Time To Get Into The Human Resources Sector?

by: Simon Monger

On Monday, SAP AG (NYSE:SAP) announced a $3.4 billion takeover of SuccessFactors Inc. (NYSE:SFSF) at a significant premium to its market price. The move sparked a rally in other stocks like Taleo Corporation (NASDAQ:TLEO), which surged nearly 20% on the same day, as well as the human resources and talent management sector as a whole. But even before this week, the sector has been outperforming the S&P 500, with a 19.9% gain that outpaced the index by 18.8%.

Popular human resource companies include:

  • Concur Technologies Inc. (NASDAQ:CNQR)
  • Cornerstone OnDemand Inc. (NASDAQ:CSOD)
  • Kenexa Corporation (KNXA)
  • Saba Software Inc. (OTCPK:SABA)
  • SuccessFactors Inc. (SFSF)
  • Taleo Corporation (TLEO)
  • The Ultimate Software Group (NASDAQ:ULTI)

The big question for investors is whether or not SAP’s purchase was a single instance or a longer-term trend. On one side, SAP may have purchased SuccessFactors as a way to catch up with rivals in the cloud-computing field. But on the other side, the move could be seen as the beginning of many such attempts at the same strategy. Indeed, the move comes after Oracle Corporation (NASDAQ:ORCL) purchased RightNow Technologies Inc.

The cloud-based human resources management industry is also rapidly expanding as companies shift from traditional software to the cloud. In a May 2011 report, Morgan Stanley analysts projected that public cloud workloads would increase at a 50% CAGR over the next three years. With this tremendous growth, it shouldn’t be surprising that many companies in traditional human resources software markets would be looking to move into the cloud.

So, where are the next moves? BMO Capital recently raised its rating on Taleo Corporation to “Outperform” from “Market Perform.” The analyst believes that the cloud software sector is being consolidated faster than expected and most investors believe Taleo is the most obvious acquisition target and that Oracle is the most obvious buyer. However, other companies in the sector may also present opportunities for investors to capitalize.

What’s the best way to capitalize on these opportunities? Stock options are among the most popular way to speculate on industry consolidation. In particular, long-term equity anticipation securities – or LEAPS – are a great way to benefit from a potential move without a significant capital outlay. And by spreading options across multiple companies in the sector, or adopting a hedging strategy, investors can protect themselves even further.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.