Five Winning Software Stocks

The broad software sector doesn't get the press it deserves, because Microsoft (MSFT Quote), the industry's 800-pound gorilla, casts a very long shadow. But this tech group can perform surprisingly well during periods of market turmoil, often outpacing telecommunications, computer hardware and Internet stocks in annual returns.

But there are major risks to consider. Program code is a funny animal, because the user base can be quite fickle, picking up and abandoning popular applications as soon as something a little better gets pushed out the door. This creates a predatory environment that affects profitability, production schedules and quality control.

Add in the overriding impact of customer service, which can destroy the most powerful software products when handled poorly or farmed out to the wrong overseas call center, and you get a picture of a tough industry with a few winners and a sea of losers, near losers and would-be contenders that don't quite measure up to the task at hand.

Investors are best served by focusing their attention on sector winners and avoiding all types of bottom-fishing. This is especially true when the broad market is convulsing in response to plunging financials and spiking crude oil prices. In that regard, here are five software stocks that show considerable upside in the months ahead.

Sybase (SY)

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Source: eSignal

Sybase (SY Quote) dropped like a rock through most of the 1990s as the tech revolution left it behind in the swirling dust. The stock bottomed in 1998 and started to move higher in a slow uptrend that's gathered steam in recent years. It's now trading at an eight-year high and showing few signs of gravity after a solid recovery off the January low.

The line under recent price action denotes the 2000 swing high at $31. The stock mounted this level on May 28 and moved sideways for two weeks in a bowl pattern. It nosed above short-term resistance on Monday and looks close to a breakout that would support a renewed uptrend into the upper $30s.