As with every bear market in the past, the US stock market will eventually cycle through the current decline and start to climb again. During this process, sectors that had previously been favored are usually replaced with new sectors that lead the new bull move.
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Software stocks have a good chance to be one of the new leading sectors for the following reasons;1- The long run-up of energy and material companies is showing definite signs of topping out. Recent trends indicate a major sentiment change is developing.
2- For companies reliant on basic materials and commodities, such as steel and oil, high prices will reduce profits and profit margins.
3- Costs for software companies are likely to stay relatively low. Orders should continue to increase as business customers seek to use software as a way to reduce costs.
Software companies have been changing in response to greater use of Software-as-a-Service (SaaS), which allows users to pay for software as needed instead of buying the software program upfront.
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As one measure of projected industry growth, the US Bureau of Labor Statistics expects “much faster than average growth” for software engineers (46%) and systems analysts (31%) from 2004 to 2014.
Software Magazine has been assembling the “Software 500” for the past few years. The 2007 list is a good place to start looking for software stocks. Companies are ranked by annual revenue.
Three software companies form the Software 500 are discussed briefly below. Each company has stock options available for trading.
Market Cap: $7,700 million
Software 500 Rank: 109
Salesforce.com has been successful providing “software on demand” to a wide range of business customers. During fiscal 2007, Salesforce had 1.1 million subscriptions for their Force.com on-demand platform.
Except for a down-move during the first half of 2006, the stock has been in a steady uptrend for more than 3 years, rising from less than $10 to a recent high of $75.21.
However, as with many software stocks, there is always the risk that expectations could greatly exceed future results. This may be one of reasons for the very high Beta value of 3.19, demonstrating high volatility.
Although earnings are growing rapidly, estimated 2009 earnings (per S&P) are only $0.34 per share. Based on current (7-25-08) price of $63.75, the resulting forward PE ratio of 188 is very high.
Market Cap: $16,500 million
Software 500 Rank: 20
Symantec Corp has been one of the leaders in security software. Revenue growth has been very strong for several years. However, earnings declined in 2006 and have not yet recovered to the 2005 level of $0.74 per share.
The stock peaked at $34 in late 2004 and slid to $15 by mid-2006.
The last 5 quarterly earnings announcements have “surprised” on the upside. This strength is indicated by the slow climb to $19.25 as of 7-25-08, in the face of the current bear market. For projected 2008 earnings of $0.53 (S&P), the modified current PE of 36 is not overly high for this sector. Beta of 0.53 shows price volatility is low.
OMNITURE INC (OMTR)
Market Cap: $1,270 million
Software 500 Rank: 210
Omniture provides a suite of “business optimization” software programs that allow business customers to manage information.
Revenue growth, which has been increasing at a very high rate since 2003, is projected by S&P to “more than double in 2008”, mostly due to recent acquisitions. However, Omniture has not yet provided positive earnings.
The company went public in mid-2006. From the peak of $38.57 in October 2007, the stock has declined more than 50% to a current price of $18.40 (7-25-08).
A covered call investing position is available for OMTR with a potential return of 4.9% and downside protection of 16.1%, so even if the price of Ominture’s stock does not decrease more than 16.1% at stock options expiration in September, the covered call investing position will remain profitable.
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[tags] bear market, energy, steel, oil, software, Software-as-a-Service, SaaS, Software Magazine, CRM, salesforce.com Inc., OMTR, Omniture Inc., SYMC, Symantec Corp., covered call investing, covered call investment strategy, investment strategy, iron condor, poweroptions, stock option trading, stock options [/tags]