Taking a Page Out of Wall Street’s #1 Analyst’s Playbook


For fresh investing ideas, we suggest taking a cue from Wall Street. Recommendations from the Street’s pros can provide a source of inspiration, as analysts often have in-depth knowledge of the industries they cover. That being said, not all analysts have the same track record, with some demonstrating a much stronger ability to generate returns with their ratings and price targets.

Taking this into consideration, we turned to TipRanks’ top rated analyst, Canaccord’s Richard Davis. According to TipRanks’ algorithm which calculates the average return of each rating as well as overall success rate, the tech sector analyst was the best performer out of 5,583 total analysts. With an 82% success rate and a 44% average return per rating, it’s clear that his calls demand attention.

With this in mind, we wanted to take a closer look at the five-star analyst’s top picks in the software space. Not only does the upside potential of each exceed 20%, but all of the stocks have earned a ‘Strong Buy’ consensus based on all of the ratings published over the last three months. Let’s dive right in.

ServiceNow (NOW)

ServiceNow is a cloud computing company that wants to make it easier to get work done with its software solutions. Even though Davis expects a rough next quarter or two from NOW, the analyst believes that the tech stock still represents a compelling investment.

His bullish thesis lies in part with the company’s commitment to achieve both near and long-term financial targets. Incoming CEO Bill McDermott stated that there hasn’t been a change in demand and activity as a result of macro conditions, and thus the company is still on track to meet its goals. Not to mention the public sector has been welcoming the cloud with open arms. In its most recent quarter, NOW signed thirteen contracts that have average contract value of more than $1 million with the U.S. federal government. This is up from the five deals it signed one year ago.

While acknowledging the concerns surrounding employee attribution, the five-star analyst calls fears “overblown.” Out of NOW’s top 100 sales representatives, the company has only lost three. It should also be noted that company-wide employee retention rates rival that of other industry leaders.

Based on all of the above factors, Davis tells investors to stay onboard. The analyst adds, “If you don’t own NOW, you should be happy because you just walked into the store and found your favorite item on an unexpected sale – we’d use what is likely to be an up and down stock price to build out a full position through year end”. Bearing this in mind, he kept his Buy rating while lowering the price target from $315 to $285. Even with this reduction, Davis sees 18% upside potential in store.

In general, other Wall Street analysts take a bullish approach when it comes to NOW. 16 Buy ratings compared to 2 Holds assigned in the last three months give it a ‘Strong Buy’ analyst consensus. Additionally, its $300 average price target puts the upside potential at 21%. (See ServiceNow stock analysis on TipRanks)

Smartsheet (SMAR)

With Davis calling Smartsheet “one of the best positioned and executing firms that we follow,” this software company is definitely on our radar.

Smartsheet offers its customers a software platform for the workplace, with this solution allowing teams to work more effectively and improve overall outcomes. While the company provides solid products, the project management space is overcrowded with competitors. That being said, Davis highlights SMAR as a standout based on the fact that its software does exactly what it’s supposed to do.

“Smartsheet makes the buying, pricing and expansion process comfortable. When you combine passionate customers with technical prowess and pleasant buying experience, you have the ingredients for a long runway of growth,” the analyst commented.

Davis argues that the key to successfully navigating a competitive industry is to continue to innovate, get scale as well as meet the needs of current customers, all three of which the analyst says SMAR is doing. The company has kept customers excited by adding new features including conditional logic enhancements, cut and copy widgets, new ways to filter, multiple select drop down lists and several others. Based on the company’s 134% customer retention, its users are liking what they’re seeing.

Like Davis, the rest of the Street has high hopes for SMAR. With 8 Buy ratings and 1 Hold received in the last three months, the message is clear: the software stock is a “Strong Buy.” At an average price target of $50.44, the potential twelve month gain lands at 24%. (See Smartsheet stock analysis on TipRanks)

Upland Software (UPLD)

While it’s yet another player in the workplace software space, Davis thinks Upland stands to become a disruptrive player in the sector thanks to its recent acquisition.

On October 6, UPLD announced that it was set to buy Altify for $84 million. Altify is a customer revenue optimization platform that is built natively on Salesforce. It was designed to improve sales execution by solving account management problems and by meeting sales process optimization needs. According to the analyst, Altify complements UPLD’s existing product offerings as well as provides a new customer base for the company to sell to.

With this purchase representing UPLD’s fifth acquisition in just the last six months, the company could see major gains driven by these expansion efforts. However, all of this M&A activity does pose risk in terms of integration. Nonetheless, the five-star analyst cites the company’s strong management team and well-practiced method for executing integrations as mitigating some of these concerns.

“If we assume that investors are willing to pay a mid-teens EBITDA multiple for Upland’s combination of gradually improving organic growth, reliable and accretive M&A, and high margins, we continue to believe that the stock should push through $50 in the next year,” Davis explained.

As the current share price is $38.04, Davis’ price target of $55 suggests shares could climb 45% higher over the next twelve months.

With only bullish calls issued in the last three months, the word on the Street is that UPLD is a “Strong Buy.” Adding to the good news, its $55 average price target indicates the highest upside potential on our list, 43.53% to be exact. (See Upland Software stock analysis on TipRanks)

To find good ideas for tech stocks trading at fair value or better, visit TipRanks’ Best Stocks to Buy tool, a newly launched feature that unites all of TipRanks’ equity insights.

 

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