Software Stocks Leading the Way in 2020, but the Top 7 Companies are Overvalued Currently
At the beginning of 2020, I wrote an outlook for a publisher. The goal was to divulge what I thought would be the top performing sectors for the year. I am happy to say that I mentioned that I really liked software stocks as there were so many companies in the group with strong fundamental indicators. Of the 33 industry groups from Investor’s Business Daily, the software sector has led the way so far in 2020 with a gain of 23.11%, at least through June 1. Unfortunately, I was also bullish on banks and that sector ranks 32nd out of 33 for its price performance thus far.
Of course, the software industry is part of the larger tech sector and you can even break the software companies down into smaller groups. There are application software and enterprise software companies. One segment of the software industry that has performed particularly well is the “software as a service” group.
What separates this group of stocks from other software manufacturers is that all of these companies provide software that provides specific needs or services for customers. For instance, Rosetta Stone is in the group and it helps consumers learn various language skills. Workday is in the group and it helps users manage critical business functions and optimize their financial and human capital resources. Notable companies in this group include Adobe Inc (NASDAQ: ADBE), Salesforce.Com Inc (NYSE: CRM), Workday Inc (NASDAQ: WDAY), Palo Alto Networks Inc (NYSE: PANW), Citrix Systems, Inc. (NASDAQ: CTXS).
On the Tickeron platform, there are 16 stocks in the software as a service theme. Looking at these stocks over the last six months, 15 of them have seen their stock price increase while the S&P 500 is up just less than 1.0%. Of these software firms, 11 of them are up over 10% in the last six months and six are up over 20%. Ring Central (NYSE: RNG) jumped 63% over the last six months and that was the top performer in the group while Veeva Systems (NYSE: VEEV) has gained 48.8%.
The price performance from the group has been incredible over the last six months. However, I was looking at the stocks in the Tickeron screener and there was something that jumped out at me. The current valuation ratings for so many of these companies fall into the overvalued category. In all, 11 of the 16 stocks are overvalued based on this indicator while three are fairly valued and two are undervalued. I arranged the stocks based on their market cap and took a screenshot. The top seven stocks are shown below with the Valuation’s highlighted.
For Adobe (Nasdaq: ADBE), the valuation rating is the only negative fundamental rating at this time. I should divulge that I have Adobe in my portfolio currently and it has been there since last October. It is also worth mentioning that the company is getting ready to release earnings on June 11. Adobe is the largest of these companies based on market cap.
For Salesforce.com (NYSE: CRM) the valuation rating is one of two indicators that are potential negatives for the company. The only other one marked in red is the seasonality rating.
Looking at some of the other top companies based on market cap, I see several stocks that have been in my portfolio at times over the past year and a half. Paycom Software (NYSE: PAYC) is currently in my portfolio and this is the second time in the past year. It was in the portfolio last fall and I took profits toward the end of the year before buying it again at the beginning of May.
Palo Alto Networks (NYSE: PANW), Workday (Nasdaq: WDAY), and Veeva have all been in my portfolio at some point in the past year.
The fundamental ratings for most of the companies are decidedly bullish, but those valuation ratings are bit of a concern. The ratings are elevated currently after the big gains off the March lows. For long-term investors these stocks are certainly attractive based on the fundamental ratings, but now might not be the time to buy them based on the technical indicators.
My own personal investment philosophy is that the fundamentals tell us what stocks we should buy, but the technical indicators tell us when we should buy them. With that in mind, now it may not be time to buy software stocks.
RNG's Stochastic Oscillator climbs into overbought zone
The Stochastic Oscillator for RNG moved into overbought territory on December 06, 2024. Be on the watch for a price drop or consolidation in the future -- when this happens, think about selling the stock or exploring put options.
Technical Analysis (Indicators)
Bearish Trend Analysis
The 10-day RSI Indicator for RNG moved out of overbought territory on November 11, 2024. This could be a bearish sign for the stock. Traders may want to consider selling the stock or buying put options. Tickeron's A.I.dvisor looked at 18 similar instances where the indicator moved out of overbought territory. In of the 18 cases, the stock moved lower in the following days. This puts the odds of a move lower at .
Following a 3-day decline, the stock is projected to fall further. Considering past instances where RNG declined for three days, the price rose further in of 62 cases within the following month. The odds of a continued downward trend are .
RNG broke above its upper Bollinger Band on November 07, 2024. This could be a sign that the stock is set to drop as the stock moves back below the upper band and toward the middle band. You may want to consider selling the stock or exploring put options.
Bullish Trend Analysis
The Momentum Indicator moved above the 0 level on November 25, 2024. You may want to consider a long position or call options on RNG as a result. In of 86 past instances where the momentum indicator moved above 0, the stock continued to climb. The odds of a continued upward trend are .
The Moving Average Convergence Divergence (MACD) for RNG just turned positive on December 04, 2024. Looking at past instances where RNG's MACD turned positive, the stock continued to rise in of 49 cases over the following month. The odds of a continued upward trend are .
The 50-day moving average for RNG moved above the 200-day moving average on November 15, 2024. This could be a long-term bullish signal for the stock as the stock shifts to an upward trend.
Following a +1 3-day Advance, the price is estimated to grow further. Considering data from situations where RNG advanced for three days, in of 277 cases, the price rose further within the following month. The odds of a continued upward trend are .
The Aroon Indicator entered an Uptrend today. In of 170 cases where RNG Aroon's Indicator entered an Uptrend, the price rose further within the following month. The odds of a continued Uptrend are .
The Tickeron Price Growth Rating for this company is (best 1 - 100 worst), indicating steady price growth. RNG’s price grows at a higher rate over the last 12 months as compared to S&P 500 index constituents.
The Tickeron Seasonality Score of (best 1 - 100 worst) indicates that the company is fair valued in the industry. The Tickeron Seasonality score describes the variance of predictable price changes around the same period every calendar year. These changes can be tied to a specific month, quarter, holiday or vacation period, as well as a meteorological or growing season.
The Tickeron Valuation Rating of (best 1 - 100 worst) indicates that the company is slightly overvalued in the industry. This rating compares market capitalization estimated by our proprietary formula with the current market capitalization. This rating is based on the following metrics, as compared to industry averages: P/B Ratio (97.087) is normal, around the industry mean (30.906). P/E Ratio (0.000) is within average values for comparable stocks, (159.968). Projected Growth (PEG Ratio) (0.443) is also within normal values, averaging (2.755). Dividend Yield (0.000) settles around the average of (0.084) among similar stocks. P/S Ratio (1.454) is also within normal values, averaging (57.816).
The Tickeron PE Growth Rating for this company is (best 1 - 100 worst), pointing to worse than average earnings growth. The PE Growth rating is based on a comparative analysis of stock PE ratio increase over the last 12 months compared against S&P 500 index constituents.
The Tickeron SMR rating for this company is (best 1 - 100 worst), indicating weak sales and an unprofitable business model. SMR (Sales, Margin, Return on Equity) rating is based on comparative analysis of weighted Sales, Income Margin and Return on Equity values compared against S&P 500 index constituents. The weighted SMR value is a proprietary formula developed by Tickeron and represents an overall profitability measure for a stock.
The Tickeron Profit vs. Risk Rating rating for this company is (best 1 - 100 worst), indicating that the returns do not compensate for the risks. RNG’s unstable profits reported over time resulted in significant Drawdowns within these last five years. A stable profit reduces stock drawdown and volatility. The average Profit vs. Risk Rating rating for the industry is 87, placing this stock worse than average.
Notable companies
Industry description
Market Cap
High and low price notable news
Volume
Fundamental Analysis Ratings
The average fundamental analysis ratings, where 1 is best and 100 is worst, are as follows
General Information
a provider of software-as-a-service solutions for business communications
Industry PackagedSoftware