Software No Longer Soft

By Matthew McCall | June 26, 2008 AAA

The software sector has recently been a consistent outperformer of the overall stock market. Regardless of what lays ahead, I would argue that its future looks bright. After lagging the S&P 500 in 2005 and 2006, the iShares Software ETF (PSE:IGV) beat the index by over 12% on its way to returning 15.8% in 2007. Through nearly six months of 2008, the ETF remains well ahead of its broader market counterpart.

What many investors do not realize is that there is more to the software sector than Microsoft (Nasdaq:MSFT) and Oracle (Nasdaq:ORCL), the two largest in size and strength. With more than 275 software stocks traded on the major exchanges, there is a world of opportunity for investors willing to think creatively.

Stock Up On Niche Software

BMC Software
The initials BMC may not seem familiar, but if you work for a Fortune 500 company you have probably heard of BMC. More than 80% of Fortune's 500 rely on BMC's software. BMC supplies enterprise management solutions that allow companies to automate their IT needs through enterprise systems, database systems and applications. In May, the company beat the Street's revenue forecast, and this is the 12th consecutive time in the last three years that BMC beat or at least met revenue. Another positive catalyst for BMC is the fact its software can help alleviate the pressure of hiring new employees in a rough economic environment. (NYSE:CRM)
While consumers are usually looking for ways to save every dollar, they are also concerned about the service they receive. CRM is here to make that experience better for the customer and easier for the company providing the service. The company's software is used to help generate sales leads, maintain customer information, and track customer interactions. The diversity of the company allows its products to be used in a variety of industries, and now it is even available through wireless devices. In a cutthroat world of sales, CRM can help push a company to the top.

Governments Need Software Too

ManTech International
ManTech provides IT services to the U.S. government with a concentration on NASA and the Department of Defense. The company was even honored earlier this year as one of the top 100 tech companies in the world by Business Week magazine. The beauty having a relationship with the government is that spending on defense and intelligence will not slow, even when the economy does. In the times we live in, unfortunately ManTech's services will be in high demand for years to come.

Integral Systems (Nasdaq:ISYS)
Despite the name, this is very much a niche software company. Integral Systems supplies systems that include both software and hardware for satellite communication monitoring. As you can imagine, the government is a major player in the world of satellites and takes advantage of Integrals' products. From a technical standpoint, the stock has been on fire since breaking out in 2008, but it does have the fundamentals to back up the move. Its quarterly year-over-year revenue growth is 55% and the PEG ratio shows the stock is undervalued at 0.84.

Software Strategy
If investing in a single stock in the software sector is too aggressive for your portfolio there are other options. The strategy of picking a few software names that focus on different areas of the industry is a solid way to diversify within the sector. Or to make things easier, there are a number of software ETFs that are available to investors that want exposure to the whole sector.

To learn more, read How To Use ETFs In Your Portfolio.

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