Intuit Quickens on Hopes That It Will Be Promoted to S&P 500

Fundamentals help, of course, but a Merrill Lynch report lit the match on a 48% price rocket.
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Oh, to be part of the

S&P 500

.

Since

Merrill Lynch

put out a report last month listing

Intuit

(INTU) - Get Report

as a potential addition to the index tracked by the nation's largest mutual fund, the finance software company's stock has posted astounding gains.

But at these levels, the ride may be as inviting as a

Coney Island roller coaster. Since the report came out Oct. 16, the stock has climbed 48%, clearly outpacing the 5% increase at the broader

S&P Mid-cap 400

, where it currently resides.

Investors and analysts hesitate to give all the credit for the rise to the speculation, pointing as well to the company's strong growth fundamentals and buying ahead of the reports on the fiscal first quarter, due Nov. 21. Intuit, perhaps best known for its

Quicken

money management software and Web site, declined to comment.

Being added to the S&P 500 boosts a stock because mutual fund managers need to buy the stock for portfolios that mimic the index.

Yahoo!

(YHOO)

, for instance, rose 64% from Nov. 30, 1999, when it was disclosed that it would be part of the index, to the Dec. 7 close, when it was officially added. The next day, the stock slipped 8%.

Still, the three most recent additions to the S&P 500 arrived with little price improvement. Having already gained so much, and with results due, it's unclear whether Intuit can go much higher in the short term. It's currently trading at 48 times trailing earnings, above the S&P 500 average of 25.

Betting on Inclusion
Intuit's stock has soared on a report it'll be added to the S&P 500.

One Intuit bull, David Brady, senior portfolio manager at

(SRYIX)

Stein Roe Young Investor Fund, says such a steep rise probably means investors missed their chance. "Looks like the door's closed," says Brady, who holds the stock. The reason: Many large-cap fund managers may already have bought some Intuit in anticipation of its being added to the index, meaning they'll have to buy less when it actually happens.

A Value Even Now?

But investors who want to buy the stock based on long-term fundamentals would do well even at these levels, he says. Intuit's 52 week high was $90, in January. There's new management, a focus on operations and, most important, a lack of progress in personal finance software by a company once viewed as a major threat in this area:

Microsoft

(MSFT) - Get Report

. "I think what is going on now is just an appreciation of those facts," Brady says.

Merrill Lynch's equity derivatives research team regularly puts out research notes on the S&P indexes. The team zeroed in on Intuit because the S&P could use another technology company and, at $13.9 billion, Intuit's market capitalization is one of the largest outside the S&P 500.

Merrill also listed

Vitesse Semiconductor

(VTSS)

and

Microchip Technology

(MCHP) - Get Report

as potential members of the 500. Both have declined since the report.

Waiting

While analysts and investors are confident that Intuit will at least meet expectations for the quarter, that alone isn't a reason to ride the stock higher, says Scott Appleby, an analyst at

Robertson Stephens

. For the fiscal first quarter ended Oct. 30, analysts expect the company to report a loss of 16 cents, according to

I/B/E/S

.

"Because it's run up more than 40% in the last month, and however many percent in the last six months, we are holding a more cautionary approach into the quarter," Appleby says. "We want to see what they say." Since the May 1 close at $36.13, Intuit's price has nearly doubled. (He has a buy rating on the stock, and his firm hasn't done any underwriting for the company.)

In the three weeks since Merrill put out its report, Intuit missed two chances to join the S&P 500. Another opportunity opens up Nov. 16, when

Georgia-Pacific

(GP)

and

Fort James

(FJ)

close their merger, opening a spot.

Still, the question is: How many money managers have already bought a seat on the ride?