Is Oracle Corporation a Good Stock to Buy?

Oracle Corporation (NASDAQ:ORCL) made our list of the ten technology stocks hedge funds were crazy about during the third quarter (see the full rankings) with 60 hedge funds and other notable investors reporting a position in the stock. Oracle has been in the news for its plan to accelerate its quarterly dividend payments, allowing investors to record them as income for 2012 (as it appears quite possible that the tax rate on dividends will rise substantially next year). Given the hedge fund interest it’s worth considering for longer-term investors as well.

The company’s most recent 10-Q (for the quarter ending in August 2012) showed a 2% decrease in revenue for the quarter compared to the same period in the previous fiscal year. Growth in the software business was offset by declines in hardware and services. With Oracle Corporation generally reducing costs- though investments in R&D were up 14%- net income increased at an 11% rate. As such the company seems to be doing well. Share count also decreased by 4%, and Oracle spent over $3 billion repurchasing shares last quarter. We’d take that as an indication that the company could continue to use buybacks to return cash to shareholders.

At a market capitalization of about $150 billion, Oracle Corporation trades at 16 times trailing earnings. However, as we’ve noted, the company has been growing nicely despite its size. Wall Street analysts expect that this growth will continue, with consensus for this fiscal year placing the stock at a current-year P/E multiple of only 12. That is setting a fairly rapid pace for growth in earnings per share, even with continued buybacks. Still, Oracle probably does not need to grow quite that fast to justify its current valuation.

We’ve already mentioned Oracle’s popularity in the hedge fund community. The Baupost Group was one major holder of Oracle stock, reporting a position of 13.5 million shares. Baupost is managed by Seth Klarman, a renowned value investor whose 1991 book Margin of Safety sells for $1,500 (check out Seth Klarman’s stock picks). Billionaire David Shaw’s D.E. Shaw nearly tripled its stake to a total of 6.8 million shares (find D.E. Shaw’s favorite stocks).