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Tuesday, October 24, 2006

Counter Intuit-ive

By William Trent, CFA of Stock Market Beat

According to Reuters:
Merrill Lynch said it downgraded the tax-preparation and accounting software maker as the shares were 10 percent to 15 percent overvalued.–The brokerage said the stock’s valuation is now at a premium to software and IT services companies. With no big catalysts on the horizon, there is a higher likelihood of a fall in the share price in the year ahead, it added.

Since one of Intuit’s major products is TurboTax, the company tends to see a huge surge in sales during the first and second calendar quarter each year. So one would expect the company to start performing well right about now. The only thing is, everybody knows all that. And since the market tends to look ahead, the season for Intuit’s stock is the off-season for its fundamentals.

The stock is now trading near the high for the year after hitting a split-adjusted low of $24 in March - the height of tax season. In fact, that $24 level had essentially been a flat line from the 2005 peak approached in November of last year (see Yahoo! historical prices).

Let’s look further back:
From April 2005 to November 2005 the stock rallied 23%.
From November 2004 to April 2005 the stock declined 16%.
From April 2004 to November 2004 the stock rallied 12%.
From November 2003 to April 2004 the stock declined 19%.
From April 2003 to November 2003 the stock rallied 53%.
From November 2002 to April 2003 the stock declined 60%.
From April 2002 to November 2002 the stock rallied 52%.
From November 2001 to April 2002 the stock declined 23%.
From April 2001 to November 2001 the stock rallied 53%.

You get the point. We think Merrill Lynch’s downgrade is the right way to play these odds.

The author may hold a position in the securities discussed. A current list of the author's holdings is available here.

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