You’d Better Be Aware of How Steven Cohen Was Trading This Stock Last Quarter

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Adobe Systems (NASDAQ: ADBE) failed to make our list of top ten tech stocks loved by hedge funds last quarter, but we believe it is one of the best investments available in the software and programming industry. Adobe saw its most recent fiscal quarter (4Q) come in with higher revenue, as a result of better adoption rates for cloud computing services. The company has a diverse suite of products that should help drive interim growth, and a bullish IT environment in the U.S. and Europe certainly won't hurt.

Adobe is leading the way in the field of paperwork digitization and record-keeping, and almost all of its revenues come from licensing fees. Given a large portion of its revenues are from this arena, Adobe enjoys a much higher EBITDA margin than its peers at 34%. Adobe also has billionaire Steven Cohen of SAC Capital as one of its big-name investors; Cohen upped his stake by 400% last quarter (see Steven Cohen's top picks).

Weakness in one of Adobe’s largest markets, Europe, forced it to fall below $20 in 2009, but the stock has since rebounded and is up 30% year to date. Adobe has impressive product lines that sport an average life cycle of about 24 months, allowing for higher lifetime revenue per customer. Adobe trades relatively cheap when compared to major peers at only 15 times forward earnings, which is also well below its five-year average P/E of 20x.

From a top line standpoint, Adobe trades at 4.2 times sales, where the average of its major peers is around 5.1x. If shares of the company did trade more in line with its peers, there's an upside price of around $43 – 13% higher than its current trading price.

Looking at one of Adobe's key competitors, Autodesk (NASDAQ: ADSK) is a design and drafting software company that appears to present another solid ‘growth at a reasonable price’ opportunity. Autodesk offers investors one of the best expected EPS growth rates at 17%, and sports a bargain-bin sales multiple of at 3.4x. After a near 25% slide from its high of $42.69 earlier this year, Autodesk now trades at a measly PEG of 1.0. In the third quarter, billionaire Dan Loeb took a new, rather large stake in Autodesk (see billionaire Dan Loeb's newest picks).

Nuance Communications (NASDAQ: NUAN), the voice and language software company, currently trades as one of the cheapest enterprise software players at only 11x forward earnings. Despite being a pioneer in voice recognition and the leader behind Apple’s Siri technology, the tech company is down 12% year to date. Even with its value orientated properties, we remain cautious given that Nuance has the highest debt ratio of any of its peers at 37% - more than twice that of Adobe. Billionaire Jim Simons was one of Nuance’s top new investors last quarter (check out Jim Simons' other key picks). (NYSE: CRM) is one of the fastest growing tech stocks around, and Ken Griffin's Citadel Investment Group still loves the stock after increasing its stake by 750% last quarter. Salesforce is up over 180% the last five years, whereas the S&P 500 has lost 3.7%. Salesforce does present investors with the best growth prospects of our five stocks listed here, as the sell-side expects it to grow EPS by 27% a year over the next half-decade. Even with such robust growth, we remain cautious due to its extraordinary forward P/E of 83x, coupled with the fact that insiders have been selling the company of late.

Citrix Systems (NASDAQ: CTXS) boasts a relatively high EBITDA margin of 24% and has beat earnings each of the last four quarters, but it's still relatively flat year to date on a stock price performance basis. Looking deeper, we see one counter argument for why Citrix may not performing better: the company's growth potential is already factored into its stock price. Citrix trades at some of the highest forward earnings (21x) and sales (4.9x) multiples in its industry. Ray Dalio's Bridgewater Associates has been a steady supporter of this company though, which is something to consider as well.

Getting back to Adobe, its shares are trading at one of the lowest forward P/E ratios amongst its peers (15x), and the company itself has a leading position in terms of profitability. We believe that it's a solid value play with over $3.5 billion in cash on hand, as it manages to generate over $1.5 billion annually in cash flow from operations. Although Adobe currently does not pay a dividend, it easily could establish a payout yielding 3%, which would only equal around $500 million in annual terms.

This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has the following options: long JAN 2013 $50.00 puts on Motley Fool newsletter services recommend Adobe Systems,, and Nuance Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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