Technology

Jefferies Sees Software Outperforming S&P 500 in 2017: 5 to Buy Now

Lee Jackson

While the software industry had a decent year in 2016, the stocks as a whole underperformed the S&P 500. The software stocks rose 5.5%, compared with a 9.5% increase in the venerable index. While some value plays had strong years, growth stocks led the downtrend in the industry averaging 5% declines. The good news for investors is 2017 looks like a rebound year, and one firm sees larger government spending as a potential positive.

In a new research report, Jefferies feels comfortable that half of the global software demand that it can gauge will see modest growth in 2017, similar to last year. The firm noted in its report:

US government information technology spending and discretionary budgets of the biggest European government IT/Software spenders are expected to increase modestly. We believe the financial services vertical (23% of global IT spending) remains relatively healthy and largely unaffected by Brexit and the US election.

With the possibility of a lower U.S. corporate tax rate helping to increase earnings and cash flows, Jefferies is bullish on five stocks, all of which are rated Buy.

Oracle

This top software stock has traded sideways since last spring and looks to be putting in a nice cup and handle formation. Oracle Corp. (NYSE: ORCL) develops, manufactures, markets, sells, hosts and supports database and middleware software, application software, cloud infrastructure, hardware systems and related services worldwide.

The company licenses its Oracle Database software to customers, which is designed to enable reliable and secure storage, retrieval and manipulation of various forms of data. Its Oracle Fusion Middleware software aims to build, deploy, secure, access and integrate business applications, as well as automate their business processes.

Trading at 14.2 times estimated 2017 earnings, and sporting a solid free cash flow yield, many analysts also feel that as the company’s 12C database cycle starts to contribute during calendar 2016, the stock could very well be poised for what they term a breakout year. After recent investors meetings, some analysts raised fiscal year 2017 cloud margins to 66% from 63% and earnings per share to $2.80. Jefferies and others on Wall Street feel that the software giant may be on the verge of a multiyear database product cycle (12cR2).

The analysts also note that Oracle, through some missteps of its own, probably is not getting enough credit for its cloud business, which continues to grow.

Investors receive a 1.5% dividend. Jefferies has $51 price target on the stock, and the Wall Street consensus price objective is $43.50. The stock closed Monday at $39.68.

Check Point Software Technologies

This remains one of the top tech stocks to buy on Wall Street for a security presence. Check Point Software Technologies Ltd. (NASDAQ: CHKP) provides network security solutions, selling software, hardware and subscription services for IT security with a focus of reducing complexity of security management. Its hardware is based on a software blade architecture that allows for multiple security functions to be run concurrently. Check Point sells its solutions to service providers, small and medium-sized businesses, consumers and enterprises, including all the Fortune 100 companies.

The company reported better-than-expected quarterly results, with strong guidance on new customer wins and double-digit growth in sales of new firewall units. The company’s guidance for this year implies solid revenue growth acceleration, driven by strong appetite for newer products.

The Jefferies report noted:

We believe that Check Point should continue to benefit from the trend towards security platforms as customers seeks to reduce complexity in their architecture. The company has historically been well run and managed for the long-term. New business appears to be re-accelerating, with two quarters of strong growth after several weak quarters.

The $116 Jefferies price target is well above the consensus target of $96.14. Note that shares closed on Monday at $97.79.