As we are now in the busiest week of the Q1 earnings cycle, with almost 800 companies reporting results, including 191 S&P 500 members, the Technology sector is poised to grab the spotlight from now till the next two weeks.
Per the latest Zacks Earnings Trends article, the trend this earnings season indicates that we may finally see back-to-back three quarters of earnings growth in the Technology sector after several quarters of decline. The report projects that earnings for the sector will improve 10.9% from the year-ago period.
Furthermore, among the various industries in the broader technology sector, Software is such an industry which has been consistently registering earnings growth even at the time when the overall sector was witnessing decline. During the 4Q16 earnings season, most software stocks reported positive earnings surprises.
Per the Earnings Trends article, the Software industry is likely to witness double-digit growth for the straight fourth quarter. The industry’s earnings are projected to grow 14.3% year over year this season. Notably, the industry registered earnings growth of 14.8%, 20.7%, 21.3% and 9% in the preceding four quarters.
The industry is poised to witness tremendous growth this earnings season and there is a high probability that various software stocks will report better-than-expected results. It commonly happens that an earnings beat boosts investors’ confidence in the stock, which is reflected in its rapid price appreciation.
Therefore, now it is wise to invest in such stocks, in order to catch the post-earnings rally. But this is easier said than done. Striking the right chord needs a fair amount of luck.
Then How to Make the Right Pick?
With the existence of a number industry players, finding the right stocks that have the potential to beat on earnings could be a daunting task. Our proprietary methodology, however, makes it fairly simple for you. You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Here, we would like to highlight some stocks in the Software industry which are likely to beat estimates this earnings season.
Why the Software Industry?
Over the years, the dynamics of the software industry, the ways in which organizations conduct their businesses and people connect with each other have changed, thanks to technological progress and innovation.
As technology continues its rapid invasion into every corner of human existence, the need for improved software has increased manifold. The last few years witnessed breakthroughs in cloud computing and artificial intelligence (AI) technology, chip shrinking technology, self-driving cars, personal assistants, high-speed Internet and home automation, thus setting the stage for strong growth in the software industry.
With the U.S. economy rebounding, as evident from the improving economic data for GDP, the Consumer Confidence Index, unemployment rate and factory activity data, we believe that there are tremendous growth opportunities for software stocks in 2017.
Notably, as per Gartner Inc. (IT), worldwide spending on software reached $333 billion in 2016, registering year-over-year increase of 5.9%. The independent research firm predicts that this spending will rise 6.8% to reach $355 billion in 2017. This is much higher than the projected rate of 2.7% increase in spending for the entire tech industry.
As the software industry promises a bright future for this earnings season, we believe adding these 5 prominent software stocks to your portfolio will help boost returns.
Avid Technology, Inc. (NASDAQ:AVID) is a solid bet which carries a Zacks Rank #2 and has an Earnings ESP of +160%. The company delivered an outstanding average positive earnings surprise of approximately 167% over the trailing four quarters.
Another stock that you may consider is eGain Corp (NASDAQ:EGAN), with a Zacks Rank #2 and an Earnings ESP of +50%. The company delivered an average positive earnings surprise of 24.68% over the trailing four quarters and has a long-term earnings growth rate of 20%. You can see the complete list of today’s Zacks #1 Rank stocks here.
One can also invest in Square Inc (NYSE:SQ), which carries a Zacks Rank #3 and has an Earnings ESP of +12.5%. The company registered an average positive earnings surprise of 23.33% over the trailing four quarters and has a long-term earnings growth rate of 22.5%.
We also suggest investing in Blackbaud, Inc. (NASDAQ:BLKB). The company has an Earnings ESP of +5.88% and carries a Zacks Rank #3. Last quarter, the stock delivered a positive earnings surprise of 13.6% and has an expected long-term EPS growth rate of 19.9%.
Investors can also count on Apptio Inc (NASDAQ:APTI), with a Zacks Rank #3 and an Earnings ESP of +8.33%. Last quarter, the company posted a positive earnings surprise of 8.70% and has an expected long-term EPS growth rate of 12.5%.
These stocks have managed to grab the spotlight with notable performances. The factors make us more or less sure that investing in these stocks will yield strong returns for your portfolio in the near term.
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