The broad software sector doesn't get the press it deserves, because Microsoft (MSFT) - Get Report, 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.
( SY) 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.
Wind River Systems (WIND)
Wind River Systems
( WIND) bottomed out in late 2002 at $2 following a long bear market decline. The recovery effort topped out two years later near 18, with the stock falling to another multiyear low in March of this year. It's taken off like a rocket since then, almost doubling in price in the last three months.
Look for another rally wave before the stock starts to pull back. That move could lift price into the November swing high at $13.42. A thrust into this level would mark a profitable trade, but longer-term investors should stand aside for now -- the next pullback could fill the large gap between $9 and $10.
BMC Software (BMC)
rallied to multiyear high in early 2007 and pulled back in a sharp decline. It returned to this price level 10 months later and sold off once again. A third rally to resistance in May was followed by a strong breakout that lifted price to $41 about three weeks ago.
The stock has been pulling back since and is now less than 2 points from breakout support. This level marks a low-risk entry zone for a strong recovery that takes out the May high and reinstates the strong uptrend. This solid performer should continue to lead the pack through the rest of 2008.
Concur Technologies (CNQR)
rallied to an eight-year high in December and pulled back with the broad market. It bottomed out in March and started a steady recovery that lifted price back to the high in early May. The upside then ran out of steam, with the stock grinding lower in a volatile pattern for the last six weeks.
Despite the downturn, the stock is still trading above support at the 50- and 200-day moving averages, while relative strength indicators are now turning higher. This is a bullish setup that favors another test at the highs, perhaps as early as late June. Notably, that uptick would also complete a cup-and-handle breakout pattern, with resistance at $40.
rallied to a multiyear high at $42 in December and sold off more than 10 points before bottoming out in January. It then began a steady recovery that pulled into a test of the high less than four months later. The stock surged above resistance immediately and resumed its long uptrend.
The rally progressed nicely, with a series of waves that lifted price more than 6 points above breakout support before the most recent pullback. That decline marked out a bull flag pattern that gave way to a strong bounce on Friday. The stock is now closing in on a buy signal for a recovery that takes out the high and heads into $50.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
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