Is All Stock Information Priced In?

by JT McGee

When you and I own a stock, we own a ticker – an easily liquidated piece of ownership. When institutional investors own a stock, they own a piece of a business that isn’t easily liquidated.

One stock I hold, American Capital, fell on my radar when I found out that John Paulson was selling it like crazy. For a billionaire hedge fund manager like himself, selling a stock isn’t easy. He has to think about selling slowly, so as not to crowd out the market with his selling pressure.

Key point: institutional investors move markets when they make moves. You and I don’t, unless we’re investing in thinly-traded micro caps.

Wall Street Roadshows

I’m starting to think there’s a good qualitative way to find great stocks – look for the companies that are the subject of many different conferences.

American Capital (ACAS) – a stock pick for 2013 – has been on a tear ever since presenting at the Citigroup US Financial Services Conference. There they were able to explain what it is that they do in front of a variety of debt and equity analysts. Basically, they could sell their valuation to people that were part of the decision-making process to buy or sell their shares.

Another stock I used to own, Metropolitan Health Networks (A stock pick from 2010, bought out by Humana in 2012), went to a bazillion different conferences for companies in the health care insurance space. In doing so, the company’s competitive edge – managing to reduce the cost of care for insurance companies in Medicaid/Medicare – was sold over and over to health care analysts. After several conferences, they got a buyout bid from their number one client, Humana.

Too Many Stocks

Really, there are too many stocks for any analyst or team of analysts to know of all of them. Those that promote themselves may be better bets than those that don’t, at least so far as a catalyst goes. A cheap stock stays cheap. A cheap stock selling itself to the institutional world doesn’t stay cheap for very long.

Purely anecdotal evidence leads me to believe that companies which attend various conferences with analysts will outperform those that do not due solely to the fact it takes less time for them to realize their true value. If a company is 50% undervalued and it becomes fully-valued in a year, investors generate a 100% return in one year. If it takes 10 years to reach full value, investors earn a compounded return of 7.2% per year, assuming no change in the valuation from year 1 to 10.

As an ACAS shareholder, I’m happy with recent performance. Obviously this bull market doesn’t hurt, but the company’s continued roadshow with analysts has to be helping, too.

Just a thought for today. Perhaps the best stocks for retail investors like us as those that are selling themselves to institutionals, and doing it often.

{ 4 comments… read them below or add one }

PK March 14, 2013 at 10:35

1) Yes, all publicly available information is known, and someone has made changes to their investment strategy based on it.

2) Usually they do not react properly to the information (like your favorite – the information in the notes).

I do like BDCs in the current environment – you know, the “hard to get money from a bank” environment. I used to be an ARCC investor but I don’t own any right now. I have my ear to the ground, though…

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Felix Lee March 17, 2013 at 06:00

This is such wonderful piece of information regarding stocks. I am not really too familiar with stocks though I am slowly trying to learn all about these and eventually venture into this.

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Darwin's Money March 19, 2013 at 09:22

I think in general all info is priced in given the sheer number of investors, real-time info, internet, etc. Regarding road shows and publicizing stocks, I get a bit wary of stock runups due to “publicity” since that often creates a bit of a runup from hype and not fundamentals. This is what I’m suffering from now on my only recent pick 3D printing stock DDD. There was a TON of press on 3D printing late last year and the stocks were running like wild; now reality has set in that earnings are not taking off. I think the runup was more media attention and hype than actual fundamentals (I’m still holding 90 shares though!)

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My Financial Independence Journey March 21, 2013 at 09:34

I don’t think for a minute that all information is “priced in.” All publicly available information is public, but it is not necessarily known or considered. Even in the universe of dividend growth stocks that I pick from, I don’t know everything about every company. I can’t even claim to know everything about the 30 or so companies I hold. I make decisions with limited information. So does everyone else.

Toss into the mix technical traders who don’t use any meaningful information about a stock but instead just trade on momentum. And of course all the people buying something because their friend or that guy on TV said it was a good idea. And the index investors who just spray money blindly at everything in the index regardless of how good or bad the company is or how over or undervalued it is. And all the algorithms that are trading using who knows what information.

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