Here are 85 high-growth software stocks, sorted by market cap. As a group they have performed very badly this year (as the fed raises rates to fight inflation), but as you can see there is a very noticeable difference in valuation between the 10 largest and the 10 smallest. This includes price-to-sales ratios (the large caps have much higher multiples), price versus 52-week range (the large caps have fallen a lot less) and more. In this note, we share a few points about this group, and discuss the upcoming CPI number as a catalyst.
To some extent, the differences between large caps and small caps (as described above) are expected because small cap companies are riskier (they are less established and more sensitive to economic challenges and declines—like this year).
However, small caps also have more explosive upside when the market recovers. For example, we could see some very strong up moves from this entire group (but especially the small caps) if this week’s monthly Consumer Price Index (CPI) numbers show continuing signs of improvement.
Specifically, the August CPI number is expected to be released tomorrow morning (Tues). Inflation is a critical economic metric, especially now as the fed has been raising rates aggressively to combat high inflation. CPI came down a bit last month (but it’s still very high), and if it comes down in tomorrow’s release that means the fed could lighten up on its hawkishness a bit (a very good thing for stocks).
We currently own several of the large cap stocks on this list in our Disciplined Growth Portfolio, including ServiceNow (NOW), Snowflake (SNOW) and CrowdStrike (CRWD), to name a few, because we believe they are top notch companies with a lot of growth in the years ahead.
However, it may be worth considering some of the small cap stocks on the list. The current large caps were the explosive leaders in the last market cycle, but their will be new explosive leaders in the next market cycle.
A few small caps that standout on their metrics alone are Olo (OLO), JFrong (FROG) and Amplitude (AMPL) for their strong growth, high gross margins and relatively more reasonable price-to-sales multiples. You may also see a few names on the list that are interesting and attractive to you.
The Bottom Line:
We’ll be researching names on this list in the coming days, but in the meantime—if Tuesday’s CPI numbers show improvement—expect explosive upside from this entire group, including the names we currently own in our Disciplined Growth Portfolio: NOW, SNOW, CRWD, PLTR, TTD and PCTY. And over the long-term, the market will get better, and many of the stocks on this list (especially the ones we own) are going a lot higher. Despite the gloom and doom, now is an attractive time to buy high-growth stocks if you are a long-term growth investor.