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This Metric Explains Why Adobe’s Slip on Earnings is an Overreaction

One of the stocks that slid in extended hours on Thursday and risks to keep the same trend on Friday is Adobe Systems Incorporated (NASDAQ:ADBE), which has reported strong financial results for the last quarter, but provided a weak outlook below the current estimates. The software company delivered a 21% annual growth in revenue to $1.22 billion for the third quarter of fiscal 2015, ended August 28, and GAAP EPS went up to $0.34 from $0.09 a year earlier. Its adjusted earnings of $0.54 per share, above the estimates of $0.50 (the revenue also came above expectations of $1.21 billion)adobe

However, the stock lost over 3% after the bell on the back of guidance for the current quarter, which included EPS in the range of $0.56 to $0.62 and revenue between $1.28 billion and $1.33 billion. These results are below the current analyst estimates of $0.64 in EPS and revenue of $1.36 billion.

Despite the market reaction on the company’s outlook, it’s important to see what analysts have to say regarding the stock’s prospects. So far, yesterday, only Citigroup reiterated its ‘Buy’ rating and the stock currently sports a mean target of around $92.20 per share. Hedge funds also seem to be fond of Adobe Systems Incorporated (NASDAQ:ADBE), as during the second quarter, the company saw an increase in both the number of funds with long positions and in the total value of holdings, fueled by a 10% growth of the stock during the period.

We analyze the hedge fund sentiment based on the data from 13F filings of over 730 investors in our database. Even though these filings are usually issued with a delay of up to 45 days, the long-term investment horizon of hedge funds makes them useful to find some interesting opportunities on the market and we have research data to prove it. Our backtests that covered the period between 1999 and 2012, showed that hedge funds’ 50 top picks, mainly including long- and mega-cap companies, underperformed the market by seven basis points per month. On the other hand, their small-cap ideas provided much higher returns and beat the S&P Total Return Index by almost one percentage point per month on average. Based on this empirical research, we launched our strategy that involves imitating a portfolio of 15 most popular small-cap stocks among hedge funds in August 2012. Since then, it has returned 118%, beating the S&P 500 ETF (SPY) by over 60 percentage points (read more details here).

With this in mind, let’s take a closer look at how hedge funds from our database have been trading Adobe Systems Incorporated (NASDAQ:ADBE) between April and June. As stated earlier, the company gained popularity, as the number of investors that own shares of the company went up to 39 from 37, while the total value of their positions advanced to $3.45 billion from $3.29 billion at the end of March. At the end of June, these funds held nearly 9% of the company. However, the top three shareholders of Adobe chose to trim their exposure to the company, including the largest shareholder, Jeff Ubben’s ValueAct Capital, which inched down its stake by 2% to 15.70 million shares. The investor consequently unloaded shares during July and last reported holding around 14 million shares. The other two, Stephen Mandel‘s Lone Pine Capital and Lee Ainslie’s Maverick Capital were more drastic in their actions and cut their positions by 24% and 33% on the quarter to 9.26 million shares and 2.33 million shares respectively.

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