In order to try and find some fertile ground for investments, I was going through the list of sectors in Morningstar and grew curious about softwares. Today I am reviewing the Software-Architecture industry. I have thus set up a screen to select companies in the “Software – Infrastructure” industry, with a market cap of over $0.5Bn.
This gives us a list of 16 companies, which I then filter against some of the criteria that I usually use in my stock reviews to try and evaluate business, balance sheet and valuation risk. You can find the spreadsheet on Google Docs.
1- Business risk
The first filter I apply is having a TTM ROE of 12% or more, which gets us down to 20 companies. Adding a second constraint of having a TTM ROA of 6% or more narrows the list of candidates to 6 companies:
- BMC Software (NASDAQ:BMC)
- CA, Inc. (CA)
- J2 Global Communications (NASDAQ:JCOM)
- Microsoft Corporation (NASDAQ:MSFT)
- Oracle Corporation (ORCL)
- SolarWinds, Inc. (SWI)
2- Balance sheet risk
My preferred balance sheet criterion for a stock review is a debt / equity ratio below 1.0x. In this case, this does not change our list given that all of the 6 companies meet that criterion
3- Valuation risk
Not only am I looking for good companies, I am also looking for companies that are not too expensive. I thus add another filter of price to earnings (trailing) being below 20.0x; reducing the number of companies to 4 which I will add to my investment ideas and review in the coming weeks
|Name||Ticker|| % ROE|
| % ROA|
| % Cash/|
|BMC Software, Inc.||BMC||33.6||9.81||18.21||18.48|
|J2 Global Communications, Inc.||JCOM||20.64||16.14||16.98||16.98|
You can find some investment ideas, more one-page “stock reviews” as well as more in-depth “stock analysis”, including valuation and copies of my financial model on my investment research blog: Margin of Safety Investing.
Many happy returns