“Since the earliest days of our youth, we have been conditioned to accept that the direction of the herd, and authority anywhere — is always right.” – Rise Up and Salute the Sun: The Writings of Suzy Kassem by Suzy Kassem
“My life seemed to be a series of events and accidents. Yet when I look back, I see a pattern.” – Benoît B. Mandelbrot
In this week’s piece we identify two investment ideas: cloud-based enterprise software companies and European banks. The former has caught our attention through its recent show of strength and the latter for its recurring weakness.
Cloud-Based Enterprise Software
A number of cloud-based, software-as-a-service (SaaS) companies have been out performing markets since the US equity market started to sell-off in October last year.
Volatile Period: 4 Oct, 2018 – 11 Jan, 2019
| Total Return | |
| S&P 500 Index | -10.74% |
| Veeva Systems | -5.49% |
| Workday Inc. | +14.97% |
| Salesforce.com | -7.26% |
| Benefitfocus Inc. | +32.01% |
| Intuit Inc. | -10.48% |
Sell-Off: 4 Oct – 24 Dec, 2018
Despite being higher beta tech-stocks, some of the SaaS names have fared far better than the S&P 500 Index during the sell-off between October and Xmas, whiles others largely matched the market’s performance.
| Total Return | |
| S&P 500 Index | -19.25% |
| Veeva Systems | -23.36% |
| Workday Inc. | -2.23% |
| Salesforce.com | -23.74% |
| Benefitfocus Inc. | +13.18% |
| Intuit Inc. | -20.83% |
Rally Off-the-Lows: 26 Dec 2018 – 11 Jan, 2019
On the other had, in the rally off-the-lows all of the SaaS stocks we identify have significantly outpaced the market.
| Total Return | |
| S&P 500 Index | +10.54% |
| Veeva Systems | +23.32% |
| Workday Inc. | +17.59% |
| Salesforce.com | +21.61% |
| Benefitfocus Inc. | +16.63% |
| Intuit Inc. | +13.07% |
In each of the charts presented below, there are two panels – the top one showing the price performance of each stock and the bottom one showing the performance of the stock relative to the S&P 500 Index. A number of the stocks are witnessing their respective relative performance break to new highs.
Veeva Systems $VEEV
(This is not the first time we are discussing $VEEV, our previous comments on the stock can be found here.)
$VEEV, founded in 2007, is the leading customer relationship management (CRM) solutions provider to the life sciences industry. The company was founded by and is managed by a highly experienced management team with both software and life sciences experience.
The company delivers its services through cloud-based architecture and its core CRM products, representing close to nine-tenths of revenue, are built upon Salesforce.com’s force.com platform.
$VEEV counts over two-thirds of the 50 leading global pharmaceutical companies amongst its clients. Its products enable pharmaceutical and life sciences companies to manage customer databases, track drug developments, and organise clinical trials with industry-specific functionality and maintaining regulatory compliance.
Multinational companies’ growing preference for cloud-based solutions has been and continues to be a secular tailwind for $VEEV. Specialised cloud-based solution providers, we think, are well-placed to continue grabbing market share from on-premise incumbents, such as SAP and Oracle, that have been slow in adapting to their clients’ shifting preferences.
$VEEV having established a beachhead with its core CRM products has over the years launched complimentary products that are supporting sales growth.
- 2011: Introduced Vault, a document management product, which quickly gained traction with existing clients including at least six out of the top 20 global pharma companies.
- 2013: Launched Network, product that provides critical customer information that can easily be integrated with its other solutions.
- 2018: Unveiled Nitro, a ready-to-use commercial data warehouse in the cloud tailored for the needs of the life sciences industry that comes with a packaged software solution. The company has already signed up four customers for the product since its launch.
The newer solutions, unlike the core CRM products, are based on the company’s proprietary platform and not force.com.
Workday Inc. $WDAY
$WDAY is a cloud-based financial and human capital management software solutions provider. Amongst the enterprise software companies, $WDAY has one of the largest established and addressable markets. It already counts 35 per cent of the Fortune 500 companies as clients for its human capital management solutions and its financial management solutions are also gaining traction.
$WDAY has been extending its international presence and product offering, in a bid to grab market share from incumbents SAP and Oracle.
The company’s products, ranking at the highest levels in independent customer satisfaction surveys, are regarded by many industry experts to have the potential sustain strong sales growth at scale for many years to come.
Benefitfocus Inc. $BNFT
We added to $BNFT to our trade ideas on 3 December, 2018.
Salesforce.com $CRM
$CRM, with its iconic 1,070-foot tower in the South of Market district of downtown San Francisco, is of course one of the pioneers of cloud-computing and amongst the very elite tech companies in the world.
Intuit Inc. $INTU
$INTU develops and markets business and financial management software solutions for small and medium sized businesses, financial institutions, consumers, and accounting professionals. It is one the highest quality enterprise software franchises in the US market.
Our preferred picks amongst the above names are $VEEV, $WDAY and $BNFT. We are neutral to positive on $CRM and neutral on $INTU. We would look to buy our preferred names on any pullbacks. Moreover, for the brave amongst you, SAP $SAP.GY and Oracle $ORCL can be shorted on rallies.
European Banks
From the Financial Times:
“Representation has splintered in almost every sizeable political system in Europe, making it harder to form governing coalitions, creating political instability and giving a voice to new formations on the radical left and right and in the political centre.”
Add “splintered representation” to the growing list of crises, existential or otherwise, European Union has had to deal with since the Global Financial Crisis.
Greece.
Cyprus.
Other periphery states’ debt crises.
Brexit.
Mouvement des gilets jaunes.
Italy’s populist coalition.
Spain’s Banco Popular.
Italy’s Banca Monte dei Paschi di Siena.
Deutsche Bank.
Given the long-list of challenges faced by Europe, it may seem strange that we are identifying European banks as an investment opportunity. However, one look at the chart of the European banking index below should explain why.
Ever since the Global Financial Crisis, whenever European banks have fallen to the levels they are currently trading at, the ECB has come out with a statement or a policy to shore up investor confidence.
Given the ECB’s track record, we think being long European banks at current levels has an attractive risk-reward profile. Nonetheless, given the uncertainty surrounding Europe, we think a pair trade involving long European banks and short the STOXX Europe 600 Index might be a prudent way to express the view.
- If the ECB comes out with a favourable policy announcement and all European stocks rally, European banks, we think, will out perform the broader European stock indices.
- Alternatively, if the ECB does nothing and things continue to deteriorate, even though banks would probably go down, they are likely to out perform the broader equity market given that they are already at 10-year lows and the average European stock is not.
An alternative expression of the trade could be to be long EURUSD.
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.