Expert: Paul Henneman - 4/14/2009

Question
I would like to thank you ahead of time for answering my question, I have two questions actually.  I consider my self a value investor and really like to research my own stocks rather than have somebody else manage my money.  My first question is, why is it that a lot of institutions and people stay away from stocks whose prices have fallen to single digits?  That doesn't make any sense to me if the fundamentals are still good, just tells me the stock isn't popular.  Secondly, when I pick stocks I have my own set of guidelines I follow for determining if its a value to me, recently I have been finding a lot of opportunities out there and all the stocks look to be priced really low for a buy and hold person like me, but all the stocks I've been finding are all held by the same hedge fund when I look under major holders.  It's Renaissance technologies and I researched them and they definately do not invest with the same principles I do.  Basically, should I be worried about a hedge fund that is that big holding the same stocks as I do? Because my thinking is they'll sell quickly at every chance to take a profit leaving other investors like myself in the dust.

Answer
Mike,
  Thank you for your question!
Yes, it is a sign of the times that many stocks have been reduced to single digits from previous highs many times their current trading level. Why don't investors jump in? This could be due to several factors. First, with an economy in trouble like it is, many investors have lost huge sums as stocks declined in value. Many people simply may not have the funds available to invest now. The majority of investors out there do so through retirement accounts like 401k and IRA's. They do this through systematic investments in a small amount each month, so do not have large sums of cash available to invest in the market at once, even when the markets are becoming more attractive.  But you are right, we probably are seeing the buying opportunity of a life time for buy and hold investors. The current rally may not last, so I would average out your purchases over time in case the markets drop back 20% or more to offset the rapid rise over the past month. But this is short term, long term looks like a real buying opportunity.
  The other problem relates to percentages. If a stock trades at $5, and drops to $4, this is a 20% loss. A few years ago, if that stock traded at $30 and dropped a dollar to $29, it is much less significant. So smaller swings in stock price at a low level mean a much larger percentage gain or loss for your portfolio. There is nothing that says a stock trading in the single digits can still see huge losses, so good research and timing is still critical.
   Regarding institutional investors in stocks you are interested in: it could be a concern depending upon how much they hold. If the percentage of outstanding shares for a stock held by hedge funds is large, that could be a concern as you mention. However, almost every public company will have some hedge fund investors, so as long as the percentage is lower, it would be less of a concern.
   Keep in mind that some investors find a high percentage of institutional or hedge fund share ownership in a stock attractive. It means that the rigorous research departments of those hedge funds currently find the stock attractive. Renaissance is one of the largest hedge funds in the world, and has achieved remarkable returns over time. It is a good organization. I would only be concerned if they held too much of the stock, or if the stock did not trade much and was not very liquid.

I hope this helps, please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com