There are many ways you can go about finding great quality stocks. You could use newsletters, newspapers, business channels, or screen for stocks. Some of those can become a bit overwhelming, which is why research sites come in handy so often. You go through their recommendations, read the how’s and why’s, and decide if you want to invest or not.
The goal, here, is to find unconventional sources that offer a glimpse of stocks that could make you money. One of those options is to use mutual funds to find great stock recommendations.
Most mutual funds are actively managed. Each is set up to specifically fit into a unique category (i.e. Dividend Income, Small-Cap Equity, Equity Income) or sector (i.e. Energy, Health Care, REIT). The fund managers and staff behind them are paid to research and invest in the best stocks that fit those categories. Finally, a mutual fund is required to report it’s holdings and finding that information is as easy as heading to the fund company website.
The “Top 10 Holdings”
A good place to start is at a mutual fund company’s website, which should contain all the information you need and more. You can go through each mutual fund individually to find stock ideas or head directly to a specific fund if you already know the type of stock you’d like.
Read through the description of the fund, to make sure it fits your investment strategy and then head to the “Top Ten Holdings” section which can be found in the summary. This is exactly what it sounds like, the ten largest holdings in that fund. But it should also have a “% of total assets” and “as of date” listed as well. Both are very important.
A good fund company will have the “as of date” updated often. For the two examples below, both are updated at the end of each month. Which provides you a much clearer picture than if it was only updated quarterly.
As far as “% of total assets” goes. If the top ten holdings are less than 30%, like you’d find in a 500 Index fund you may want to avoid it. But say you’re looking through a sector specific fund for retailers and the top ten holdings represent 55% of the fund. It shows how much that fund manager believes in those 10 stocks.
For the examples below I used the websites of the two biggest fund companies, Vanguard and Fidelity. I chose these two because you may be familiar with them or have money already in one of their mutual funds.
First Example
You’re looking to find a high quality, dividend paying stock but it has to still be a growing company. You would eventually like it to have a dividend yield of at least 3%. So you head over to Vanguard’s website and search through all the different mutual funds and find the Vanguard Dividend Growth Fund.
To the left is the top ten holdings in the fund as of 7/31/2011, only a few weeks before this was written. And they represent 28.6% of the fund which isn’t that high but it gives us a good start on where to go next.
Of the ten listed, Automatic Data Processing, PepsiCo, General Dynamics and Johnson & Johnson all had 3% or higher dividend yields. Which fit your criteria and now provides four stocks to research and decide if they belong in your portfolio.
The “% of total assets” is a bit low. Each of the top ten holdings only represent 2.6% to 3.4% of the fund. Which isn’t a big difference from 10th to 1st place. You still have four potential opportunities from the list. But, it may be a good idea to look through a few other funds.
Second Example
You’d like to find a quality retail stock. One that will benefit from the holiday shopping season that is still several months away, but also a slow growing economy. But with so many possibilities to choose from it’s hard to know were to start. So you head over to the Fidelity website.
Looking through their funds, is the Fidelity Select Retailing Portfolio, which fits the sector requirement. To the right is the top ten holdings. The “as of date” is about a month before this was written. But with these ten stocks making up just over 55% of the fund, you might chose to overlook that time difference.
Since you’re looking to find a quality stock that could benefit from upcoming holiday shopping, you may want to throw out Home Depot, Priceline and Lowes. Which leaves seven stocks to research and decide if any will benefit from both a slow growing economy and the holidays.
This is a perfect example of a top ten holding that a fund manager really believes in, at 55%. And if you dig a little deeper and look at all the holdings, you’d find that Amazon makes up 14% of the fund, Home Depot is 7% and TJX Companies is at 6% of the fund. Concentrating on these three may be enough to find that quality retail stock.
The fund manager is going to put more money into the stocks he/she believes will make the most. If a fund divides the money up relatively evenly it doesn’t really help. But when you see a significant difference like in the Select Retailing Portfolio, it makes a statement.
If you’re trying to find a stock and not having any luck in the conventional channels. Try taking a look in some mutual funds, not as an investment, but as another free resource.