In the July 25, 2014, issue of Capitalist Times Premium, we highlighted a conservative strategy for long-oriented investors to profit from the growing appeal of the software-as-a-service (SaaS) model.
Our approach focused on established, pure-play SaaS companies that should be able to maintain deliver outsized revenue growth and names that produce specialized, on-premises software that have started to transition to the SaaS model, gradually building a stream of recurring revenue. (See Add Some SaaS to Your Portfolio.)
This time, we highlight a more aggressive tack that seeks to profit from smaller, momentum-driven names that have sold off this year after a strong rally in 2013.
Although some of these technology stocks run more on hype than actual earnings, the 12 percent pullback in the Russell 2000 Computer Services Software & Systems Index after its 52 percent gain in 2013 gives us an opportunity to add some of the higher-quality names in this group.
Not only do we expect these stocks to benefit from the strengthening US economy and investors’ eventual return to riskier fare, but both of our picks also offer specialized software solutions to large addressable markets that should drive growth over the long term.
Once again, we opted to focus on companies that have demonstrated enough proof of concept to reassure us that we’re not investing in vaporware or empty promises. After all, the size of the potential market is only meaningful if the company has the product and strategy to take advantage of this opportunity.