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.

Software Developer

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.