Software is a huge sector, and like any huge sector there is a mix of wheat and chaff. The trick, then, is to separate the two and focus one's time on the most promising ideas. The following are five above-average software companies that are worth a closer look by investors seeking some technology ideas with solid chances of market-beating performance.

IN PICTURES: Baby Buffett Portfolio: His 6 Best Long-Term Picks

1. Cognizant Technology Solutions (Nasdaq:CTSH)
Cognizant is the youngest of the Tier 1 Indian IT firms (which includes Infosys (Nasdaq:INFY) and Wipro (NYSE:WIT)), and has the added twist of a U.S.-based management. Employee turnover is quite high compared to U.S. software companies, but this is nothing new in this sector. The company has a high reliance on financial services, but recently crossed the $1 billion mark in quarterly revenue despite the uncertain conditions in the sector. Wage and tax pressures in India are concerns to monitor, but recent revenue growth in excess of 40% and increasing analyst estimates suggest solid near-term momentum.

2. DST Systems (NYSE:DST)
DST Systems is the outlier in this group, as the stock has underperformed the S&P 500 over the last year and the valuation is quite a bit below the industry average. DST is the largest third-party shareholder record keeping company, and has a significant share of the outsourced mutual fund business. The company also owns stakes in State Street (NYSE:STT), Computershare and Euronet Worldwide (Nasdaq:EEFT) - and those holding are worth about one-third of the stock's current valuation. Even allowing for risk of the company's reliance on healthy equity and credit markets, DST looks like a software name that could appeal to value investors.

3. MICROS Systems (Nasdaq:MCRS)
Investors are starting to feel quite a bit better about the hospitality industry, as the casino, hotel and restaurant sectors have been outperforming recently. As a provider of software and IT products to that sector, it perhaps not so surprising that the stock of MICROS has been strong as well. As the travel and leisure markets improve, MICROS should see good operating leverage here and from international customers. There is likewise the possibility to deepen its penetration in a sector that has not yet consistently adopted technology outside of the large national operators.

4. Oracle (Nasdaq:ORCL)
Oracle has had a good run over the past year (up about 35%), but still does not look overpriced. Assuming that Oracle can continue past success in middleware and applications and take a leadership position in this hardware/software hybrid model that seems to be emerging in the large-cap IT space, the odds should be pretty good that Oracle continues to outperform the market.

5. Red Hat (NYSE:RHT)
Like Cognizant, MICROS and Oracle, Red Hat has enjoyed a good run over the past year. Unlike the other names on this list, however, Red Hat builds itself on the basis of service and support. Much as Microsoft (Nasdaq:MSFT), IBM (NYSE:IBM) and VMWare (NYSE:VMW) want to break that dynamic and convert customers to their proprietary products, there is likely to always be a segment of the market that prefers open-source software over proprietary systems.

On top of that, Red Hat has the opportunity to expand its service model into the growing cloud and virtualization markets, a move that would likely mean above-average returns if successful.

The Bottom Line
Software, and technology in general, can offer volatility and valuation levels that trouble conservative investors. That said, they are often cash-generating high-margin businesses and even a conservative investor may find that a small allocation to software is worth the trouble. These names are just a starting point for due diligence, but each would seem to have a better than fair shot at solid performance in both the short and long term. (For related reading, take a look at 4 Industry Changing Tech Trends.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!