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Should You Buy NetSuite Inc (N) Following Its Major Leadership Change?

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NetSuite Inc (NYSE:N) reported its second quarter financial results in the after-hours on Thursday. The cloud software provider managed to meet the Street’s expectations, while also and perhaps more interestingly, it announced a major leadership change. NetSuite Inc (NYSE:N) reported total revenue of $177.3 million with a net GAAP loss of $32.3 million or $0.41 per share for the quarter. The Street’s expectations for the quarter were $0.02 EPS on a non-GAAP basis on total revenue of $172.11 million. During the same period in 2014, the company reported a net loss of $0.31 per share with 35% lower revenue. NetSuite Inc (NYSE:N) reported non-GAAP earnings for the second quarter of $0.02 per share compared to $0.06 EPS in the second quarter of 2014. The company also hiked its full year guidance for Fiscal Year 2015 based on its strong second quarter earnings. NetSuite Inc (NYSE:N) bumped up its full year sales guidance to $735 million – $745 million from its old estimate of $730 million to $743 million. The provider of cloud-based software also announced a major change in leadership, with CEO Zach Nelson giving up his President title to COO and former CFO Jim McGeever. McGeever was also added to the board as a Director. McGeever was the 15th employee of the company when he joined the organization in 2000.  Due to this leadership change and earnings report that met expectations, shares of the company jumped by around 4% in the pre-market and by around 10% in the early trading hours on Friday, finally closing the day at $99.70, 8.28% above its closing price on Thursday. Given the volatility in the company’s upper management ranks however, can it be considered a wise investment?


At the end of the first quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long in this stock with a total investment of $158.7 million; these figures stood at around $166.5 million in holdings from 15 hedge funds at the end of 2014. Taking into account that NetSuite Inc (NYSE:N) dropped around 15% of its value during the January – March period, less than a 5% drop in aggregate capital investment in the stock by hedge funds indicates that they actually added some shares to their holdings, despite the overall drop in value of those positions. Netsuite is now up by 7.5% since the end of the first quarter.

But why do we track the hedge fund activities? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect the hedge funds’ activities. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small cap stock picks among hedge funds also bested passive index funds by around 81 percentage points over the 34 month period beginning with September 2012, returning nearly 140% (read the details here).

Likewise, other research (not our own) has shown insider purchases are also effective piggybacking methods for investors that lead to greater returns. That’s why we believe investors should pay attention to what hedge funds and insiders are buying and keep them apprised of this information. As opposed to hedge fund, insiders were not quite as bullish on NetSuite Inc (NYSE:N), as there were no insider purchase of the shares during the first half of this year, but there were quite a few insider sales, especially by some top executives. CEO Zach Nelson sold around 118,000 shares this year, while Chairman Evan Goldberg sold around 120,000 shares, and Director Deborah Farrington sold around 26,000 shares.

Keeping this in mind, let’s take a look at the key smart money action surrounding NetSuite Inc (NYSE:N).

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