Why Software Stocks May Be the Best Q4 Buys Now

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One thing a landslide of heavy selling can do is to bring stock valuations back in line with what makes sense for investors looking forward, and after a long period of outperformance, the software segment has pulled back sharply. In fact, since the beginning of 2016, while the market was up an impressive 30%, the software was up over 70%, but recently the market has pulled back about 7% while the software is down over 10%.

In a recent research report, while Jefferies hardly was pounding the table on the software, the report did make the case that some of the stocks in the firm’s coverage universe are back to levels that make more sense.

The Jefferies report noted this:

The swoon in the market over the last couple weeks has further piqued our interest in the topic of Valuation and how we should consider the unique characteristics of Software models and their highly profitable, highly recurring renewal revenue streams.

Six stocks looked very interesting now, and the following four are high-profile companies that are admired across Wall Street.

Alarm.com

This company has continued to gain recognition, and it is a solid home security play. Alarm.com Holdings Inc. (NASDAQ: ALRM) is a leader in the smart home with its cloud and subscription-based platform that has redefined traditional home security and offers variety of interactive services, such as interactive security, home automation, energy management, wellness and other for both residential and commercial customers.

Jefferies believes Alarm.com has among the largest platforms in the marketplace, with 5 million subscribers and more than 25 million connected sensors and devices, processing 20 billion data points per year.

The Jefferies price objective for the stock is $55, and the Wall Street consensus price target is $56.64. The shares closed trading on Monday at $44.51.

Apptio

This small-cap company could be in the sights of a larger player and is a top pick at Jefferies. Apptio Inc. (NASDAQ: APTI) is the leading cloud provider of technology business management (TBM) software solutions to global enterprises. Its cloud-based software-as-a-service (SaaS) platform help chief information officers and IT professionals strategically manage and forecast IT costs. As of last year, the company had over 325 customers across a wide range of industries.

Apptio currently sells five applications: Cost Transparency, IT Benchmarking, Business Insights, Bill of IT and IT Planning. In November the company announced several new modules and feature additions at the annual TBM Conference in San Diego. New modules (Project Financial Planning, Services Demand Planning and SaaS Insights) will be sold separate from the core app. Top Wall Street analysts were encouraged by these releases and believe the company may be positioned as the best of breed TBM vendor.

Jefferies has a $47 price target, and the consensus target is $41.86. The shares closed at $30.19 on Monday.

NICE

Jefferies remains very positive on the shares of this company. NICE Systems Ltd. (NASDAQ: NICE) is a global enterprise software provider. Its segments include Customer Interactions Solutions, which provides data-driven insights that enable businesses to deliver personalized experience to customers, and Financial Crime and Compliance Solutions.

The company serves contact centers, back office operations and retail branches, covering various industries, including communications, banking, insurance, health care, business processes outsourcing, government, utilities, travel and entertainment.

The $132 Jefferies price target compares with the $111.78 consensus target and the most recent close at $105.

Ultimate Software

This favorite of portfolio managers is owned by many of the top funds on Wall Street. Ultimate Software Group Inc. (NASDAQ: ULTI) is a leading provider of cloud-based human capital management (HCM) solutions, with more than 20 million people records in the cloud. Ultimate’s award-winning UltiPro delivers HR, payroll, talent and time and labor management solutions that connect people with the information they need to work more effectively.

The demand for predictive analytics in the area of HCM is rapidly increasing, as businesses are seeing the value of big data and data modeling across many areas of the business, such as expense management and inventory management. This cost-saving software continues to be adopted at a rapid pace.

Jefferies feels that the setup for investors looks very positive and its $370 price target is well above the consensus estimate of $316.65. The stock closed on Monday at $295.14.

It can always be risky to buy shares during earnings season, especially with an expensive market. Investors may want to consider buying smaller positions now and keep some dry powder for the actual earnings releases.