Jefferies Says Software Stocks May Continue to Outperform the S&P 500

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Many of the firms that we cover around Wall Street have become more positive on the prospects for improved capital expenditure (capex) spending by corporate America as the year progresses and into next year. Declining U.S political and tax policy uncertainty, combined with a capex figure that is low compared to gross domestic product (GDP), has the software analysts at Jefferies bullish on software spending. With software stocks outperforming the S&P 500 since early July, but only inline with the index for the year, the Jefferies team thinks the sector can lead the way in the latter half of this year and into 2014. Here are their top stocks to buy.

Citrix Systems Inc. (NASDAQ: CTXS) is a name that is showing up on top lists around Wall Street. The company has seen extremely strong cloud software sales growth and recently expanded its strategic alliance with Cisco Systems Inc. (NASDAQ: CSCO) to support data centers. The Thomson/First Call price target for the stock is $80.

EMC Corp. (NYSE: EMC) is not a software company. Yet the majority ownership position its has in VMware Inc. (NYSE: VMW) makes it is a dual threat. Owning the stock gives investors a top storage name in enterprise hardware, as well as the cloud computing software from its majority stake. The consensus price target for this top tech name is $31. Investors also receive a 1.5% dividend.

Fortinet Inc. (NASDAQ: FTNT) is one of the top names to buy in cyber security. After a slow start to the year, the company delivered solid second-quarter numbers, and the order backlog for the rest looks very promising. The consensus price target stands at $24.

Intuit Inc. (NASDAQ: INTU) posted inline earnings and raised its dividend after the close Tuesday. The company provides business and financial management solutions for small businesses, consumers, accounting professionals and financial institutions, primarily in the United States, Canada, the United Kingdom, India and Singapore. Its Quickbooks product is a top seller. The consensus price objective for the stock is posted at $67.

Red Hat Inc. (NYSE: RHT) provides open source software solutions primarily to enterprise customers worldwide. With 15.4% earnings growth reported in its fiscal first quarter, sales are booming as its Jboss middleware business drives revenue. The consensus price target for this fast growing company is $58.

Salesforce.com Inc. (NYSE: CRM) has not only dominated the customer relationship management (CRM) software business, it has absolutely blown away the short sellers who have doubted the stock for years. This stock also has become a darling of CNBC pundit Jim Cramer, which may or may not be a good thing. The consensus price target for the stock is $50.

Workday Inc. (NYSE: WDAY) held an initial public offering (IPO) less than a year ago and has been a monster success. The company provides enterprise cloud-based applications for enterprises in the United States and internationally. It offers applications for customers to manage critical business functions that enable them to optimize their financial and human capital resources. The consensus price target is at $70, which is below current trading levels.

Investors looking to buy the software sector as a whole may want to consider the iShares North American Tech-Software ETF  (IGV). Another route that focuses more exclusively on the cloud computing stocks is to buy the First Trust ISE Cloud Computing Index Fund (SKYY).

Cloud computing, cyber security, CRM data management are all software areas that are not only here to stay, they are growing exponentially. Tech investing often requires investor patience. That patience can pay off big time, if Jefferies is right and corporate capital expenditures grow this year and into 2014.

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