A gain of 30.03% in 2019 for shares of Franco-Nevada Corporation (FNV) likely couldn't have happened without smart institutions being along for the ride. One thing is clear – the shares show a high amount of unusual trading activity. It's bullish activity because the shares are heading higher on increasing volumes, indicating that a buyer is involved. This stock is interesting because the company continues to break higher on big volumes even as the stock market suffers due to trade conflicts.
Smart money managers are always looking to bet on the next outlier stocks … the best in class. The main criteria we look for when betting on upside in a stock include a history of strong fundamentals, solid technicals, and unusual trading in the shares.
I'll go into the fundamental picture later, but the true tell on the near-term trajectory of the stock lies in its trading activity. Simply put, it's all about supply and demand. When demand is higher than supply, the stock rises. When demand is lower than supply, stocks fall. For 2019, Franco-Nevada stock has clearly been in demand.
For Mapsignals, when we look for an entry on a leading stock, we want to see an increase of potential buying. Just to show you what our unusual trading activity signals look like, have a look at all of the unusual institutional (UI) signals Franco-Nevada stock has made over the past year. Focusing on 2019, you can see a lot of buy signals (green) that line up with a lift in the shares. This is exactly the kind of setup we look for at our research firm. We want to bet on the likeliest candidates heading higher. This move is notable because stocks move based on supply and demand. This is a chart showing big demand:
So far in 2019, Franco-Nevada stock has logged 14 unusually high-volume days, indicative of buying in the shares (see chart above). But what gets our attention now is that Franco-Nevada is still gaining quietly but in an unusual way, which suggests that demand for the stock is increasing.
If you are going to make a bet on the direction of a stock, it is prudent to pay attention to how the shares are trading. Just like you don't want to fight the trend, you also don't want to fight a stock that shows increasing price alongside an increase in the volume traded. Someone could potentially be accumulating a position.
Mapsignals' goal is to identify tomorrow's top stocks today. We're basically looking for outlier companies with healthy fundamentals accompanied by outsized unusual institutional trading activity. By studying these data points, we can make an educated guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest-quality stocks.
When we decide on a strong candidate, we consider leaders that have a history of technical outperformance. When they show leadership, we see these as opportunities. Here are a few areas in which Franco-Nevada stock has grabbed our attention year to date (YTD):
- YTD outperformance vs. market: +15.41% vs. SPDR S&P 500 ETF (SPY)
- YTD outperformance vs. gold ETF: +16.39% vs. SPDR Gold Shares (GLD)
- Recent bullish unusual trading signals
Now, we take it a step further and score the best stocks showing unusual trading activity. Below you can see the historical times since 2018 when Franco-Nevada made buy signals for Mapsignals. These are the highest-rated signals in our stock universe. What jumps out is that the company is performing very well even while the market just had one of its biggest daily sell-offs of the year:
On top of a technical picture that is strong, one should also look under the hood to see if the fundamental picture supports a medium-term investment. As you can see, Franco-Nevada's latest earnings report showed growth:
- Q1 2019 year-over-year revenue growth rate: +3.87%
- 12 consecutive annual dividend increases
Franco-Nevada shares are breaking out to highs with the expectation that the company will keep growing alongside higher gold prices. We like the medium-term story of the stock. The narrative for Franco-Nevada is that, in times of market stress, precious metals can be a safe haven. We are always on the lookout for companies showing usual trading activity in the shares and sector leadership. The best companies in a group tend to outperform over the long run. All of this points to a medium-term opportunity for the stock.
The Bottom Line
Franco-Nevada can be a bellwether in times of market stress. If gold continues to trade higher as global tensions mount, Franco-Nevada shares could be in position for more upside. Given the lift in price and recent unusual accumulation signals, this stock could be worth a spot in a precious metals-oriented portfolio.
Disclosure: The author holds no position in Franco-Nevada shares at the time of publication.