How Do Hedge Funds View These Stocks That Just Reported Earnings?

Paychex, Inc. (NASDAQ:PAYX) and Actuant Corporation (NYSE:ATU) are trending after reporting earnings earlier today. Paychex is up by 0.6%, while Actuant is up by 10% in early morning trading after both companies beat expectations with their earnings reports. Let’s take a closer look at the financial results of the two companies and see how the world’s greatest investors view them.

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In the eyes of most investors, hedge funds are assumed to be underperforming, old investment tools of the past. While there are more than 8,000 funds in operation at present, hedge fund experts at Insider Monkey look at the aristocrats of this group, around 700 funds. Contrary to popular belief Insider Monkey’s research revealed that hedge funds have lagged in recent years because of their short positions as well as the huge fees that they charge. Hedge funds managed to outperform the market on the long side of their portfolio. In fact, the 15 most popular small-cap stocks among hedge funds returned 118% since the end of August 2012 and beat the S&P 500 Index by 60 percentage points (see the details here).

Paychex, Inc. (NASDAQ:PAYX) reported EPS of $0.58 on revenues of $723 million for its fiscal first quarter of 2016 versus expectations of $0.51 in EPS on revenues of $717.55 million. Human resource services revenue increased by 15% year-over-year to $279.7 million while payroll service revenue rose by 5% to $432.5 million. Operating income jumped by 11% to $296.1 million.

“Fiscal 2016 is off to a good start, and we have continued to experience positive results across our major product lines. Payroll service revenue growth was 5%, as expected. We continue to see strong demand for our human resource services, including double-digit growth in the number of client worksite employees served,” Chief Executive Officer Martin Mucci commented.

Guidance is solid. The leading provider of payroll solutions expects revenue to increase by 7-8% and net income to increase by 8-9% for fiscal year 2016. The guidance numbers are in the range of analyst estimates. Shares of Paychex are up by 4% year-to-date, outperforming the S&P 500.

Hedge funds were bullish on Paychex, Inc. (NASDAQ:PAYX) in the second quarter. 31 hedge funds owned $361.85 million of the company’s shares (representing 2.10% of the float) on June 30, versus 21 funds and $287.2 million respectively on March 31. Greg Poole’s Echo Street Capital Management increased its position by 431% to 617,209 shares while Paul Marshall and Ian Wace’s Marshall Wace LLP established a new position of 198,531 shares. Dmitry Balyasny’s Balyasny Asset Management increased its position of call options by 67% to cover 250,000 underlying shares, while Benjamin A. Smith’s Laurion Capital Management established a new position of call options underlying 200,000 shares. Going the other way was Clint Carlson‘s Carlson Capital, which decreased its position by 7% to 1.7 million shares.

In contrast to hedge funds, analysts think that Paychex is fully valued. Three analysts have a ‘Sell’ rating, four have a ‘Hold’ rating, and just two have a ‘Buy’ rating. Goldman Sachs has a ‘Neutral’ rating with a price target of $52 per share. JPMorgan has a ‘Neutral’ rating as well with the same price target. Overall, analysts have a consensus price target of $48.50 per share, giving Paychex 5.4% upside.

Actuant Corporation (NYSE:ATU) reported fiscal 2015 fourth quarter EPS of $0.37 on revenues of $300.38 million versus expectations of $0.29 in EPS on revenues of $294.21 million. Earnings beat expectations as management maintained a tight control on costs. Revenues fell less than expectations as core sales declined by just 7% year-over-year when excluding the impact of divestments and foreign exchange. Overall, Actuant reported a yearly adjusted EPS of $1.65 on revenues of $1.25 billion for fiscal year 2015. Guidance is solid. Management expects fiscal 2016 EPS to be $1.20-$1.40 on revenues of $1.16-$1.20 billion, giving Actuant a reasonable forward PE of 14.9 when using the midpoint of the EPS guidance range.

Hedge funds are bullish on Actuant Corporation (NYSE:ATU). 20 hedge funds owned $166 million of the company’s shares (representing 12.00% of the float) on June 30, versus 12 funds and $185.59 million respectively on March 31. Richard S. Pzena‘s Pzena Investment Management increased its position by 18% to 2.38 million shares while Ken Griffin’s Citadel Investment Group upped its stake by 89% to 875,338 shares. Joel Greenblatt’s Gotham Asset Management increased its position by 85% to 506,641 shares while Lee Munder’s Lee Munder Capital Group upped its holdings by 32% to 492,880 shares. Glenn Russell Dubin’s Highbridge Capital Management established a new position of 343,991 shares.

Analysts are bullish but reserved on Actuant. Although the analysts covering the industrial company have a consensus price target of $28.60, their price targets have trended lower in recent months. Robert W. Baird lowered its price target to $25 from $26 on June 19, while Barclays initiated coverage with an $18 price target on September 24.

Disclosure: None