Taking a Wait and See Approach to Rovi Corp (ROVI)

One of our most egregious misses this year was not investing in ROVI, the digital rights management company (formerly known as Macrovision) that has transformed itself into a company with a broad portfolio of media related businesses. It was under consideration for posting as a buy recommendation as the market, and this stock, moved off the July lows, but we passed on it for what we thought were better opportunities. This stock gained about 50% from the buy point we were considering.

But we aren’t chomping at the bit for entry now that the stock has pulled back. And it’s not the ugly nature of the pullback that makes us reticent. Many winning stocks begin their corrections with high volume selling, the effects of which can be mitigated as fresh money buys into the stock and price “bases out.”

The reasons we’re taking a wait and see approach to ROVI aren’t on the chart. It has to do with who, or more correctly who doesn’t, own the shares.

Near the beginning of every quarter Investor’s Business Daily publishes their list of stocks that have had the largest number of top mutual funds buy and sell during the previous quarter. IBD considers a mutual fund a “top” fund if its performance over the preceding quarter was in the top 15% of all funds.

While this information might seem stale it’s an important record of stocks in which the best mutual funds are building and unwinding positions. Following what top mutual funds are doing alerts you to stocks that are often on pace to outperform the market.

We were shocked to find the most sold stock on the list last quarter was ROVI. A net total of 44 mutual funds sold the stock. That’s an incredible number for a stock still in an uptrend. But it is apparent on the chart that the second leg higher that launched in July came on lighter volume than that which started in March. This likely speaks to institutions selling into retail strength as many top performing funds decided the position had achieved full value.

Are they right? Only time will tell. But it’s notable that a simple analyst note could take the stock down so severely, as if the conviction of longs left with the smart money.

We’ll continue to track ROVI and if it sets up properly weeks or months from now we’ll again consider a position. But for now we’ll follow the smart money like always and stay on the sidelines.