Stock market investing is often a game of follow the leader.
Large investors and institutions begin to purchase a particular stock or sector, creating a bullish upswing in price. In turn, this upward momentum attracts more investors who purchase shares, pushing the price even higher. This is the essence of the popular investing concept known as trend following.
Trend-following investors wait for shares to break out above a certain level before they purchase, in the belief the upward momentum will continue as additional investors buy shares.
The trend-following strategy has been successful over time, but it has a fatal flaw. The big-trend funds that espouse this technique are diversified across dozens -- sometimes hundreds -- of instruments. These funds often use algorithms to slash their losses and let the winners run. It's an intensive hands-on investing method that is often very difficult for individual investors to replicate.
The primary flaw is the fact that no one knows when the trend will change. In other words, like a game of musical chairs, will you be one of the last bullish investors to purchase shares before the leaders start to sell?
While I am not averse to using the trend-following strategy if fundamental factors indicate true value, I prefer to purchase shares on weakness rather than strength.
With that said, I also like to follow the big-money players -- but not based on price breakouts. I particularly enjoy following the big money if share prices aren't currently reflecting their buying.
I know this flies in the face of what many investors believe, but let me explain.
Large investors have ways of carefully buying shares over time in order to avoid moving the price much. In other words, large investors buy stock in anticipation of an upward move. They also often take profits on sharp upward moves, which results in many trend-following investors getting burned by buying powerful price breakouts.
Here's How I Do It
My strategy is to watch carefully what large institutions and big investors are doing, then follow them into the sectors or individual stocks. Not only do I watch their official filings as to what was bought or sold, but I listen to what they say. Reading news articles and seeking out the big investors' statements can be a good way to figure out what they're planning.
The theory behind this strategy is that the big players are privy to information and ideas that individual investors simply cannot access.
I have found that this strategy becomes particularly powerful when two or more diverse big players enter a particular stock or sector. This means that despite differing personalities, philosophies and investing ideas, both see value in the sector.
It is this strategy that attracts me to the beaten-down newspaper sector.
This money-losing, near-death business has attracted players as diverse as Amazon.com (Nasdaq: AMZN) founder Jeff Bezos, Warren Buffett, and John W. Henry, owner of baseball's Boston Red Sox. A deep value investor like Buffett, an Internet visionary like Bezos, and a trend-follower like Henry all see value in the sector.
Bezo recently announced his plans to pay $250 million for The Washington Post Co. (NYSE: WPO). He intends on taking the company private. Shares of WPO have nearly doubled from a low of near $300 in October 2011 to a recent $600.
|Warren Buffett believes strongly in the local reach and community reporting of hometown newspapers as they adopt new ways to capitalize on Internet growth.|
At the same time, Buffett's Berkshire Hathaway (NYSE: BRK) has purchased 28 daily newspapers over the past 15 months for $344 million. Buffett believes strongly in the local reach and community reporting of hometown newspapers, noting in his recent letter to shareholders that he and his longtime business partner, Berkshire Vice Chairman Charlie Munger, "believe that papers delivering comprehensive and reliable information to tightly bound communities and having a sensible Internet strategy will remain viable for a long time."
In addition, Henry recently announced his purchase of the Boston Globe for $70 million. This incredibly low price is far from the $1.1 billion paid for the Globe and its local media properties back in 1993. This illustrates how much many newspapers have plunged in value.
Other bullish signals include the fact that The New York Times Co. (NYSE: NYT) recently declared a dividend of $0.04 a share, its first since 2008. CEO and President Mark Thompson said, "The strength of the balance sheet justified the restoration of the dividend."
These diverse endorsements of the newspaper business triggered my research into the sector. My favorite stock in the industry is the third-largest U.S. newspaper company, McClatchy (NYSE: MNI).
The company operates 30 daily newspapers and various niche-type publications. It also owns 15% of CareerBuilder.com, more than 25% of Classified Ventures and 33% of HomeFinder.com, as well as interests in other popular Internet-based companies. This mix of print and Internet is exactly what Buffett was talking about.
McClatchy derives 24% of its advertising revenue from digital sources. It posted total revenue last year of more than $1.2 billion, of which $200 million was from digital operations. McClatchy has slashed its workforce by more than 50% since 2007 and has seen revenue drop more than $1 billion during that time.
However, the company has expanded its digital business with a larger sales force and more incentives. Christian Hendricks, vice president of McClatchy's interactive media division, strongly believes that digital will return the company to its former glory days. At the at the Local Media Association's fall conference, he said, "Newspapers need to move beyond the giant suck of print to find a sustainable future -- and digital is the only path out."
Shares of MNI are currently trading at $3, directly below the 50-day simple moving average.
Risks to Consider: This is a low-priced stock that is prone to extreme volatility. While the newspaper business is exhibiting bullish signals, it remains an industry in decline. It's also important to note that Warren Buffett recently dumped his holdings in Gannett (NYSE: GCI), the largest newspaper publisher in the United States. Always use stops and position size properly when investing.
Action to Take --> I like shares of McClatchy right now in the $3 area. I think it may become a buyout candidate; I would not be surprised if a large investor shows interest in this company sometime in the future. If not, its aggressive digital campaign is the right track to organic growth. Buying now with a 12-month target of $5-plus and stops right below the 200-day simple moving average at $2.80 makes solid sense.