In this article, via an analysis based on the latest available institutional 13-F filings, we identify the software companies that legendary or guru fund managers favor the most based on their buying, and also the number of gurus that have a position and/or bought the stock during the quarter. In an earlier article, we looked at the picks of the world's largest money managers or mega funds in the software group, that can be accessed by clicking on the above hyperlink.
The legendary or guru fund managers included, such as Warren Buffet, George Soros, Carl Icahn, Steven Cohen and Mario Gabelli, are well-known for their savvy in picking winning stocks year after year. Taken together, these guru fund managers are bearish on the software group, cutting a net $426 million in Q4 from their $14.39 billion prior quarter holdings in the group (for more general information on these guru funds, please look at the end of the article).
The following are the high growth software companies that these guru fund managers are most bullish about, that have also outperformed YTD relative to their peers in the group (see Table):
Red Hat Inc. (RHT): RHT provides open source software solutions to enterprises worldwide, including the Red Hat Linux operating system. A total of eight guru funds hold 1.6% of the outstanding shares, with six funds buying and one selling during the quarter. Also, together guru funds added a net $75 million in Q4 to their $116 million prior quarter position in the company. The top buyer was top ranked tech-focused hedge fund Coatue Management ($68 million), and the top holders were Coatue Management ($68 million), SMidCap-focused mutual fund company Columbia Wanger Asset Management ($52 million), and famed investment guru Martin Zweig's hedge fund Zweig-DiMenna Fund ($32 million).
RHT has recently been one of the strongest performers among mid- and large-cap software companies, currently trading at multi-year highs, after rising about 45% YTD v/s the average 13% rise for its peers in the group. The RHT story has been powered by higher earnings, that will have more than doubled to $1.19 in FY 2013 (ending February) from the trough earnings of 59c in the 2008/09 recession. However, that alone does not fully explain the eight-fold-plus rise in shares from the lows in 2008/09.
Indeed, RHT's original vision of supplanting Microsoft Corp. (MSFT) proprietary software with its own open-source software in the corporate and personal desktop market may not have panned out, but the company may be closer to achieving a dominant position as the operating system provider in the enterprise data center and cloud computing markets. And that may explain its nose-bleed valuations, trading at a current 56 times earnings and at 42-43 forward P/E, while revenue grew 21% year-over-year and earnings grew 12% year-over-year in its latest Q1 (February) report. Certainly, RHT valuations are not for the faint-of-heart, but for those wanting to speculate that RHT may become the dominant provider of operating systems for the enterprise data center and cloud computing markets, and thus higher revenue and profits going forward, the bullish stance of guru fund managers should offer some comfort.
Salesforce.com Inc. (CRM): CRM provides customer and collaboration relationship management software and services to various businesses and industries worldwide. A total of seven guru funds hold 0.4% of the outstanding shares, with six funds buying and one selling during the quarter. Also, together guru funds added a net $43 million in Q4 to their $32 million prior quarter position in the company. The top buyers were billionaire star fund manager Stephen Cohen's hedge fund SAC Capital Advisors ($13 million) and Chicago-based hedge fund company Balyasny Asset Management (BAM), headed by Guru Dmitri Balyasny ($10 million), and the top holders were legendary billionaire investor Ken Griffin's Chicago-based hedge fund Citadel ($23 million), SAC Capital Advisors ($19 million) and BAM ($15 million). Also, for those familiar with our series on legendary and guru funds, and the world's largest money managers or mega funds, we also noted in an earlier article that mega fund managers too were bullish on CRM, based on their Q4 2011 trading activity.
CRM has also been (besides RHT above) one of the strongest performers in the software group this year, up about 55% YTD v/s the 13% average rise for its peers in the group. The stock currently trades near its all-time highs, and 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. In its latest Q4, CRM 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%.
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 13.7 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 companies that guru fund managers accumulated in Q4 (see Table):
- Microsoft Corp. , that is the world's leading software company, developing operating systems, business software and other applications for servers, PCs and intelligent devices, in which guru funds together added a net $241 million in Q4 to their $5.29 billion prior quarter position in the company;
- SAP AG (SAP), that is a leading German developer of collaborative e-business solutions for enterprise markets worldwide, in which guru funds together added a net $44 million in Q4 to their $80 million prior quarter position in the company;
- Tibco Software (TIBX), that provides business application and database integration, process automation, management and optimization software, in which guru funds together added a net $20 million in Q4 to their $164 million prior quarter position in the company;
- social business cloud software company Jive Software Inc. (JIVE), that came public in December of 2011, in which guru funds together hold a new $18 million position;
- business intelligence software provider Qlik Technologies (QLIK), in which guru funds together added a net $17 million in Q4 to their $17 million prior quarter position in the company; and
- KIT Digital Inc. (KITD), that provides digital media services enabling the broadcast of video content on the Internet and wireless devices, in which guru funds together added a net $1 million in Q4 to their $2 million prior quarter position in the company.
Besides these, guru fund managers based on their Q4 trading activity indicated that they are bearish on the following software companies:
- Opentable Inc. (OPEN), a provider of restaurant reservation solutions in the U.S., Canada, Germany, Japan, Mexico and the U.K., in which guru funds together cut a net $37 million in Q4 from their $41 million prior quarter position;
- Oracle Corp. (ORCL) develops database and middleware software, and business application software and hardware systems for enterprises, in which guru funds together cut a net $36 million in Q4 from their $1.69 billion prior quarter position;
- Vmware Inc. (VMW), that 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, in which guru funds together cut a net $29 million in Q4 from their $68 million prior quarter position;
- Symantec Corp. (SYMC), that is a developer of internet and network security, storage and systems management applications for consumers and enterprises, in which guru funds together cut a net $26 million in Q4 from their $307 million prior quarter position; and
- Allscripts Healthcare Solutions (MDRX), that is a provider of clinical, connectivity and patient information software applications for healthcare providers, in which guru funds together cut a net $21 million in Q4 from their $30 million prior quarter position.
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.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.