Stock Quotes in this Article: BAC, F, FB, ADT, KRFT

BALTIMORE (Stockpickr) -- Valentine’s Day may have been a few weeks back, but the real love story is going on right now: It’s all about how institutional investors are feeling about stocks again.

Slowly but surely, professional investors are getting the message that this market is going to continue to plow ahead in 2013. Yesterday’s all-time highs in the Dow don’t hurt in conveying that message. Institutions such as hedge funds, pension funds, and asset managers are buying equities again with both hands.

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The question is whether you should be following their lead.

Even if institutions are making the right big move by buying stocks, are they buying the right stocks? I’ll admit that some of their choices look surprising right now, but they’re worth a closer look.

To do that, we're focusing on 13F filings. Institutional investors with more than $100 million in assets are required to file a 13F -- a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F.

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In total, approximately 3,400 firms file 13F forms each quarter, and by comparing one quarter's filing to another, we can see how any single fund manager is moving their portfolio around. While the data is generally delayed by about a quarter, that’s not necessarily a bad thing. Research shows that applying a lag to institutional holdings can generate positive alpha in some cases. That’s all the more reason to crack open the moves being made with institutions’ $14.6 trillion under management.

Today, we’ll focus on five institutional favorites for the fourth quarter of 2012.

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Bank of America

Bank of America (BAC) is one of those head-scratchers among professional favorite stocks right now. The bank is one of the largest in the world, with operations that range from consumer and commercial banking to investment banking and asset management. BofA was also one of the most conspicuous losers during the credit crisis, betting big on Countrywide -- and picking up tens of billion of dollars in legal liabilities in the process. Still, institutions love this stock right now, and they picked up 589 million shares of the firm in the most recent quarter.

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BofA’s scale does come with some advantages. Its reach in all 50 states gives the firm the ability to court more mobile banking customers and raise substantial, cheap deposits. The flip side of that coin is that growth is exceptionally hard to achieve at this point unless the broad economy grows too -- something that not all investors are willing to concede.

That said, there are some positives to Bank of America. While growth may be hard to come by, its price has ample room to appreciate before its valuation starts to look unwieldy. The inevitable return to higher interest rates means that the critical spreads that BofA is able to earn can expand (and margins along with them). And as Bank of America slowly and painfully shores up its loan book, it should start looking a whole lot less scary to investors.

Maybe BofA isn’t as much of a head scratcher as it may first appear, but investors shouldn’t pile in without understanding the risks of that come with it.

Kraft Foods Group

The last six months or so since have been good for Kraft Foods Group (KRFT). Since the firm’s spin-off from what’s now Mondelez International (MDLZ) at the start of the fourth quarter, shares of the food maker have rallied around 10%. That’s nearly twice what the broad market has managed to turn out over that same period. And institutional investors have been some of the biggest beneficiaries; they bought or were issued 378 million shares of KRFT last quarter.

Kraft Foods Group is one of the biggest food and beverage stocks in the world. Its brands include grocery store staples like Kraft, Oscar Mayer, Jell-O and Capri Sun. By splitting off its grocery food business from its global snack business, Kraft pulled apart its most stable and recession resistant brands from the more consumer-driven snack segment. That move leaves KRFT shareholders with a cash-generation engine that pays a hefty 4% dividend yield right now and a way to tap North Americans’ pantries -- its brands can be found in 98% of U.S. households.

KRFT may not be as exciting as the growth-hungry snack segment at Mondelez, but exposure to a mature market in a low interest rate environment make the firm look attractive. With relative strength looking stellar since the split, investors could to worse than to follow institutions’ lead and buy KRFT.

Facebook

I wish I could say the same about Facebook (FB).

Sure, the social network has seen its share price rally by close to 50% in the last six months. And sure, the firm’s ability to maintain profitability is a big positive. But Facebook still needs to answer some big questions if it wants to justify the huge price premium it’s currently trading for. Institutions clearly don’t agree with me there; they picked up 375 million shares of Facebook last quarter, boosting their stake in the firm to $21 billion.

Facebook’s stats are impressive: It boasts more than 900 million monthly users and 500 million daily users. But its why those users turn to Facebook that’s troubling; generally speaking, users to go Facebook to communicate with friends. While that provides the firm with a mountain of targeted advertising information, actually putting it to use requires FB’s advertisers to divert users from what they came to the site to do. That’s a fundamental business model problem.

That doesn’t mean that there’s not value there. Users spend inordinate amounts of time on Facebook, and there are better ways to monetize that. Games are one big one -- they generate revenues without trying to distract users in the process. For now, the firm generates attractive revenue numbers for its cost structure, but that doesn’t justify its lofty valuation.

ADT

Institutional investors have been picking up shares of ADT (ADT) with both hands since it spun off from Tyco International (TYC) back in September. All told, funds and investment firms picked up 190 million shares of the $11 billion security firm last quarter. That brings their stake in the stock to $9 billion.

ADT provides security, fire, and carbon monoxide monitoring services to 6.4 million homes and small businesses. The security business comes with some big benefits for firms such as ADT. For starters, customers sign lucrative, relatively long-term contracts to add ADT’s services, a practice that keeps multi-year retention rates extremely high. And because customers go to the trouble (and expense) of installing ADT hardware on their premises, switching costs are even higher.

As ADT expands the offerings that its Pulse platform can carry (such as surveillance cameras and electronic thermostats), it also opens the door to considerable add-on revenues. A strong balance sheet and huge recurring cash flow generation round out the picture at ADT. Relative strength has been excellent for this stock; shares have rallied more than 28% since the spin-off took effect last September, and investors should expect more of the same in 2013.

Ford Motor

Even though 2013 is taking on a slow start for shares of Ford Motor (F), investors shouldn’t discount this stock. Ford has undergone a big transformation in the past few years. The automaker was the only one of its Detroit peers to avoid bankruptcy, and it was the first to return to profitability and resume its dividend following the rebound in auto sales.

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There’s been a simple secret to Ford’s success: It started making cars that consumers wanted to drive again. Since its revamp, the firm has managed to score considerable accolades from auto reviewers over initial quality and reliability, and that has resonated with potential buyers. Even though Europe remains a big black cloud for the firm, management is going forward with a plan to shore up its business across the pond as well.

A decade ago, U.S. carmakers were weighed down with cumbersome brands that lacked any real diversity in their lineups – it was one of the many things that made U.S. automakers look less appealing than their foreign rivals. That’s why Ford’s revamp of the Lincoln marque as a standalone luxury brand is so exciting. If Lincoln can shake its reputation as an “old person’s car” or high-end airport shuttle, there’s considerable room for the band to compete in the lucrative luxury market.

Institutions piled into Ford positions last quarter, picking up 152 million shares of the firm. That ratchets their total positions in Ford to $26.7 billion right now.

To see these stocks in action, check out the Q4 2012 Institutional Buys portfolio on Stockpickr.



-- Written by Jonas Elmerraji in Baltimore.


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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to

TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.