Intuit Inc. (NTU)’s Drop Supports Underweight Sentiment from Hedge Funds

Amid a massive sell-off for the fourth consecutive day, one of the stocks that lost more ground is Intuit Inc. (NASDAQ:INTU), which slumped by 11% on the back of weak financial results for the fourth quarter and full fiscal year 2015. The company posted revenue of $696 million for the fourth quarter ended July 31, up by 7% on the year, but it also turned to an adjusted loss of $0.05 per share, from EPS of $0.01 posted a year earlier. Analysts expected a loss of $0.11 per share and revenue of $739 million for the period. For the full year, the company’s revenue inched down by 1% to $4.19 billion, while adjusted EPS dropped to $2.59 from $3.40 in fiscal year 2014.

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The decline of Intuit Inc. (NASDAQ:INTU)’s stock might also fueled by the announcement regarding the divestiture of its Demandforce, QuickBase and Quicken units. The sale of these assets will lower the revenue by some $250 million in the current fiscal year and will negatively impact the EPS excluding items by around $0.10 per share. In this way, Intuit’s outlook for the fiscal year 2016, includes revenue between $4.53 billion and $4.6 billion, and earnings per share in the range of $3.40 to $3.45. The company also raised its dividend for the first quarter of fiscal 2016 by 20% to $0.30 per share.

These results have definitely taken the smart money by surprise, as Intuit Inc. (NASDAQ:INTU) saw a considerable increase in popularity during the second quarter. We think that hedge fund sentiment is an important metric for stock analysis, because this group of investors generally spend significant resources while researching their next opportunities. However, the latest data show that hedge funds have been underpeforming the market in terms of net returns, which can be explained by their high fees and by the fact that hedge funds usually hold large amounts in assets under management, which forces them to have more exposure to more efficiently priced large- and mega-cap stocks. Nevertheless, we determined that one of the possibilities to benefit from the expertise of hedge fund managers is to follow their small-cap ideas. Our strategy, which is based on imitating a portfolio of 15 most popular small-cap picks among a pool of 700 hedge funds, has returned 123% since August 2012, and outperformed the S&P 500 ETF (SPY) by some 65 percentage points (see more details here).

In this way, when we look at Intuit Inc. (NASDAQ:INTU), we see that during the second quarter, the number of investors bullish on the stock went up to 43 from 29, while the total value of their long positions surged to $1.20 billion from $860.35 million at the end of March. However, these investors still hold only 4.30% of Intuit’s outstanding stock, which suggests an overall underweight sentiment.

A closer look at the numbers shows that among the funds we track, the two largest shareholders of Intuit Inc. (NASDAQ:INTU), David Blood and Al Gore‘s Generation Investment Management and Ken Griffin‘s Citadel Investment Group reduced their stakes by 42% and 14% during the second quarter, respectively. Generation reported ownership of 1.90 million shares, the position amassing 2.65% of its equity portfolio, while Citadel’s position of 1.59 million shares accounts for only 0.14% of its portfolio. However, the third largest shareholder, Israel Englander’s Millennium Management boosted its exposure to the company by 1.28 million shares to 1.31 million shares. A similar trend can be noticed among the majority of Intuit’s largest shareholders.

It’s not clear whether Intuit’s decision to divest some of its assets was not foreseen by hedge funds, or if they were betting on the company increasing its shareholder value through these planned transactions. What we can see, however, is the unanimous reaction of analysts, six of whom have lowered their price targets. Among them, the highest target is currently set by Jeffries Group, which reiterated its ‘Buy’ rating with a price target of $115, down from $120. The lowest price target was set by Wedbush, which decreased it to $96 from $97 with a ‘Neutral’ rating. The seventh analyst that issued an update on Intuit today is First Analysis, which downgraded the stock to ‘Underweight’ from ‘Equal Weight’.

Taking into account the market’s negative reaction on Intuit Inc. (NASDAQ:INTU)’s results and divestiture plans, as well as a lower outlook from analysts, it is most likely that hedge funds will follow suit and will reduce their exposure to the company, which is why we don’t recommend buying shares of the stock on today’s dip.

Disclosure: none