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With the ongoing banking distress and slowly declining inflation, it looks like the Federal Reserve may be close to finished with rate hikes. Some investors fear that the problems in the banking sector may push the economy closer to a recession, and the Fed themselves likens the situation to an additional rate hike.
Based on the Fed Fund Futures curve, traders now believe that the Fed is actually done raising interest rates. The curve now shows an 89% chance of policy makers leaving the baseline Fed Funds Rate unchanged at the next meeting. If this is true it will have major implications for the market and economy.
If interest rates traders are correct about the expectations of the Fed, it is likely that long-dated securities, like technology stocks may begin a bull run. Using the Zacks Rank, I have identified two software stocks with high ranks, and strong near-term expectations. Furthermore, both show very promising technical chart setups, which provide high risk-return trades.
Image Source: CME Group
Pegasystems
Pegasystems (PEGA - Free Report) is a customer relationship management software company that focuses on transaction-intensive enterprises. PEGA software enables organizations to deliver high-quality, consistent customer service across all major engagement channels. The company's customers represent a wide range of industries, including banking and financial services, insurance, healthcare management, and telecommunications.
After a brutal performance in 2022, where Pegasystems stock experienced an -80% correction, the stock has come out strong this year. YTD PEGA stock is up 30%, far outperforming the broad market indexes.
Image Source: Zacks Investment Research
Pegasystems is also a Zacks Rank #1 (Strong Buy) stock, indicating upward trending earnings revisions. Over the last 60 days analysts have revised earnings expectations significantly higher. Current year sales are expected to grow 6% YoY to $1.4 billion, while earnings are projected to climb 88% to $1.35 per share.
Image Source: Zacks Investment Research
PEGA is trading at a one-year forward sales multiple of 3x, which is significantly below the industry average 7x, and its five-year median of 6x. It seems PEGA stock got caught up in the hype of the post-covid boom, pushing its valuation to unreasonable levels. The -80% correction has brought the valuation back to much more compelling levels.
Image Source: Zacks Investment Research
The price action in PEGA stock has carved out a very interesting technical pattern. Building a clear cup and handle pattern, the stock looks like it can easily breakout to the $60 area. It is key that the stock breakout out above the handle high of $48. If it trades back below $44, the trade would be invalid, and likely signal further rate hikes.
Image Source: TradingView
Salesforce
Salesforce (CRM - Free Report) is also a customer relationship management software company, hence the stock ticker. There is no doubt that Salesforce and Pegasystems are in direct competition with each other. Fortunately for both, the enterprise software industry is massive, so there is likely room to address a respective niche. Salesforce products are easier to use and developing tools on the software much simpler. Alternatively, Pegasystems is more useful for the developers who are interested in getting into the nitty gritty of creating complex workflows.
During the most recent quarterly report Salesforce surprised analysts and showed a much larger profit than was expected. After investments from activist investors pressured management to prioritize profits in the rapidly changing economic environment, CRM laid off about 10% of its workforce. As challenging as it was it seems to have worked well for the company.
Salesforce is a Zacks Rank #1 (Strong Buy) stock, indicating upward trending earning revisions. Current quarter sales are expected to grow 10% to $8.2 billion, while earnings are projected to climb 64%. Additionally, analysts are in unanimous agreement in upgrading CRM’s earnings, which have been revised higher by as much as 30%.
Image Source: Zacks Investment Research
Salesforce is trading at a one-year forward earnings multiple of 39x, which is above the industry average of 29x, and well below its five-year median of 124x.
Image Source: Zacks Investment Research
CRM has a similar technical setup to PEGA, building out a cup and handle pattern. The large earnings gap up made the price action a bit sloppier, but the levels are there, nonetheless. There is clear resistance at the $190 level, so if price can breakout above there it should really get going. The setup would be invalid if it can’t trade above there, or if it goes down below the $170 level.
Image Source: TradingView
Conclusion
The stock market seems to be on a precipice. Interest rates and Fed policy are going to be critical to the future path of stocks, especially tech stocks like those discussed here. Keep a close eye on where rates go, and what the Fed policy makers say. Most importantly, make a trading plan, define your risk, and stick to the plan.
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2 Software Giants to Buy if Rates Have Peaked
With the ongoing banking distress and slowly declining inflation, it looks like the Federal Reserve may be close to finished with rate hikes. Some investors fear that the problems in the banking sector may push the economy closer to a recession, and the Fed themselves likens the situation to an additional rate hike.
Based on the Fed Fund Futures curve, traders now believe that the Fed is actually done raising interest rates. The curve now shows an 89% chance of policy makers leaving the baseline Fed Funds Rate unchanged at the next meeting. If this is true it will have major implications for the market and economy.
If interest rates traders are correct about the expectations of the Fed, it is likely that long-dated securities, like technology stocks may begin a bull run. Using the Zacks Rank, I have identified two software stocks with high ranks, and strong near-term expectations. Furthermore, both show very promising technical chart setups, which provide high risk-return trades.
Image Source: CME Group
Pegasystems
Pegasystems (PEGA - Free Report) is a customer relationship management software company that focuses on transaction-intensive enterprises. PEGA software enables organizations to deliver high-quality, consistent customer service across all major engagement channels. The company's customers represent a wide range of industries, including banking and financial services, insurance, healthcare management, and telecommunications.
After a brutal performance in 2022, where Pegasystems stock experienced an -80% correction, the stock has come out strong this year. YTD PEGA stock is up 30%, far outperforming the broad market indexes.
Image Source: Zacks Investment Research
Pegasystems is also a Zacks Rank #1 (Strong Buy) stock, indicating upward trending earnings revisions. Over the last 60 days analysts have revised earnings expectations significantly higher. Current year sales are expected to grow 6% YoY to $1.4 billion, while earnings are projected to climb 88% to $1.35 per share.
Image Source: Zacks Investment Research
PEGA is trading at a one-year forward sales multiple of 3x, which is significantly below the industry average 7x, and its five-year median of 6x. It seems PEGA stock got caught up in the hype of the post-covid boom, pushing its valuation to unreasonable levels. The -80% correction has brought the valuation back to much more compelling levels.
Image Source: Zacks Investment Research
The price action in PEGA stock has carved out a very interesting technical pattern. Building a clear cup and handle pattern, the stock looks like it can easily breakout to the $60 area. It is key that the stock breakout out above the handle high of $48. If it trades back below $44, the trade would be invalid, and likely signal further rate hikes.
Image Source: TradingView
Salesforce
Salesforce (CRM - Free Report) is also a customer relationship management software company, hence the stock ticker. There is no doubt that Salesforce and Pegasystems are in direct competition with each other. Fortunately for both, the enterprise software industry is massive, so there is likely room to address a respective niche. Salesforce products are easier to use and developing tools on the software much simpler. Alternatively, Pegasystems is more useful for the developers who are interested in getting into the nitty gritty of creating complex workflows.
During the most recent quarterly report Salesforce surprised analysts and showed a much larger profit than was expected. After investments from activist investors pressured management to prioritize profits in the rapidly changing economic environment, CRM laid off about 10% of its workforce. As challenging as it was it seems to have worked well for the company.
Salesforce is a Zacks Rank #1 (Strong Buy) stock, indicating upward trending earning revisions. Current quarter sales are expected to grow 10% to $8.2 billion, while earnings are projected to climb 64%. Additionally, analysts are in unanimous agreement in upgrading CRM’s earnings, which have been revised higher by as much as 30%.
Image Source: Zacks Investment Research
Salesforce is trading at a one-year forward earnings multiple of 39x, which is above the industry average of 29x, and well below its five-year median of 124x.
Image Source: Zacks Investment Research
CRM has a similar technical setup to PEGA, building out a cup and handle pattern. The large earnings gap up made the price action a bit sloppier, but the levels are there, nonetheless. There is clear resistance at the $190 level, so if price can breakout above there it should really get going. The setup would be invalid if it can’t trade above there, or if it goes down below the $170 level.
Image Source: TradingView
Conclusion
The stock market seems to be on a precipice. Interest rates and Fed policy are going to be critical to the future path of stocks, especially tech stocks like those discussed here. Keep a close eye on where rates go, and what the Fed policy makers say. Most importantly, make a trading plan, define your risk, and stick to the plan.