Retail investors can learn a lot about what stocks to watch by looking at the activity of institutional investors. An institutional investor is defined as “a company or organization that invests money on behalf of other people.” So, while hedge funds and investment banks operate as different business entities, they both fall under the institutional investor basket. Insurance companies, pension funds, and endowment funds are also institutional investors. Today, institutional investors make up more than 90% of all stock trading activity.
Institutional investors are seen as having a strong advantage over retail investors. Why? Institutional investors have access to resources that aren’t available to your average retail investor. Take Whale Rock Capital, a top-performing hedge fund, for example. In an interview, CEO and founder Alex Sacerdote explained that:
“We do 1,000 face to face meetings a yeardespite being only a team of five. I think we travelled something like 250k miles last year. We go to Asia three or four times a year. We recently travelled 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 provides enormous value, as company executives will most likely offer more details 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? That’s where the 13D and 13G forms come in. Institutional investors must submit either a 13D or 13G form when acquiring ownership of a company of 5% or more.
As retail investors, we can take advantage of the 13D and 13G forms by seeing what top-performing institutions have been buying, albeit with a slight delay.
With that in mind, here are five stocks to watch that institutional investors have been buying recently.
- Carvana (NYSE:CVNA)
- GoodRx Holdings (NASDAQ:GDRX)
- Southwest Airlines (NYSE:LUV)
- HubSpot (NYSE:HUBS)
- Discovery Communications (NASDAQ:DISCA)
Stocks to Watch: Carvana (CVNA)
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Carvana had a subpar performance in 2021, declining by 3% and trailing the S&P 500’s yearly return of 26% by a wide margin. However, 2020 marked a standout year for CVNA stock, as it returned a breathtaking 160%. In addition, Carvana was a major beneficiary of Covid-19 as interested car buyers flocked to the Carvana app and website instead of brick-and-mortar dealerships. After 2021 saw Carvana basically stagnate, two major billion-dollar institutions are now capitalizing on CVNA stock’s dull performance.
In an amended 13G filing received by the U.S. Securities and Exchange Commission (SEC) on Jan. 12, Baillie Gifford increased its current Carvana position by an additional 620,641 shares, or 6.8%. Baillie Gifford boasts assets under management (AUM) of $191 billion. Furthermore, the fund is a long-term investor and holds each position for an average of 10.43 quarters. After the purchase, the United Kingdom-based institutional investor now owns 11.28% of all Carvana shares outstanding. It’s safe to say that Baillie Gifford is bullish on the future of automobile e-commerce.
The second billion-dollar institutional investor to pick up shares of CVNA stock is Fidelity Management and Research. In an amended 13G filing received on Jan. 10, FMR increased its current Carvana position by a massive 2,302,683 shares, or roughly 33%. The fund now owns 10.86% of all Carvana shares outstanding. FMR manages $1.2 trillion in AUM and holds each position in its portfolio for an average of 21.94 quarters.
GoodRx Holdings (GDRX)
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Like Carvana, GoodRx had a disappointing 2021.
After reaching 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 to use with no registration required. Instead, GoodRx collects revenue through referral fees and advertisements. Additionally, the platform helps consumers compare prescription drug prices and discounts from multiple vendors in order to find the best priced selection. GoodRx’s website notes that “The cost of a prescription may differ by more than $100 between pharmacies across the street from each other!” Since its inception, GoodRx has helped consumers save $35 billion on healthcare and prescription drugs. Now, GoodRx is attracting the attention of a major investment bank.
Morgan Stanley (NYSE:MS) filed a 13G form on Jan. 7. The filing states that the investment bank picked up 11,556,961 shares of GDRX stock after previously owning zero shares of the healthcare platform. Additionally, Morgan Stanley’s purchase signifies 14.2% ownership of all shares outstanding.
It should be noted that Morgan Stanley analyst Ricky Goldwasser has a $41 price target for GDRX stock. This implies upside of more than 50% from current prices.
Stocks to Watch: Southwest Airlines (LUV)
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Airlines like Southwest Airlines have experienced volatile price movements since Covid-19 began.
Now, with the onset of the omicron variant, airlines are having to cancel thousands of flights due to staff shortages and other extenuating circumstances, like weather. From Jan. 4-5, Southwest Airlines cancelled over 1,200 flights, more than any other airline carrier in that time period. However, data from FlightAware shows that global arrivals via aircraft has increased by 10% this week when compared to the prior week. This is a small silver lining for an industry that has been pummeled by reduced air travel. However, an established investment firm is now capitalizing on Southwest Airlines’ current predicament.
In an amended 13G filing received on Jan. 10, The Vanguard Group reported that it had increased its existing Southwest Airlines position by 10,227,315 shares, or close to 20%. After the purchase, The Vanguard Group now owns a 10.44% stake in LUV stock, which is equivalent to 61,814,978 shares.
According to the latest ADV form, 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 firm is committed to LUV stock for the long haul.
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Shares of HubSpot have been on a rampage since the March 2020 pandemic lows. The marketing software solutions company gained over 65% in 2021 amid a scramble to increase digital marketing solutions.
However, a recent short report published by a prominent hedge fund has sent shares of HubSpot to the doghouse. On Dec. 22, Kerrisdale Capitalreleased a short report alleging that HubSpot is overvalued compared to its peers and slowing in growth with declining margins. Kerrisdale also highlighted that rivals to HubSpot are gaining market share, such as Klaviyo and Mailchimp. Since then, HUBS stock has declined by a staggering 33%. Despite Kerrisdale’s short report, an acclaimed investment firm is now buying shares of HubSpot.
On Jan. 10, T. Rowe Price (NASDAQ:TROW) filed an amended 13G form. The form stated that T. Rowe Price had acquired an additional 1,905,309 shares of HUB stock, increasing its current position by a whopping 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)
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The last of the stocks to watch is Discovery Communications, a multinational media company that engages in factual content across several distribution platforms. Last year, the media company was caught up in the Archegos fiasco.
In 2021, shares of DISCA stock rose as high as $79, which investors attributed to Archegos bidding up the stock on leverage. Later that year, Archegos’ highly leveraged positions turned against the fund, and as a result, Archegos had to liquidate its entire DISCA position. Shares of DISCA stock declined rapidly, and the company now trades at $31 a share, a far cry from its 2021 highs.
In the midst of the selloff, investment banks like Credit Suisse (NYSE:CS) took a lot of damage. This is because Credit Suisse and other banks sold swaps to Archegos. Swaps allow funds like Archegos to gain exposure to stocks without actually owning them. The ownership falls in the hands of the bank selling swaps. Nonetheless, a New-York based hedge fund with over $2 billion in AUM is now taking advantage of DISCA stock’s price decline.
In a 13G filing received by the SEC on Jan. 7, Brahman Capital reported that it had purchased 8,907,654 shares of DISCA stock. The purchase represents a 5.26% ownership stake in Discovery. Brahman Capital has an average holding period of 4.76 quarters, which suggests that Brahman believes that DISCA stock will bounce back higher this upcoming year.