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 in upward trend: price rose above 50-day moving average on July 25, 2024
RNG moved above its 50-day moving average on July 25, 2024 date and that indicates a change from a downward trend to an upward trend. In of 35 similar past instances, the stock price increased further within the following month. The odds of a continued upward trend are .
Notable companies
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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