Like most technology sectors, the Dow Jones U.S. Software Index has lagged the overall market this year. The index is down 9.5% in 2010, well below the 4.2% loss for the S&P 500. Even with the broad underperformance of their peers, the software stocks offer some compelling investment opportunities for investors who are willing to take their chances as a stock picker.
The recession has led to higher unemployment, but productivity has not been hit as hard since companies have been able to automate jobs. The software sector has been responsible for helping to keep productivity up even with fewer workers, and unfortunately for the unemployed, this will likely be a trend that continues. Below are a few software stocks doing well in this volatile market.
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Solera Holdings (NYSE: SLH) is a company that provides software and services to the auto insurance claims processing industry. The stock is sitting at an all-time high after going public in May 2007. Recently the company raised its annual dividend to 30 cents a share from 25 cents and paid down its debt, boosting its 2009 return on equity to a record 21.5% (To learn more, see Return On Equity - Investopedia Videos.) Even though the company is trading at a reasonable P/E ratio of 20.2 based on 2010 earnings estimates, the stock is not extremely undervalued. Growth is expected to slow in the coming years, and the upside may be limited in the near term. I suggest looking for a pullback to the high $30s before becoming an aggressive buyer.
The Cloud-Computing Platform
Salesforce.com (NYSE: CRM) provides customer relationship management services to companies to help streamline sales and customer service via the cloud-computing platform. The stock recently jumped to a new all-time high after reporting earnings better than analysts' expectations. Excluding one-time charges, net income shot up 71% with revenue rising by 25%. CRM is one of my favorites in the space because it allows companies to lower costs and increase productivity. There is also the tie to the popular cloud-computing sector that has been attracting big money.
Informatica (Nasdaq: INFA) offers enterprise data integration as well as data quality software and services. Similar to CRM, Informatica has a division that deals with the "cloud", which is one reason the stock is hitting a nine-year high. During the last quarter, the company reported record revenue that grew by 33%. The quarter was boosted by 79 deals worth over $300,000, also a new record.
Quest Software (Nasdaq: QSFT) hit a fresh eight-year high in late August as the overall software sector continues to struggle. Even though the stock is up 13% in 2010, the forward P/E ratio for Quest is 13.4, very attractive for a fast-growing technology company. The company is an enterprise systems management specialist that helps facilitate the delivery of information through corporate networks and the internet.
Cognizant Technologies (Nasdaq: CTSH) provides IT consulting and services along with outsourcing around the globe. A big move in early August on the back of earnings sent the stock to a new all-time high before pulling back for the remainder of the month. The stock has very strong support at the $55 to $58 range, and that is where the stock once again becomes an attractive buy opportunity.
A Stock Picker's Dream
The software sector is without a doubt a stock picker's dream, but it could also be a nightmare if proper research and discipline are not involved. Before considering buying any of the above or any other software stocks, please perform your due diligence, buy on pullbacks and implement a stop-loss strategy. (To learn more, see The Stop-Loss Order - Make Sure You Use It.)