Protect Profits in Software

This week, I've profiled consumer device stocks and Internet-related names and focused on the momentum in the chipmakers. There's one more hot subsector to profile that's not as cheap as it was in 2005: software.

Technology stocks in general aren't as cheap as they were, but the sector is the only one that's currently undervalued according to my model. Technology is now undervalued by 4.6%, down from being 10.3% undervalued at the end of 2005. Software stocks have seen a more dramatic shift. They were 19.9% undervalued in May vs. just 5.5% undervalued now.

Accordingly, it looks like the right time to reduce positions in most of the stocks that I've profiled in this sector. (If you're not already familiar with my criteria for selecting and evaluating stocks, please read over the section at the end of this column on the metrics I use.)

When you trade and invest in software companies, focus on the positive but overbought weekly chart profiles, not the weakening fundamentals, to stay with the upward momentum for these stocks. This will make stock selection particularly tough for the long-term investor, who usually considers weakening fundamentals something that can't be ignored. The stocks with a sell rating, but without a risky level at which to sell on strength, should be monitored to sell on weakness on sell stops below the pivots shown. Stocks that are rated a buy or hold can be bought on weakness to a pivot or value level, and sold on strength to a risky level. There is no need for action at marker levels when this column is posted.

Akamai(AKAM Quote) is rated a sell by ValuEngine and is 80.7% overvalued, with fair value at $12.68. The weekly chart profile is overbought, with the five-week modified moving average (MMA) at $20.60 and the 52-week high set intraday during this session, at $23.97.

Long-term investors should consider reducing this position by 25% on strength to my quarterly risky level at $24.74 or consider a sell stop on a close below my monthly pivot at $21.39.

Business Objects(BOBJ Quote) is rated a hold by ValuEngine. The stock is 29.5% overvalued with fair value at $32.71. The weekly chart profile is overbought, with the five-week MMA at $40.26 and the 52-week high at $43.07, set Jan. 6.

As with Akamai, long-term investors will want to consider reducing this position by 25%. Look at placing a sell stop below my monthly pivots at $42.28 or $38.95, depending on your risk tolerance.