The fourth quarter earnings season is just around the corner. Despite a turbulent stock market in 2015, courtesy sliding crude prices, Greek debt drama, the slowdown in the Chinese equity markets and geopolitical tensions emanating from Syria, Yemen and Ukraine, the tech sector remained relatively unscathed.

In the last reported earnings season, the tech sector performed well, with total earnings for the sector (based on 94.9% of the tech stocks by market cap in the S&P 500) up 6.7% on 4.3% revenue growth. As many as 71.4% companies in the sector beat earnings per share (EPS) estimates while 57.1% posted better-than-expected revenues.

For the full year, the S&P North American Technology Sector Index grew 8.5% in the year in contrast to the S&P 500 that closed in the red, down 0.7%. Software stocks once again led the tech sector rally with S&P North American Technology Software Index up 11.7% in 2015.

Software Sector

Software means a set of commands given to a computer to carry out a definite task. It is intangible unlike computer hardware.

As technology continues its rapid invasion into every corner of human existence, the need for better software has skyrocketed. The past year witnessed strong advancements in cloud computing and artificial intelligence (AI) technology, breakthroughs in chip shrinking technology, self-driving cars, personal assistants, high-speed Internet and home automation. All these developments have set the stage for a stronger software industry.

As per Fortune, Forrester Research has estimated software spending to increase 5.7% to a staggering $600 billion in 2016, driven mostly by cloud applications, analytics and mobile. This is way above the projected growth rate of 3.8% for overall tech industry spending, which is likely to touch $2.9 trillion in 2016. The report also pointed out that spending on SaaS will be $108 billion this year, up 24% on a year over year basis.

As software promises a bright future, we believe adding some of these stocks to investment portfolio will make 2016 a profitable one for investors.

Identifying 3 Future Winners

By using the Zacks proprietary methodology, investors may select stocks with a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP, which have a fairly high chance of performing well in the near term. Zacks Earnings ESP shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
We have picked the following three stocks that meet both the criteria:

MicroStrategy Inc. (MSTR - Snapshot Report)

Headquartered in Tysons Corner, VA, MicroStrategy is engaged in developing and selling enterprise ready analytics, security and mobile software platforms to a host of industries including pharmaceutical and healthcare, retail, financial services, manufacturing, technology, media and telecommunications. The company’s primary product offerings include MicroStrategy 10.1 Secure Enterprise. It also provides technical, advisory & consultation and education services.

MicroStrategy carries a Zacks Rank #1 and an Earnings ESP of +3.46%. Moreover, the company has delivered positive earnings surprises in the last four quarters with an average beat of 42.4%. The company is expected to announce fourth quarter 2015 results on Jan 25.

Workday, Inc. (WDAY - Snapshot Report)

Headquartered in Pleasanton, CA, Workday offers enterprise cloud applications for human resources and finance. It delivers Human Capital Management, Financial Management, Payroll, Time Tracking, Procurement, and Employee Expense Management applications. The company offers its clientele the applications to manage critical business functions for their financial and human capital resources. It serves a host of industries including, healthcare & life sciences, technology, financial services, business services, retail as well as education & government industries.

This Zacks Rank #2 company has an Earnings ESP of +5.13%. Moreover, it has delivered positive earnings surprises in all the last four quarters with an average beat of 12.4%. The company plans to announce fourth-quarter fiscal 2016 results on Feb 23.

NetSuite Inc. (N - Snapshot Report)

NetSuite is the leading provider of on-demand, integrated business management software for growing and mid-size businesses. The company has thousands of customers globally, using its online products and professional services to manage all key business operations in a single hosted system These services include customer relationship management; order fulfillment; inventory; accounting and finance, product assembly; ecommerce; web site management; and employee productivity.

NetSuite carries a Zacks Rank #3 with has an Earnings ESP of +8.57%. Moreover, Netsuite has delivered positive earnings surprises in the last four quarters with an average beat of 7.4%. The company is expected to announce fourth quarter 2015 results on Jan 25.

Conclusion

With the world getting more wired, tech stocks will continue to allure investors. If you are looking for attractive investment options in the software space, we recommend you keep an eye on the above-mentioned stocks.