That’s the case with software stocks at the moment. With valuation multiples at levels investors could only have dreamed of for the last decade I think there are some real opportunities to consider.

What’s the risk?

Right now, the concern with software is that artificial intelligence (AI) increases competition. And the danger is that this could force existing companies to compete on price, compressing margins.

The best thing about these businesses is their ability to keep increasing prices. But if that comes under threat, their shares will be worth a lot less than investors thought they were six months ago.

Importantly, though, the current software leaders aren’t defenceless. From a customer’s perspective, switching is complicated, difficult, and risky, so the savings need to be worth it.

Software stocks have been falling across the board recently. But I don’t think the threat is equal across all companies, which means there are potentially huge opportunities to consider right now. 

Sage Group

FTSE 100 company Sage Group (LSE:SGE) provides accounting software for mid-sized enterprises. The stock is down 37% in the last 12 months, which suggests a big challenge – and there is one.

Anthropic has launched agentic plugins that threaten to do a lot of what the firm’s core product does. That’s an obvious risk, but there are a couple of things investors should note.

One is that the products aren’t the same – Sage’s Trust Label means the firm is prepared to stand behind its software’s outputs meeting industry compliance standards. Anthropic doesn’t do this.

Another is that Sage subscriptions account for around 1% of the average customer’s budget. That makes switching a lot of time and effort and a big risk for a small potential saving.

Guidewire Software

Guidewire Software (NYSE:GWRE) and I have history – I bought the stock in 2022, sold it in 2023, and regretted it ever since. But it’s 50% off its highs, so I might be about to get another chance.

The company provides software to the insurance industry and it’s been steadily signing up carriers for the last few years. And the reason it’s taken so long might actually be to its advantage.

The insurance industry is notoriously slow-moving. But that might well be to Guidewire’s advantage – it’s never lost a customer to a competitor because they generally don’t change unless they have to. 

As a result, the chance to buy the stock after a sharp selloff could be a huge opportunity. So I’ll certainly be taking a closer look for my own portfolio in the next couple of weeks. 

Time for action?

It’s easy to talk about being greedy when others are fearful or buying quality shares at bargain prices. But the reality is this is often harder than it looks. 

Taking advantage of opportunities involves being ready to think about buying when it looks like there’s a threat – often an existential one – on the horizon. 

That’s the case with Sage Group and Guidewire Software at the moment. But I think investors should see today’s prices as a chance to consider buying at unusually attractive valuations.

The post Be greedy when others are fearful: 2 shares to consider buying right now appeared first on The Motley Fool UK.

Unfortunately for me, I sold my shares a year after buying them, banking a 20% return and feeling pretty good. But I missed out on another 293% – and there’s an important lesson here.

What is Guidewire Software?

Guidewire Software is a business that provides software to insurance companies. This allows them to do things like manage their claims and policies via an online portal. 

The thing that impressed me most back in 2022 was the firm’s market position. There wasn’t really another competitor in sight and the company had never lost a customer to a rival. 

Progress in signing up insurers was steady, rather than spectacular. But the prospect of strong margins and a product that had high switching costs for clients looked attractive to me.

Since then, Guidewire has gone from strength to strength. In its latest update, the company reported 33% growth in subscription revenues and a 10-year contract with a major Tier-1 insurer.

In terms of profitability, the firm’s operating income has more than doubled over the last 12 months. Adjusting for non-cash expenses, it now generates over $200m a year.

Overall, my assessment of the business was pretty good – and I think it might even be worth considering at today’s prices. So the obvious question is why did I decide to sell?

Cash flows

A closer look at Guidewire from a financial perspective was the main reason I went off the stock. Back in 2022, it was generating around $93m in free cash flow, but there were two problems.

The first was this wasn’t a big number in the context of a company with a market value of $6.7bn. It represented a 1.3% return at a time when UK interest rates were on their way to 5.25%.

The other issue was this was more than offset by stock-based compensation. So Guidewire had to spend more on share buybacks than it generated in free cash to avoid shareholder dilution.

To some extent, this is still the case. The firm’s $232m in free cash flow is still largely offset by stock-based compensation and offers just a 1.2% return on the current market value. 

None of that, however, has stopped the stock doing exceptionally well over the last three years. With sales growing more quickly than shares, investors are in a better position now than before.

I’m still not sure Guidewire’s likely cash flows mean the stock makes much sense as a 10-year investment. But for anyone with a longer time horizon, I think it could be worth considering. 

Foolish takeaway

While there might still be an opportunity for me in Guidewire shares, there’s also an important lesson. Finding (and buying) the right stocks is only one part of the investment process. 

Just as important is holding on to them for the long term. That’s something I’m looking to get better at in my investing – and I have my experiences with Guidewire to remind me of that.

The post A growth stock I bought in 2022 is up 328%. Here’s why I’m not happy about it appeared first on The Motley Fool UK.

The problem with stocks like these, though, is that pretty much everybody knows about them. This means shares in these companies are nearly never cheap. Even in times of stress, market participants are drawn to these stocks as relative safe havens. As a result, I think the best stocks to buy for my portfolio now are ones that have similar features to Apple, Adobe, and Visa, but that are less well-known than those big names.

I’ve found a stock to buy right now that I think fits the bill. The company is modernising an industry still reliant on technology that—in some cases—dates back to the 1950s. It has a dominant position within its industry, winning more business annually than all of its major competitors combined. And in its 20 years of operating, the company has never lost a customer to a competitor.

Best of all, I think the company is currently flying under the radar of most investors. Its market cap is just over $7bn, which means it’s too small to make a meaningful difference to the portfolio of someone like Warren Buffett. But it’s plenty big enough for an investor like me. Any guesses as to what it is?

The company

The stock I’ve been buying is Guidewire Software (NYSE:GWRE). The company provides operating software to the insurance industry. If you’ve ever heard of Salesforce, think of that but with a much more specialised focus. Guidewire concentrates on being the best within its niche and, as far as I can see, it’s leaving its competitors in the dust. 

I think that Guidewire’s size protects it reasonably well from disruption. Since it produces more revenue than its next five competitors combined, it has the scale to fend off smaller competition. But for a bigger player like Salesforce, the opportunity in the insurance sector is unlikely to be big enough to justify the resources needed to compete with Guidewire.

At the moment, Guidewire is unprofitable. Unprofitable companies, such as Guidewire, have been hit hard by the market lately. At the time of writing, Guidewire stock is down around 33% from its highs. As interest rates rise to combat soaring inflation, there’s a risk that Guidewire stock might underperform for a few years.

Over time, however, I think that Guidewire’s business should win out for me as an investor. The company is in an excellent financial position, with current assets more than covering total liabilities. And I expect it to expand into the substantial untapped opportunity within its industry. Guidewire looka like one of the best stocks for me to buy now for my portfolio, while growth stocks are out of fashion. And if they stay out of fashion for an extended period of time, I intend to keep buying.

The post Stocks to buy now: an under-the-radar winner that’s quietly dominating its industry appeared first on The Motley Fool UK.