway trends. You can go back and see float data for 98, 99, 2000 and you will see same story repeated again and again.

So here is a recap of float based on questions I answer on email.

What is float
Float is the number of shares actually available for trading in the open market. To understand float you need to understand authorized shares, treasury shares, outstanding shares and restricted shares.

Authorized shares are total number of shares authorized by shareholders. Companies do not issue all authorized shares and retain some in treasury. Which are called treasury shares. The issued shares constitutes outstanding shares. The shares issued to insiders, favored parties, employees are typical the restricted shares, which have certain restriction in terms of ownership and when and how they can be sold. Float is the number of shares after restricted shares are removed from the outstanding shares.

e.g
Let up take a hypothetical company Trader Mike Inc. which derives its income from trading, advertising, sponsorships and strategic investments in start ups.
Authorized shares= 25 million
Treasury shares= 5 million
Outstanding shares= 20 million
Restricted shares= 10 million
Float= 10 million

What is important to you is the float figure, that indicates actual stock under market circulation. To explain float I got in to discussion of authorized shares, treasury shares , outstanding shares etc, but those are not the figures I look for, unless it is an IPO. In IPO's float increases after the lock up expires.

Where to find float figures
Almost every financial site and software has float information. Float information is dynamic and figure change often and different sites follow different update schedule, so you might find different figures for float. You can find float on stocks on following sites/software:
1 Telechart
2 Moneycentral
3 Yahoo Finance
4 Reuters
5 CNN Money
On some days IBD in their "NYSE/NASDAQ Stocks on the move" has float information also. If you look at these section today, you will notice it. Earlier this used to be a regular column.

Do low float stocks have low trading volume
This is where biggest confusion is. No. A stock with low float can still have very high daily volume. At times stocks have daily volume larger than their floats. Recent example of stocks with low float like BTJ, NVEC, GROW, IDSA,DXPE,SYNL, NGA,MTOX, BWLD, etc will show you days when the stock trades almost half its float or more in a day. Float turnover change is one of the criteria which can be used to identify stocks which are undergoing such rapid float turnover. Those are hot momentum stocks. IBD publishes this list on Thursday.

So given a choice of breakouts to buy, one of the ways to narrow the list is by using float, that is if you are looking for stock likely to make major moves. If you are looking for slow mover, choose the high float one. I prefer stock which can move much higher so I choose those with low float plus ample liquidity.


Float and IBD's Top Supply/ Demand Companies


Earlier I have posted about float in IBD way of thinking.Every Thursday Investors Business Daily prints a IBDs Top Supply/ Demand Companies list in the B section.It has 10 stocks in it every week. It is essentially a comparison of trading volume to the stocks float. Now some of these stocks have been on this list for many weeks and have gone up many fold. If you regularly follow that list you will find many profitable ideas in it.

If you read the fine print, IBD says it is a gauge of institutional supply and demand. Higher rating on Supply/ Demand rating indicates heavy demand from mutual funds and institutional investors. It is one of the factor they have found to be essential in their model of stock market's biggest winners over the years.

The Supply/Demand Rating gauges investor demand in a stock by comparing its volume to its float. Stocks trading heavy volume with low floats tend to carry higher Supply/Demand ratings. Use the Supply Demand Rating within the context of other IBD Ratings as well as a stock's chart. A stock that has peaked and is heading lower could still maintain a high Supply/Demand Rating.

Now this rating is very similar to Norman Fosback's Volume Turover Ratio. Norman Fosbackin his classic book Stock Market Logic provides a Volume Turnover Ratio to select stocks in portfolio.
Volume Turover Ratio is calculated by dividing total trading volume in a stock over last six months by the total number of shares outstanding. The result is multiplied by 2 to convert it to yearly. Norman Fosback book offers number of detailed studies on effect of stocks floats and supply in general on stock returns.

In the First few editions of How to Make Money in Stocks William O'Neil specified stocks with less than 25 million float as ideal CANSLIM candidates. Subsequently the post dot com era editions have dropped that requirements.
"If you desire clear cut factual evidence, the 40 year study of the greatest stock market winners indicated more than 95% of the companies had fewer than 25 million shares in their capitalisation when they had their greatest period of earnings improvements and stock market performance. "
How to Make Money in Stocks


Dan Zanger on float and earnings

Dan Zanger the super trader who has consistently made triple digit returns for some years now has been focuses on importance of float consistently in all his writings or in interviews . If you study his method in detail his winning formula was small float and 100% plus EPS growth. Now that he is trading a significantly bigger account he is looking at larger float stocks. In his recent interviews he has indicated less than 100 million float as ideal.

Small float is not the Holy Gail in trading , large float stocks do make triple digit moves in a year if they have very good earnings but given a choice of many stocks with superior earnings or breakouts in a day selecting low float candidates can increase the probability of higher profits.


Dan Zanger on Float:
Over the last fifteen years, I've spent over 10,000 hours studying every type of chart pattern formation imaginable. From Cup and Handle patterns to Falling Wedges, Ascending Triangles, Bull and Bear Flags and too many others to list here now. And lucky for us these patterns repeat over and over and over again!

I combine these patterns with stocks that have unusually higher rates of growth and low number of shares that float. For the average stock I list, growth rates must be up at least 40% for both earnings and revenues growth for their most recent quarters and most stocks that I list have growth rates up 80, 90, 100 and sometimes up 200% and more. It's these high growth rates combined with stocks that have low number of shares that float that make them so explosive.

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Incorporating float in to your trading criteria can help improve your results. Float below 25 million is what I try and look for on good earnings candidates.


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6 comments:

Nashas said...

Hi Pradeep,

I have noticed that low float stocks fluctuates up and down a lot and that messes up with stops. Any suggestions how to avoid that?

Thanks and by the way.... great blog.

Pradeep Bonde said...

By timing your entry with a catalyst like earnings announcements. Typically such events lead to buying frenzy on such stocks, where they will seldom revisit your entry criteria.

Silver said...

Did anyone notice SIF on Friday? This stock has a float of 2.8 million and an average trading volume range between 2,000 - 50,000. Friday this stock jumped over 86% to $17.70 on earnings and it's trading volume jumped to just over 681,000. I agree with pradeep that typically low float stocks are the ones that are likely to have these kinds of reactions to news.

Michael said...

I need to buy some shares in that Trader Mike Inc., it sounds like a winner! :-)

B7 said...

Why do you use Float instead of dollar value of Float? Isn't 25M shares at $10 share a lot less than 25M shares at $50 per share?

Pradeep Bonde said...

Float and dollar volume are two completely different concepts.