Why These Software Stocks Could Be On the Move

VASCO Data Security International, Inc. (VDSI) and SouFun Holdings Ltd (SFUN) are vulnerable to downgrades, while Microsoft Corporation (MSFT) could see future upgrades

Sep 2, 2015 at 2:26 PM

A number of sectors are helping to lead the Nasdaq Composite (COMP) higher today. Among the outperformers are software stocks, with the iShares North American Tech-Software ETF (NYSEARCA:IGV) tacking on 0.8% to trade at $93.13. However, from a longer-term perspective, this sector may actually be vulnerable to future headwinds.

Of the 40 software names we follow at Schaeffer's, just 10% are currently trading above their 80-day moving average. Also, despite the fact that the average stock is down close to 3% year-to-date, 62% of covering analysts have handed out "buy" ratings. In other words, as a whole, the sector may be negatively impacted by an unwinding of optimism.

Among the most overhyped equities is VASCO Data Security International, Inc. (NASDAQ:VDSI), which is one of the worst-performing software stocks we track. The shares are up 0.1% at $15.70, but still face a year-to-date deficit of nearly 45%. Nonetheless, both of the analysts covering VDSI consider it a "buy" or better, and its consensus 12-month price target of $34 more than doubles current levels. Long story short, downgrades and/or price-target cuts are a real possibility.

Along similar lines, SouFun Holdings Ltd (NYSE:SFUN) is a historic underperformer -- shedding 22% year-to-date at $5.75, even after accounting for today's 5.5% explosion. Yet, five brokerage firms rate the shares a "strong buy," compared to just one "hold" and not a single "sell" -- potentially setting the stage for downgrades.

But not everything is "gloom and doom" within the sector. Microsoft Corporation (NASDAQ:MSFT) has added 2.9% this afternoon to hover near $43.02, after recently bouncing from its 32-month moving average -- which roughly corresponds with the round-number $40 level. In other words, the stock could benefit from double-barreled technical support.

What's more, 10 of 24 analysts have handed out "hold" or worse assessments on MSFT. Should the shares sustain their comeback, a capitulation among these skeptics could spell upside for Microsoft Corporation.

Follow @Schaeffers

$40 Gets You 4 High-Conviction Trades. Let's Go.

We just booked back-to-back double-digit gains on Celsius and Palantir in Trade of the Week, and we’re eyeing even bigger wins!

Every week starts with a fully defined options trade straight from the desk Schaeffer’s Senior V.P. of Research, Todd Salamone, backed by 30+ years of proven market experience and disciplined risk management.

Right now, you can get 4 total trades over the next 4 weeks for $40 – just $10 per trade.

👉 Sign Up Now to Receive Your First Trade!