Readers of this blog and followers of my weekend videos know I’ve been pounding the table on the enterprise software sector for the past year or two. I’m still bullish on the group but I think they need to consolidate over the next few months for the following reasons:
1) Many stocks have seen strong gains so far this year and they are extended from proper buy points. For example, if you search on Twitter for “@jfahmy #IBDPartner” you will find many examples of charts I posted earlier this year such as ZS at $44 (now $74), OKTA $68 (now $120), TWLO $98 (now $134), TEAM $89 (now $128) and COUP $73 (now $119). I’m not mentioning these to brag but rather to stress the strong gains they’ve had without seeing any significant pullbacks. I simply feel they need time to digest these gains and build new bases.
Quick note: I am not saying to sell these names if you own them or to short these stocks. I am simply reminding people to know their own time frame and to not be surprised if these stocks move sideways in a range for a while.
2) The summer is usually a slow time for technology and it would make sense for some of these stocks to consolidate and possibly resume higher in the fourth quarter. Also, large buyouts tend to mark short term tops for a sector. The Salesforce.com buyout of Tableau Software for close to $16B might be a sign that this group needs to cool off.
3) Many of these stocks are becoming crowded trades. This is expected when stocks pretty much go up in a straight line and many market participants start to chase. A consolidation would “shake out” some of the weak hands and late-comers to these stocks.
I reduced my exposure to this sector for clients recently. Again, I still like and hold some of these names longer-term, which is why I always remind people to know their time frame and to do what works for you. If I am correct and these stocks build new bases, the good news is we will really see the true leaders continue their advance in the future. In other words, for the past two years you could pretty much buy anything software related and it would go up. Over time, cream rises to the top and the companies who can sustain their strong revenue growth and increase profits will resume their leadership role while the companies that see slower growth will become the laggards. I am confident that this will show up in the tape over time. Good luck trading!
I can be reached at: jfahmy@zorcapital.com
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