Don’t Copy the Insider Purchase at Guidewire

For a $1.8 billion market cap stock, Guidewire Software Inc has very little following in the hedge fund community: the largest position in our database of 13f filings from funds and other notable investors was less than $10 million. Citadel Investment Group, managed by billionaire Ken Griffin, owned about 320,000 shares at the end of the third quarter and this was a very small percentage of that fund’s invested assets (in addition to being down 30% from three months earlier). Check out Griffin’s stock picks. Driehaus Capital and White Elm Capital were two funds buying the stock (see more stocks Driehaus Capital and White Elm Capital were buying).

As a business application software company, we can compare Guidewire to Verint Systems Inc. (NASDAQ:VRNT), Sapient Corporation (NASDAQ:SAPE), Qlik Technologies Inc (NASDAQ:QLIK), and SS and C Technologies Holdings Inc (NASDAQ:SSNC). When we look at these peers we generally see forward P/Es of less than 20, and less than 15 in the cases of Verint and SS&C. Qlik is the exception, with high earnings multiples despite an 88% decline in earnings in the third quarter of 2012 versus a year earlier. We think that it joins Guidewire as a poor buy. The other three companies experienced at least some revenue growth, though Verint’s net income was down considerably. We would note that even in these cases the low forward multiples are based on expected growth- none of them look like a good value in terms of their trailing earnings, with the lowest P/E on that basis belonging to Sapient at 22. As a result we’re skeptical that any of these stocks offer an attractive combination of cheap and well-performing.

We don’t think that this is a good insider purchase for investors to follow, as Guidewire- and the other stocks in its industry- actually seem that they might be overvalued. Even the companies with decent financial performance are priced at high earnings multiples and don’t look like good value prospects. In Guidewire’s case there has been significant insider selling as well.

Disclosure: I do not own any shares of Guidewire or any other stock mentioned in this article.