Author describes using dark pool/institutional order flow data to avoid a value trap in an unnamed mid-cap industrial stock, and asks whether this is legitimate due diligence.
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I consider myself a disciplined value investor. I don't chase hype, I read 10-Ks, look for low P/B ratios, and focus on Free Cash Flow.
Last month, I was looking at a mid-cap industrial stock (won't name ticker to avoid bias) that looked incredibly undervalued. It was trading at 0.8x Book Value, P/E was around 7, and the dividend yield was 5%.
A year ago, I would have bought immediately.
But this time, I checked a different data source. I’ve been testing a monitor that tracks non-indexed institutional order flow (basically private wallet movements before they hit the lit exchange).
Even though the "public" sentiment was bullish, the flow data showed massive, quiet distribution (selling) from institutional wallets. It was a sea of red in the dark pools.
I decided to trust the flow and sit on my hands. Since then, the stock has dropped another 18% on bad earnings news that apparently the "insiders" already knew about.
My ethical question to the community: Is using this kind of "flow data" to verify your fundamental thesis considered "cheating" or just modern Due Diligence? I feel like relying solely on balance sheets is driving blind nowadays compared to seeing the actual money flow.