The Best Companies Of The Software Industry – August 2015

While ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself.  With that in mind, this article will take a brief look at the best companies of the software industry, selecting the most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 550 companies reviewed by ModernGraham, 17 were identified as being closely related to the retail industry.  Of those, only three are suitable for the Defensive Investor, six are suitable for the Enterprising Investor, and the remaining eight are considered speculative at this time.  Excluding any extreme outliers, the average company was rated as being priced at 97.79% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 30.06.  The industry as a whole, therefore would appear to be fairly valued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Elite

The following companies have been rated as undervalued and suitable for either the Defensive Investor or the Enterprising Investor:

CA Inc. (CA)

CA Inc. is suitable for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is only concerned by the low current ratio, and the Enterprising Investor is willing to overlook concerns regarding the level of debt relative to the current assets because the company satisfies the more conservative Defensive Investor.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.

From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.33 in 2011 to $1.95 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 3.65% annual earnings growth over the next 7-10 years and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the price.  (See the full valuation)

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Disclaimer:  The author held a long position in Coach Inc. (COH) but did not hold a position in any other ...

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