Despite a continuing lack of visibility in the sector, software stocks have surged in the past month as investors are apparently more optimistic about the group than analysts are.

From the time the

Nasdaq Composite

dropped to 1638.80 on April 4 until the close of the markets May 2,

Siebel Systems

(SEBL)

,

BEA Systems

(BEAS)

,

Internet Security Systems

(ISSX)

and

Mercury Interactive

(MERQ)

all saw their stock prices gain more than 100%. The

Dow Jones U.S. Technology Software Index

is up almost 44% since April 4.

Siebel, which

beat analysts' expectations by a penny for the first quarter, is a prime example of a company that has gained a ton in the past month, even though it remains far below the price it sold at six months ago. From the day of the Nasdaq's low through May 2, the stock shot up 101%. However, it remains off 22.7% from its price three months ago and 58.1% below the $114.43 the stock fetched six months ago.

Internet Security has a similar story to tell, gaining 165% in the past month. However, the company was still 17.9% below the price it traded at three months ago and 37.5% off the levels of six months ago.

Microsoft

(MSFT) - Get Report

is up 34.3% in the past month, and 14.7% ahead of where it was three months ago.

Veritas

(VRTS) - Get Report

has gained 82.9% since April 4, but remains 53.1% below its numbers six months ago.

Check Point Software

(CHKP) - Get Report

, meanwhile, is up 63.6% on the month.

Even as software stocks continue their ascent, analysts were questioning the rally and offering words of caution to investors.

TheStreet.com

looked at the sector's run-up despite an

absence of fundamentals in a story last week.

Todd Bernier, an analyst with

Morningstar

said the recent influx of buyers into the computer software companies is counterintuitive. "So much of the valuation is predicated on future performance," he said, adding that most companies in the sector are saying there isn't much visibility and that considerable uncertainty about the coming quarters remains. "That would necessarily lead one to think that prices would come down," he said. "These stocks are overvalued, generally speaking."

The lack of visibility for the rest of the year was readily apparent during the last reporting period, when a number of companies tore down their forecasts for future quarters. When Siebel last reported earnings, it warned that software license revenue growth would be 25% to 30% in the second quarter, well below the growth rate of 40% or more analysts were expecting. The company said license revenue could come in at somewhere between $280 million and $350 million, illustrating the lack of visibility. A day earlier, Veritas

lowered its financial guidance for the rest of the year. Microsoft also

cut its earnings forecast for the fourth quarter and next year.

David Gremmels, a research analyst with

Thomas Weisel Partners

, said the sector rally is part of the overall market upswing during the past month, but also reflects a belief among some investors that the worst is over for the software group. "I think a lot of investors believe that we've found a bottom and that there's quite a bit of money on the sidelines," he said.

Gremmels said that valuations are in line with the historical levels maintained through the third quarter of 1999. "There were several events that converged in 2000 that made it an exceptional year and led to accelerated growth," he said. "The first was pent-up, post-Y2K spending. A lot of that budget was freed up and a lot of that was spent on new initiatives. The second reason was the dot-com bubble. A lot of small dot-coms had a lot of money to spend and spent it freely and that benefited the vendors. The final thing would be that 2000 was a year when a lot of vendors came out with Web-enabled versions of their products."

And while Gremmels may understand why investors are buying back into the stocks, he doesn't necessarily agree with it. "We're currently neutral on most of the names," he said, citing companies such as

Oracle

(ORCL) - Get Report

,

Commerce One

(CMRC)

and

Ariba

(ARBA)

, which the firm has market perform ratings on. "We have buy ratings on companies we consider to be premier software franchises," he said, noting Siebel,

Manugistics

(MANU) - Get Report

and

i2 Technologies

(ITWO)

. Many of these companies issued

profit warnings before they reported their last round of quarterly financial results. (Gremmels said his firm has an underwriting relationship with Siebel, but not the other companies he spoke about for this story.)

"We're going to remain neutral as long as the current lack of visibility exists in the market," Gremmels said. "We are picking up very few data points to suggest that Q2 is looking any better than Q1. Until we get some indications that enterprise customers are stepping up and writing checks again, then it's difficult to be bullish on the group."

Going against the general sentiment in the analyst community, and maybe reflecting the mood of investors,

Goldman Sachs'

analyst

Rick Sherlund came out with an endorsement of the sector last week, by saying that he expects information technology spending to increase. He also contended that

software companies should be able to pull out of the current economic slump well ahead of other tech sectors. Additionally, Sherlund doesn't think Europe will experience a technology spending slowdown to the same extent as the U.S. and that IT budgets will begin to "firm" as confidence that the economy isn't going into a recession grows.

He said "the worst may be over in terms of economic uncertainty" and that "software is not subject to the need to work down channel inventory levels and is sold more for current consumption, so business could potentially come back more quickly than in other sectors."

Then there is some middle ground. Kimberly Caughey, an analyst with

Parker/Hunter

said that although she doesn't think the rally is sustainable, there are some companies with good fundamentals that would be worth investing in.

"Two years ago people would buy anything and assume it would go up, independent of their business model," she said. "But I think things are saner now. You have to have a good business model." Her firm, which covers a limited number of software companies, currently has a buy rating (which she says is equivalent to a strong buy by many other firms) on companies such as

Computer Associates

(CA) - Get Report

. The firm doesn't have an underwriting relationship with CA.

Morningstar's Bernier, at least, retained plenty of near-term concern for the investors who think now may be the time to start building positions in their favorite software names. "My fear is that the second quarter is a wash and the numbers are going to be brutal, and the companies that haven't brought their numbers down are begging for a pounding," he said. And as for the rest of the year? "No one really knows," he said. "There's probably a lot of pain left."