The current market has been a tough one for tech stocks.
But according to two experts, software stocks may be investors’ best bet now amid this volatile market.
Overall, the tech sector has sunk nearly -8% in May as anxiety increases amid escalating trade tensions between the U.S. and China, and as of Thursday, between the U.S. and Mexico. However, the software sector has held up somewhat better, and is down just -6%.
“The outperformance within software has really been correlated to the yield curve. As the yield curve has flattened, software has outperformed,” Oppenheimer’s chief market technician, Ari Wald, said. “And our macro focus is on low growth rather than no growth, and I think a premium continues to get placed on these higher-growth companies in this low-growth world.”
“When you add it all up, we think [software is] a group that continues to work,” Wald continued. “Here’s a group of the market that’s already at new highs. It’s already broken through September resistance. The market hasn’t been able to do that. I think that’s telling.
Mark Tepper, president and CEO of Strategic Wealth Partners, argues that software is doing better due to the industry’s continual growth, as well as the fact that it is insulated from issues with China.
“We’re right in the middle of this slow-growth economy right now, and businesses are trying to do anything they can to gain an edge,” Tepper said on Tuesday. “Every company wants to be as efficient as possible, as profitable as possible, and there are software companies that help them to do that. Beyond that, a lot of tech is exposed to the trade war, but not software.”
Tepper went on to say that investors who are looking for “growth without the trade war headwinds” need look no further than stocks within the software space. Two stocks in the sector he likes now are Palo Alto Networks (NYSE: PANW) and Adobe (NASDAQ: ADBE).
“We just recently bought Palo Alto Networks, and cybersecurity is a secular theme that we want to be a part of,” Tepper said. “They’re the leading firewall provider, and … all the heavy lifting surrounding their shift over to subscription-based revenues is now behind them. And right now, you can pick them up at an incredibly attractive valuation.”
Adobe has the benefit of subscription revenue from its Creative Cloud digital media suite business as well as its marketing business, “which is where all the advertising business is headed right now,” Tepper argued.
“Over the last four years, they’ve gone from 50% recurring [revenues] all the way up to 88% recurring. And over the course of that time, their profit margins have nearly tripled as a result, and they’ve got no exposure to China,” Tepper said. “So, software companies are less exposed to the trade war, but a lot of them have pulled back, and we’re backing up the truck and buying them while they’re on sale.”
As for Wald, he likes Adobe as well and said that the stock has been one of his team’s “long-standing recommendations” due to its technical resilience.
Another stock Wald likes in the software space is Microsoft (NASDAQ: MSFT).
“Here’s a stock that’s getting through multi-decade resistance versus what’s been a relatively strong technology sector,” Wald said, calling Microsoft “a leader among leaders” in the sector.
Analysts rate all three stocks a Buy, and see upside ahead for each. Analysts’ average price target for ADBE would see the stock 5.36% over the next twelve months, their price target for MSFT indicates possible upside of nearly 9%, and their average price target for PANW suggests upside of 28.26%.