In order to try and find some fertile ground for investments, I was going through the list of sectors in Morningstar and grew curious about softwares. Today I am reviewing the Software-Architecture industry. I have thus set up a screen to select companies in the "Software – Infrastructure" industry, with a market cap of over $0.5Bn.
This gives us a list of 16 companies, which I then filter against some of the criteria that I usually use in my stock reviews to try and evaluate business, balance sheet and valuation risk. You can find the spreadsheet on Google Docs.
1- Business risk
The first filter I apply is having a TTM ROE of 12% or more, which gets us down to 20 companies. Adding a second constraint of having a TTM ROA of 6% or more narrows the list of candidates to 6 companies:
- BMC Software (BMC: 48.07 0.00 0.00%)
- CA, Inc. (CA: 24.81 0.00 0.00%)
- J2 Global Communications (JCOM: 29.90 0.00 0.00%)
- Microsoft Corporation (MSFT: 27.81 0.00 0.00%)
- Oracle Corporation (ORCL: 31.675 0.00 0.00%)
- SolarWinds, Inc. (SWI: 19.41 0.00 0.00%)
2- Balance sheet risk
My preferred balance sheet criterion for a stock review is a debt / equity ratio below 1.0x. In this case, this does not change our list given that all of the 6 companies meet that criterion
3- Valuation risk
Not only am I looking for good companies, I am also looking for companies that are not too expensive. I thus add another filter of price to earnings (trailing) being below 20.0x; reducing the number of companies to 4 which I will add to my investment ideas and review in the coming weeks
| Name | Ticker | % ROE TTM | % ROA TTM | Price/ Earnings Trailing | % Cash/Market Cap |
| BMC Software, Inc. | BMC | 33.6 | 9.81 | 18.21 | 18.48 |
| CA, Inc. | CA | 15.78 | 6.51 | 14.9 | 21.31 |
| J2 Global Communications, Inc. | JCOM | 20.64 | 16.14 | 16.98 | 16.98 |
| Microsoft Corporation | MSFT | 46.73 | 21.79 | 11.05 | 3.71 |
Many happy returns
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