One of my favorite pieces of information to follow is ownership within a company. Three separate types of ownership are most useful to me in gauging sentiment on shares; institutional ownership, insider ownership and short interest.
Insider ownership is the amount of the company owned by management, the board of directors and any single owner with more than 5% of the shares outstanding. I like to see at least 5% of the company owned by those that know its outlook better than anyone else. Of all the market participants, these are the ones that should have faith in the company’s future.
Institutional owners are the large private equity and pension funds with billions to invest. The stakes are high for these money managers and they employ armies of analysts to put together their portfolios. Few others have the kind of access to company management that these owners enjoy. The average institutional ownership for most U.S. indexes is around 60% so anything well above or below might signal a strong view on the shares.
When an investor has a particularly negative view on a company, they can borrow and then sell the shares. Since the investor has to eventually buy the shares back to satisfy the amount borrowed, they are hoping the price declines sharply. This ‘short interest’ can be extremely important as a sentiment indicator and as a catalyst for changes in price.
Love or hate, both make money
How you use this information is critical. Some stocks with low ownership and high short interest are worthy of the sentiment. Fundamentals suck and the outlook is bleak. Stay away from these stocks or even join the short sellers.
Other stocks with low ownership and high short interest may just be victims of a rumor, a sector out of favor or a quarterly misstep. Fundamentals and the outlook are strong and the poor ownership sentiment could actually cause the shares to surge in the future. Neglected by the institutions, a good quarter or hopes of a turnaround could have the big money swarming. Remember, those shorted shares must eventually be bought back. If the outlook improves and shares rise, all the short sellers may buy back at once and drive the price even higher.
Below are three companies with low institutional ownership and high short interest that might be worth another look.
Textainer Group Holdings (TGH)
Textainer Group purchases and leases marine cargo containers worldwide. Institutional ownership is low at 29% with insiders controlling 5% of the company. Short interest has increased lately and stands at 2.35 million shares, or 10.7% of the float.
The shares pay a generous dividend yield of 5.4% that should be stable if not increased over the next quarters. The company has raised its dividend in 17 of the 25 quarters since 2007, maintaining it during the recession. The dividend of $0.47 per share has been increased 135% over the six years. Transportation and cargo companies have not done well lately on fears that the slowdown in China will affect sales. This may be true in the very short-term but the sector has stronger long-term growth prospects with high barriers to entry.
Southside Bancshares (SBSI)
Southside Bancshares is a $454 million regional bank offering services through 48 branches in Texas. Institutional ownership just makes the screen at 39% with insider control of 9% of the company. Short interest has held steady over the last month at 2.0 million shares, or 12.3% of the float.
The dividend yield of 3.2% is fairly high even for regional banks. The quarterly dividend has been increased 233% since the first payout in 2003. Small regional banks are seeing their margins squeezed by higher regulatory fees and oversight as Dodd-Frank and Basel requirements come to the market. Shares are fairly cheap and I think consolidation could be coming as bigger players would be able to handle the higher fees and requirements more efficiently. Texas should do fairly well in the renaissance of U.S. energy and the bank is well-positioned.
Republic Bancorp of Kentucky (RBCAA)
Republic Bancorp of Kentucky is a $551 million regional bank exclusively in the state of Kentucky. Institutional ownership is low at 29% but insiders control 49% of the company. Short interest has decreased since last month but still stands at 0.99 million shares, or 10.3% of the float.
Like most regional banks, the shares pay a nice dividend (2.7%) which is stable and increased regularly. The quarterly dividend has been raised 260% since the first payout in 2003. While the economy of Kentucky is not as stable as Texas, the bank is stable and fundamentals are very strong relative to peers. The 49% owned by insiders strongly supports the shares and could eventually shake out the short sellers.
Watch them more closely than other companies
Whenever you go against the market and buy shares of companies that are widely neglected or hated by others, you need to keep a close eye on the fundamentals and company news. These stocks have the best chance of big gains on a turnaround in sentiment but can also move lower, destroying the return you managed from dividends.
The three stocks above have good long-term business models and should pay out a strong dividend until a catalyst drives the price higher.
Cool post.
On some accounts, you could likely put blue-chippers like WMT or MCD in a “hated” stock group as well.
Mark
Hi Mark. Very true – There are plenty of haters of those stocks as well.
I first saw TGH & TAL as great International Dividend Growth Stocks to Buy on StreetAuthority.com. Also, Fool.com recommended TGH as a Buy in the last 2 months. Both stocks are Rapidly Increasing Dividend Growth Stocks for long-term growth.
DRK