Sell Microsoft Corporation (MSFT)? Hedge Funds Are.

Microsoft Corporation (NASDAQ:MSFT) shareholders have witnessed a decrease in hedge fund sentiment in recent months. This is important because Citigroup cut its estimates on Microsoft this morning, so let’s take a look at what the smart money thinks.

According to most traders, hedge funds are assumed to be slow, old financial tools of the past. While there are greater than 8000 funds trading today, we look at the aristocrats of this group, around 450 funds. It is widely believed that this group has its hands on the lion’s share of the hedge fund industry’s total capital, and by paying attention to their top equity investments, we have found a number of investment strategies that have historically outstripped the S&P 500 index. Our small-cap hedge fund strategy beat the S&P 500 index by 18 percentage points annually for a decade in our back tests, and since we’ve started sharing our picks with our subscribers at the end of August 2012, we have outpaced the S&P 500 index by 24 percentage points in 7 months (see all of our picks from August).

Equally as beneficial, positive insider trading sentiment is a second way to break down the financial markets. As the old adage goes: there are a variety of incentives for a corporate insider to drop shares of his or her company, but just one, very simple reason why they would buy. Many empirical studies have demonstrated the useful potential of this strategy if you know what to do (learn more here).

Keeping this in mind, let’s take a look at the key action regarding Microsoft Corporation (NASDAQ:MSFT).

What have hedge funds been doing with Microsoft Corporation (NASDAQ:MSFT)?

At year’s end, a total of 95 of the hedge funds we track were bullish in this stock, a change of -12% from the previous quarter. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were upping their holdings considerably.

Of the funds we track, Yacktman Asset Management, managed by Donald Yacktman, holds the largest position in Microsoft Corporation (NASDAQ:MSFT). Yacktman Asset Management has a $797.9 million position in the stock, comprising 4.8% of its 13F portfolio. The second largest stake is held by First Eagle Investment Management, managed by Jean-Marie Eveillard, which held a $729.8 million position; the fund has 2.6% of its 13F portfolio invested in the stock. Remaining hedgies that are bullish include Boykin Curry’s Eagle Capital Management, Ken Fisher’s Fisher Asset Management and Kerr Neilson’s Platinum Asset Management.

Seeing as Microsoft Corporation (NASDAQ:MSFT) has experienced declining sentiment from hedge fund managers, it’s easy to see that there were a few money managers who were dropping their full holdings last quarter. Intriguingly, Robert Rodriguez and Steven Romick’s First Pacific Advisors LLC sold off the largest investment of the “upper crust” of funds we watch, comprising about $286 million in stock.. Jeffrey Tannenbaum’s fund, Fir Tree, also cut its stock, about $74.4 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 13 funds last quarter.

What do corporate executives and insiders think about Microsoft Corporation (NASDAQ:MSFT)?

Insider trading activity, especially when it’s bullish, is particularly usable when the primary stock in question has experienced transactions within the past 180 days. Over the latest half-year time period, Microsoft Corporation (NASDAQ:MSFT) has seen zero unique insiders buying, and 6 insider sales (see the details of insider trades here).

Let’s also examine hedge fund and insider activity in other stocks similar to Microsoft Corporation (NASDAQ:MSFT). These stocks are Intuit Inc. (NASDAQ:INTU), Adobe Systems Incorporated (NASDAQ:ADBE), salesforce.com, inc. (NYSE:CRM), SAP AG (ADR) (NYSE:SAP), and Oracle Corporation (NASDAQ:ORCL). This group of stocks belong to the application software industry and their market caps are closest to MSFT’s market cap.