Separating Weak Holders From the Strong

Find out who the large holders are.

The higher the proportion of stock held by insiders and long-term investors, the more strongly a stock's holder base is. I track this by reviewing proxy statements as well as 13D and 13G filings, which are freely available at the SEC Web site.

These data require some judgment to interpret. First, I find out who holds more than 5% of the stock, because some of those large holders tell a story about the stock.

Most institutional investors will not take stakes of more than 5% in a corporation's shares, as getting into and out of such large positions requires careful trading. Once they are above the 5% limit, changes in position size must be disclosed via 13D filings, which give away information to other traders who may trade against the large holder. Large holders by their very nature tend to be strong holders; the costs of exiting a position are significant.

Look at insider activity.

Insiders, if they hold large positions, tend to be strong holders of a company's shares. Additionally, they often have a clearer perspective on the company's prospects. Insider buying can be a great indicator of potential value, particularly if the insider pays for the shares from his or her own pocket. Small insider holdings and holdings acquired for compensation are more likely to be cashed in when insiders need the proceeds. Insider data are freely available at Yahoo!; here is an example.

One exception needs to be understood regarding large insider holdings. If the holdings are so large that a single investor has discretionary control over the company, then it pays to review how that "control investor" has treated outside passive minority investors (folks like you and me) in the past. If he or she acts on self-interest to the detriment of smaller investors, then it's time to look elsewhere.

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David J. Merkel, CFA, FSA, is a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. Previously, he managed corporate bonds for Dwight Asset Management. At time of publication, neither Merkel nor his fund had any positions in the securities mentioned in this column, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Merkel cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send your comments to [e-mail].

Analyst Certification: All of the views expressed in the report accurately reflect the personal views of the research analyst about any and all of the subject securities or issuers. No part of the compensation of the research analyst named herein was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in this report.

Merkel is employed by Hovde Capital Advisors LLC (the "firm"), a registered investment advisor with its principal office located in Washington, D.C. The Firm and/or its affiliates have or may have a long or short position or holding in the securities, options on securities, or other related investments of the issuers mentioned herein.