Nvdia (NASDAQ: NVDA), 360 DigiTech (NASDAQ: QFIN) and Endava (NYSE: DAVA) are making investors the old-fashioned way: By earning institutional support.
One of the biggest market stories of the past year is the rise of the individual investor pushing so-called meme stocks higher. You might be forgiven for thinking that’s the way investments rally these days, but it’s far from the truth.
Institutions have the firepower to purchase shares in bulk once they identify a promising stock. Institutions include mutual funds, exchange-traded funds, pension funds, hedge funds, banks, insurance companies, foundations, university endowments and other large entities.
These organizations have their own in-house analysts, as well as outside research services and consultants. Those teams leave no stone unturned when it comes to portfolio construction, and aren’t leaving their purchasing to hunches or guesswork.
One way to get a gauge of institutional support is to track the number of mutual funds owning shares. While it’s true that mutual funds are gradually being supplanted by ETFs, many 401(k) plans are still constructed mainly around mutual funds.
Many funds are managing hundreds of millions or even billions of dollars. The larger, established funds require that their holdings be liquid enough to scale in and out of. It’s not the case that then can sell off a position quickly in one day. In fact, it can take weeks or months to move into or out of a position.
If a large fund attempted to make its entire purchase of a stock in one day, its own buying would propel prices suddenly higher, and out of the fund’s own buy range.
When you see a stock rallying in unusually heavy volume that can be a signal that big institutions are accumulating a position, and you could follow along.
Nvidia shares are up 49.88% in the past three months and 53.28% year-to-date. The chipmaker began rallying in October 2019, and was only briefly affected by the pandemic downturn in March 2020. After falling that month, the stock resumed its rally in April of last year. Monthly upside trading volume was higher seven times since February 2020.
The number of mutual funds owning shares rose in each of the past seven quarters, to 4,367 most recently.
The largest holder is the Vanguard Total Stock Market Index Fund (VTSMX), which owns 2.68% of Nvidia shares. Meanwhile, at the Fidelity Advisor Semiconductors Fund (FELAX), Nvidia shares comprise a whopping 19.89% of fund assets.
360 DigiTech is another animal altogether. A China-based mid-cap, the company operates a platform that allows financial institutions to offer products and services to a wide customer base. The stock is up 60.86% in the past three months and 254.88% year-to-date.
Trading volume was heavier than normal in January, February, March and June of this year.
360 DigiTech went public in December 2018. As it’s much newer and smaller than Nvidia, a heavily-weighted S&P 500 component, it will have fewer funds owning shares.
However, that number has been growing steadily since a small blip in the quarter ending in March 2020, when some funds unloaded shares at the beginning of the Covid selloff. Current fund ownership stands at 141, up from 42 at the end of March 2020.
Cloud analytics firm Endava advanced 33.88% in the past three months and 47.73% so far this year. This, too, is a mid-cap that went public in 2018 and has been attracting institutional support.
Its up/down volume ratio is 3.6, meaning buyers have been making their mark in a big way.
The number of mutual funds owning shares rose from 125 in the quarter ended in September 2019 to 166 today.
The American Funds Smallcap World Fund (SMCWX) owns 3.03% of Endava’s shares. Meanwhile, at the Polen International Small Company Fund (PBIRX), Endava shares comprise 4.95% of fund assets.
NVIDIA is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.
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