Float and IBD's Top Supply/ Demand Companies | stockbee


Float and IBD's Top Supply/ Demand Companies

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. "
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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.


NO DooDahs said...

Float size is just leverage. You still need a catalyst or an anomaly to create an edge. Trading small floats without an edge will just hasten bankruptcy.

Pradeep Bonde said...

All major edges or anomalies are known or in public domain. So what explains the underperformance of many or superior performance of many. There are things in addition to anomalies which help one milk an edge or anomaly better.

Pradeep Bonde said...

The point about the IBD demand supply list is very different from the absolute float thing. The two points got confused in the post. The IBD demand Supply has nothing to do with absolute float, even a high float company can be on the list as long as its current ratio of trading volume /float is high.
The ratio is more as the name indicates a demand supply indicator.

NO DooDahs said...

What explains the relative performance of different groups of traders? That is a simple question, Pradeep, with a simple answer.

Some traders let their emotions rule their decisions, and thus they will always under-perform. They need therapy, AA, counseling, or some other process to learn to separate their emotions from their actions. There's an entire field of behavioral finance devoted to these issues, we have to remember that not everyone thinks analytically and it may be that some people aren't capable of analytical thought. If this one fact were not true, I suspect that many of the anomalies that work would actually stop working.

Some traders do not have the knowledge of what does actually work. That's a shame, but it is their fault, since the information is freely available.

Some traders have false knowledge, i.e., they believe something works when it doesn't, so like a voodoo shaman reading bones, they make GDP projections and examine housing starts statistics, and think that they will gain true market insight as a result. Again, this is their fault. There are too many ways of verifying what does (doesn't) work and too much free information out there for them to be stuck with ill-conceived paradigms.