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Hedge Funds Pile Into Software Stocks as ETF Adds Record Money

Hedge Funds Pile Into Software Stocks as ETF Adds Record Money

Investors’ preferences have changed frequently this reporting season. One day, it’s technology stocks that are in favor when growth angst is flaring. The next day, economic confidence returns and the reflation trade is back in vogue.

One group that seems to have remained steadfast through all the rotations are software developers. And their lofty valuations are no hurdles to share gains.

A Goldman Sachs Group Inc. basket of software shares with high multiples has advanced more than 8% since the third-quarter earnings season began, ahead of the S&P 500. About one-fifth of its members are scheduled to report results Thursday, including Cloudflare Inc. and Datadog Inc. postmarket.

Behind the gains is a belief that software makers are poised to reap gains at a time when labor shortages prompt companies to seek ways to boost efficiency and productivity. Viewed from a wider lens, the industry also stands to benefit from a secular boom in spending on everything from cloud computing to cyber security.

“Software is in a sweet spot,” Anastasia Amoroso, chief investment strategist at iCapital Network, said by phone. “If you look at price to sales for the index or certain companies, they’re off the charts. But as long as earnings growth for software continues to come in strong, I do think on price-to-earnings/growth, software is still one of the more attractive sectors.”

Hedge Funds Pile Into Software Stocks as ETF Adds Record Money

That optimism is shared by investors. Last month, traders poured a record amount of money into the iShares Expanded Tech-Software Sector ETF (IGV). Meanwhile, hedge funds raised their industry exposure to a five-year high, according to data compiled by Goldman’s prime brokerage.

And for now, the stance has been vindicated by better-than-expected earnings. Microsoft Corp. just overtook Apple Inc. as the largest American company by value after its cloud-based software helped drive robust sales and profit growth.

Software companies in the S&P 500 are expected to post a 26% increase in third-quarter profits with sales rising 15%, data on actual results and analyst estimates compiled by Bloomberg Intelligence show.

©2021 Bloomberg L.P.