Originally published on Members Only site.
IBD every month has list of new buys by top 15% funds. The list was in Wednesday paper. Now if you look at this list carefully, you will see most of these had recent earnings surprise or earnings or sales acceleration.
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Buying after funds have bought is one way to look at it, but the better way to look at it is what do funds buy and why. You should buy when funds buy , not after they bought. If they buy on earnings surprise, you should also buy based on it. Understanding the criteria funds use to buy stocks is important.
In smaller and neglected stocks where the inefficiencies are greatest, you will find on Episodic Pivots (EP), if you look at fund ownership, it will be low and then you look at fund ownership 3 or 6 months down the line, it would have increased.
For example in June I saw a EP in GHM on earnings day, it had around 6 funds owning it. Now if you see there are 11.
Or look at LPHI, it also had earnings day EP in June, it had on all databases 0 funds ownership, now it has 10 funds owning it.
So when earnings or other catalyst comes in funds come in. You will see this again and again. Especially for neglected stocks which suddenly have earnings acceleration, everybody gets the information at the same time. So understanding why and when funds buy gives you an advantage. You don't have the resources to research and analyze like funds, but if you understand the logic they use, you have significant edge.
Another fine lesson in The Art of Chart Reading.