4 Rising Stars In The Enterprise Software Space

Includes: MANH, N, TLEO, ULTI
by: Joshua Hayes

The stock market has been in an impressive uptrend following the October fourth lows. It started off slow but as the rally has unfolded more and more, stocks have formed very bullish price patterns.

These bullish patterns consist of a nice uptrend in price on strong volume that comes with lower volume pullbacks. These chart patterns can be seen in a lot of sectors in the market, with the Retail sector showing the most breakouts and bullish patterns. At the same time, a lot of technology stocks are showing up in my scans with bullish price and volume patterns.

I have profiled a lot of retail stocks with strong fundamentals lately, going over only a few technology related gems here and there. Today, let’s take a look at four more technology related stocks in the Computer Software-Enterprise industry group that have fantastic fundamentals which support further price appreciation. A quick note on the EPS and sales growth below. The numbers are for the past eight quarters compared to the year earlier.

First off, Taleo Corporation (NASDAQ:TLEO). Taleo Corporation is a Dublin, CA provider of talent management software that facilitates the recruitment, assessment, and management of human resources.

EPS has grown 44%, -11%, -18%, 25%, 0%, 44%, 93%, and 20% the past eight quarters. Sales growth, during this time, has grown 5%, 14%, 15%, 16%, 33%, 30%, 24%, and 41%. 2011 and 2012 annual EPS estimates have been raised again and are expected to gain 31% and 11% respectively. Taleo Corporation has 0% debt to shareholder equity, a return on equity of 10%, a cash flow of $1.17, and spends 18.3% of revenues on R&D. The stock currently carries a P/E ratio of 33 which is in the lower end of its 5-year range of 10-94. Mutual funds definitely like the numbers the company is putting up, with 383 funds holding ownership of the stock compared with 353 funds eight quarters ago. However, it should be noted, that fund ownership is down from 406 just one quarter ago.

Next, Manhattan Associates (NASDAQ:MANH). Manhattan Associates is an Atlanta, GA developer of supply chain management software for manufacturers, distributors, retailers, and transportation providers. EPS growth the past eight quarters has come in at 19%, 471%, 200%, -12%, 3%, -23%, 55%, and 76%. Sales growth, during the same period, has grown -18%, 22%, 33%, 13%, 15%, -3%, 14%, and 16%. Growth is expected to continue, with gains annual EPS estimates for gains of 47% and 7% in 2011 and 2012 respectively. Manhattan Associates sports a debt to shareholder equity of 0%, a return on equity of 19%, a cash flow of $1.89, and spends 13.6% of revenue on R&D. The P/E ratio is currently at 22, in the mid range of the 5-year range of 10-27.

Mutual fund ownership has not grown during the past eight quarters and has actually declined from 342 funds to 307 funds. While this is not a great development, with the stock hitting new highs, it does indicate better performing mutual funds have entered the stock versus weaker performing funds. The good news is, despite this, that management still has a 10% stake in the company indicating they are invested in the company’s future growth.

The youngest of the group is Netsuite (NYSE:N). Netsuite came public in 2008 and is a San Mateo, CA provider of on-demand customer relationship management and enterprise resource planning software and e-commerce services. EPS growth has grown 100%, 0%, 200%, 300%, 100%, 50%, -33%, and 25% the past eight quarters. Sales growth has grown 4%, 6%, 17%, 19%, 21%, 21%, 23%, and 23%, during the same period. 2011 and 2012 annual EPS estimates are for gains of 8% and 100% respectively. Netsuite has a debt to shareholder equity of 0%, a return on equity of 8%, a cash flow of $0.61, and spends 18.1% of revenues on R&D. The current P/E ratio might be high to the usual value crowd. However, savvy investors know that the company’s 284 P/E ratio isn’t high in context to its historical range of 110-999.

Finally, Ultimate Software Group (NASDAQ:ULTI). Ultimate Software Group is a Weston, FL designer of web-based payroll and workforce management software for organizations in the U.S. and Canada. EPS growth the past eight quarters has been wonderful with gains of -9%, 29%, 29%, 117%, 70%, 11%, 56%, and 38%. Sales growth has been steady with gains of 5%, 14%, 16%, 19%, 16%, 16%, 17%, and 19%. 2011 and 2012 annual EPS estimates are for gains of 40% and 58% respectively. Ultimate Software Group has 3% debt to shareholder equity, a return on equity of 20%, a cash flow of $0.96, and spends 18.5% of revenue on R&D. It does sport a high P/E ratio relative to its 5-yr range of 30-123 at a current 108.Mutual fund ownership has grown from 255 funds eight quarters ago to 286 currently.

I profiled the companies above based on their superior financials, While fundamentals help me find the stocks I want to buy, fundamentals are never used to actually buy a stock. For that, we need technical analysis.

Taleo Corporation is currently working on a deep cup base. If it can continue to move sideways here and break out to a new 52-week high, that is when I will make my purchase.

Manhattan Associates has already broken out to a new high and will be a purchase on any pocket-pivot point buy signal I am given off the 10-day moving average.

Netsuite has rallied a bit too far too fast off the October fourth lows and needs to build a handle to the current V-shaped base it has formed before it can produce a buy signal.

Ultimate Software Group is in the same situation as Netsuite. It needs to calm down here and build another quiet base. If it can do that, the next breakout would produce a buy signal. Another area I would get long, since it has already hit new highs, is a high volume bounce off the 10 day moving average. This would produce a pocket-pivot point buy signal that can be acted upon.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ULTI, TLEO, N, MANH over the next 72 hours.

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