By Stockpickr Staff
Posted on June 12, 2009

The software sector is starting to heat up in a serious way, and many market participants are missing out on the action.

Jim Cramer brought attention to the under-the-radar move in the sector on Thursday’s “Stop Trading!” segment on CNBC. Cramer told viewers that the software stocks are exploding here, and you don’t hear a word about them. He mentioned that names such as Oracle (ORCL), Microsoft (MSFT) and Salesforce.com (CRM) are starting to get very active to the upside.

The big names in the space such as Microsoft and Oracle aren’t the only ones that are starting to advance. Just take a look at the action in smaller-cap companies such as Merge Healthcare (MRGE), up 195% on the year, or LivePerson (LPSN), up 91%. This clearly demonstrates that investors are bargain-hunting in many of the beaten-down names and finding value as the big and small companies are being bid up to higher prices.

The software complex is also starting to heat up from an M&A standpoint. Data-storage giant and software maker EMC (EMC) is battling it out with competitor NetApp (NTAP) to buy storage appliance and software firm Data Domain (DDUP) for at least $1.8 billion. Just last week, Intel (INTC) said it would buy testing and development software maker Wind River Systems (WIND) for $884 million.

There are even rumors that Dell (DELL) is actively looking to do some deals to expand its portfolio in storage-related hardware, software and services. Like many large-cap tech companies, Dell is sitting on billions in cash that could be best put to work by buying up cheaper tech companies at depressed levels. Some rumors have Dell looking to buy out Palm (PALM) and some other potential targets include Emulex (ELX) and QLogic (QLGC).

Considering the M&A activity and the positive price action in the software sector, how should investors look to play this space? Let’s take a look at a few software stocks that look enticing based off of their charts.

1. Hewlett-Packard

One large cap software company that has an interesting chart is Hewlett-Packard (HPQ). Looking at the chart below, you can see that shares of Hewlett are approaching some previous resistance at around $37.50 a share and at around $39 to $39.30 a share. If the stock can manage to trade above those levels, it could be set to run toward $42 or possibly even higher.

Investors looking for an entry point on Hewlett can either buy the breakout or wait for the stock to pull back toward the 50-day moving average of $35.28 before entering a position. The stock also has strong support at around the $33 level. Keep this name on your radar because the stock continues to act well even when the market pulls back.



2. Internet Capital Group

Next up is Internet Capital Group (ICGE). This company is focused on acquiring and building Internet software and services companies. Internet Capital Group holds ownership interests in 14 companies that are considered to be partner companies.

Looking at the chart below, you can see that shares of Internet Capital Group have started to breakout of a very significant resistance level at around $6 a share. This level is significant because the stock has failed to breach this price four times in the past. This breakout, which has already taken shares up toward $6.30, is happening on rising volume. Volume for a number of recent up days has surpassed the average daily volume of around 169,000 shares.

It’s also worth noting that the stock is currently trading above both the 50-day and 200-day moving averages which is often a bullish indicator. If Internet Capital Group can continue its uptrend and hold above the breakout level of $6 a share, it could be setting up to head significantly higher towards $9 a share.



3. Openwave Systems

Another interesting software stock is Openwave Systems (OPWV). This company is an independent provider of software solutions for the communications and media industries.

Looking at the chart below, you can see that Openwave is starting to look like one powerful stock. The shares have already made a very large move from 45 cents to current prices of more than $2 a share. Don’t let the big move scare you off. It could easily be preparing to trade much higher.

The stock is approaching some previous resistance at around $2.86 a share on above average volume. If Openwave can break above that level, it could be setting up to head back towards $5 a share, or possibly even higher.

It’s worth noting that on Tuesday, Wedbush Morgan Securities upgraded the stock from hold to buy due to strong prospects for the company’s mobile technology software. Wedbush believes that as smart phones and other mobile devices gain popularity, the company will benefit significantly.



4. Salesforce.com

The final software stock that looks compelling is Salesforce.com (CRM), a provider of software on demand. The company makes customer relationship management software for business of all sizes and industries worldwide.

Looking at the chart below, you can see that Salesforece.com has been finding some strong support around the 50-day moving average of $39.43. If the stock can manage to hold that level, it could be setting up to make a run back toward some previous resistance at $42 and $45.50 a share. A break above those levels could send the stock soaring to $60 a share.

It’s worth noting that the stock is heavily shorted, with more than 12% of the float currently short as of June. Anyone who has been betting against this stock has been ignoring many of the bullish technical indicators the stock is displaying. Some examples are the higher lows Salesforce has been making since December 2008 and the strong uptrend during the same period. Look for a huge short squeeze if the stock can burst through $45.50.



For more ideas, visit the Charts of the Week portfolio.

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