Insider ValueAct Capital Trims Stake In Adobe Systems Incorporated (ADBE), Has The Ceiling Been Hit?

According to a recent filing with the Securities and Exchange Commission, Jeffrey Ubben‘s ValueAct Capital has disposed of some 307,000 shares of Adobe Systems Incorporated (NASDAQ:ADBE) to drop its total stake in the $40.54 billion software company to 15.70 million shares valued at about $1.27 billion. The holding represents about 3.1% of the company’s outstanding shares. So far this year Adobe Systems Incorporated (NASDAQ:ADBE)’s stock has appreciated by nearly 12% and is currently trading about 3.68% below its 52-week high. In its financial results for its fiscal second quarter, Adobe’s EPS of $0.48 beat expectations by $0.03, while revenues of $1.16 billion were in line with estimates.


It is not just Ubben who is taking money out of the stock, smart money has begun to collectively lose confidence in Adobe Systems Incorporated (NASDAQ:ADBE) at its appreciated value, having more than doubled in value since the beginning of 2013. Among the funds that we track, 37 had an aggregate investment of $3.29 billion in the company at the end of March, compared to 46 firms holding $3.54 billion in shares at the end of the previous quarter. The drop in capital invested was even offset by the further of appreciation of shares in the first quarter, showing just how much smart money was leaving the stock. Nonetheless, shares have gained nearly another 10% in the second quarter, proving that hedge funds weren’t necessarily right in this case, at least not yet.

Jeffrey Ubben
Jeffrey Ubben
ValueAct Capital

First a quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy, which identifies the best small-cap stock picks of the best hedge fund managers returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 135% since the launch of our small-cap strategy compared to less than 55% for the S&P 500 (see the details).

ValueAct is also an insider at Adobe Systems Incorporated (NASDAQ:ADBE) due to the fund’s representation on the company’s board. Other insiders selling during 2015 include about 62,000 shares sold by Shantanu Narayen, who is the company’s President and CEO, and 48,000 shares sold by Senior Vice President and General Manager of Digital Marketing, Bradley Rencher. However, readers must bear in mind that insider selling could occur because of a myriad of other factors and not just a bearish outlook, hence it is a much weaker signal than insider purchases as to the management’s perception about the company’s prospects.