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What do the world's largest money managers like in the software group? Through research of the latest available Q4 institutional 13-F filings, we identify the software company stocks that are being accumulated and those being distributed by the world's largest fund managers, managing between $50 billion and over $700 billion in 13-F assets. Taken together, these mega fund managers control over 35% of the assets invested in the U.S. equity markets, but number just over 30 out of the tens of thousands of funds that invest in the U.S. equity markets. Also, taken together, they are bearish on the software group, cumulatively cutting $2.72 billion in Q4 from their $245.62 billion prior quarter position, with most of the cut in software leader Microsoft Corp. (NASDAQ:MSFT), in which they shed $2.24 billion worth of stock in Q4.

The following are the software stocks that these mega fund managers are most bullish about, that are showing strong revenue and earnings growth, and that have also outperformed their peers YTD, that is, relative to SPDR S&P Software & Services ETF (NYSEARCA:XSW) that is up 13% YTD (see Table):

Salesforce.com Inc. (NYSE:CRM): CRM provides customer and collaboration relationship management software and services to various businesses and industries worldwide. Mega funds together added a net $315 million in Q4 to their $10.15 billion prior quarter position in the company, and taken together, mega funds hold 48.7% of the outstanding shares. The top buyer was mega fund T Rowe Price Associates, with $288 billion in 13-F assets ($263 million), and the top holder was mutual fund powerhouse Fidelity Investments, with $492 billion in 13-F assets ($3.2 billion).

CRM is scheduled to release its next Q1 (March) report on May 17th after the market close. In its latest Q4, the company beat analyst revenue and earnings estimates, with revenue growth of 38% and earnings growth of 39% year-over-year. Furthermore, analysts are projecting that strong growth will continue, with earnings projected to rise from $1.40 in FY 2012 (ending January) to $2.08 in FY 2014 at an annual rate of 21.9%. The stock is up about 55% YTD compared to the 13% rise for the average software stock over the same time period. Also longer-term, the stock is up almost an astounding eight-fold from the depths of the 2008-09 recession, possibly among the best large-cap performers in the software group over that period.

Wall Street analysts are generally bullish on the stock (31 out of 41 rate it a buy/strong buy), and the company also recently received a position mention in Barron's, where it was argued that the company's Chatter software that allows businesses to set up private social networks, is helping it cross-sell its core sales automation software. Its shares currently trade at 75-76 forward P/E and 13.5 P/B compared to averages of 36.8 and 4.1 for its peers in the computer software group.

Vmware Inc. (NYSE:VMW): VMW is a provider of virtualization-based cloud infrastructure solutions, enabling organizations to aggregate multiple servers, storage infrastructure, and networks together to form shared pools of capacity that can be dynamically allocated as needed, increasing IT utilization and decreasing overall IT spending. Mega funds together added a net $154 million in Q4 to their $2.69 billion prior quarter position in the company, and taken together mega funds hold 6.0% of the outstanding shares. The top buyer was Fidelity Investments ($94 million), also the top holder at $812 million.

VMW released its Q4 just last week, on Thursday, April 18th, beating analyst revenues and earnings estimates, with revenue growth of 25% and earnings growth of 38% year-over-year. Furthermore, analysts are projecting that strong growth will continue with earnings projected to rise from $2.17 in 2011 to $3.17 in 2014 at an annual rate of 20.9%. The stock is up about 38% YTD compared to the 13% rise for the average software stock over the same time period. Its shares currently trade at 35-36 forward P/E and 9.1 P/B compared to averages of 36.8 and 4.1 for its peers in the computer software group.

The following are some additional software stocks that mega funds accumulated in Q4 (see Table):

  • Check Point Software Technology (NASDAQ:CHKP) is an Israeli provider of internet security software, hardware and services, in which mega funds together added a net $201 million in Q4 to their $3.02 billion prior quarter position in the company.
  • Citrix Systems Inc. (NASDAQ:CTXS) develops online application virtualization, networking and performance management software, in which mega funds together added a net $188 million in Q4 to their $7.85 billion prior quarter position in the company.
  • Symantec Corp. (NASDAQ:SYMC) is a developer of internet and network security, storage and systems management applications for consumers and enterprises, in which mega funds together added a net $140 million in Q4 to their $5.86 billion prior quarter position in the company.
  • VeriSign Inc. (NASDAQ:VRSN) is a leading provider of digital security products and services to website hosts, enterprises and e-Commerce service providers, in which mega funds together added a net $119 million in Q4 to their $2.58 billion prior quarter position in the company.
  • Netsuite Inc. (NYSE:N) is a provider of on-demand, integrated business management software, including financials/ERP, customer relationship management or CRM, professional services automation [PSA], and e-commerce capabilities that automate processes across departments, in which mega funds together added a net $54 million in Q4 to their $363 million prior quarter position in the company.
  • Allscripts Healthcare Solutions (NASDAQ:MDRX) is a provider of clinical, connectivity and patient information software applications for healthcare providers, in which mega funds together added a net $5 million in Q4 to their $865 million prior quarter position in the company.

Besides these, mega funds, based on their Q4 trading activity, indicated that they are bearish on the following software stocks (see Table):

  • Microsoft Corp, the world's leading software company, that develops operating systems, business software and other applications for servers, PCs and intelligent devices, in which mega funds together cut a net $2.24 billion in Q4 from their $89.75 billion prior quarter position in the company.
  • Oracle Corp. (NYSE:ORCL) develops database and middleware software, and business application software and hardware systems for enterprises, in which mega funds together cut a net $1.28 billion in Q4 from their $48.78 billion prior quarter position in the company.
  • Nuance Communications Inc. (NASDAQ:NUAN) is a leading provider of voice and language solutions for businesses and consumers worldwide, transforming the way people interact with devices and systems, in which mega funds together cut a net $298 million in Q4 from their $3.39 billion prior quarter position in the company.
  • business intelligence software provider Qlik Technologies (NASDAQ:QLIK), in which mega funds together cut a net $83 million in Q4 from their $1.18 billion prior quarter position in the company.
  • SAP AG (NYSE:SAP) id a leading German developer of collaborative e-business solutions for enterprise markets worldwide, in which mega funds together cut a net $13 million in Q4 from their $897 million prior quarter position in the company.

Table

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General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.

Credit: Fundamental data in this article were based on SEC filings, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Source: Top High-Growth Outperforming Software Picks By The World's Largest Money Managers