Mister Softee
Opportunity in software?
Sometimes the timing of these notes can be a bit tough. There were three basic things I wanted to talk about this weekend. I chose to cover ‘Be Bullish’ because I thought it was the timeliest, and I suppose that’s worked out fine. Now I want to cover the other two topics, oil and software.
I tend to avoid talking about very newsy things where I’m not sure I have a lot of alpha to give. Arguably, that’s where oil fits, so I’ll keep commentary short, there. Basically, it may seem odd to someone paying close attention that WTI oil now costs more than Brent oil. Doesn’t it seem wrong that US oil costs more than European oil if they’re the ones really suffering from the Middle East turmoil?
Really, it’s just a technical quirk due to WTI futures delivering a month ahead of Brent. With the steep decline in the futures curve (technically called backwardation,) that makes the WTI benchmark look higher than Brent, even though it’s still more expensive in the physical market. The more important thing to look at is the futures curve prices of both are rapidly coming down-- the market feels more confident the oil crisis is fading.
I also wanted to spend a bit more time talking about software (IGV,) which got killed, last week. I was hoping to talk about it before it jumped back up, but it’s already rising 5%, today. That’s one of the things I was going to mention-- the potential was there for it to rise sharply, just like the other narrative driven selloffs we’ve seen, such as in memory stocks (MU.) Well, there you go!
One thing I still like at these prices is the potential for software stocks to be long-term holds. I think there’s enough chaos in these markets that it’s really hard to find stocks that can confidently be held for over a year so you can sell in a tax-advantaged fashion. I believe there are a number of stocks that have the potential to go up a lot in a short period of time and others that are likely great buys when the economy slows. Finding good long-term buys right now is tough.
Software stocks, at least for the most part, lack obvious problems. Earnings still look good; they’ve just been severely de-rated due to AI concerns that thus far seem pretty speculative. To be fair, it wasn’t long ago that software stocks held a premium valuation, so to some extent, a shrinking of earnings multiples seems deserved.
As for the AI threat, a lot of software companies use AI to improve their business. It seems more like an upgrade than a threat. It’s tough to beat those data moats, distribution channels, and customer relationships. AI models have a hard time dealing with the many messy aspects of software systems. There likely are some software stocks in trouble from AI, and as the years go on, that may increase, but most of them seem likely to be fine for years.
Ultimately, we’ll see what happens. For our part, we’ve spent the last month or two adding to our software holdings. That may have looked like a bad idea last Thursday, but we held on as there should be long-term value in the space. Minimizing taxes may not be very sexy, but it is remunerative. I can’t guarantee we can manage to get long-term gains here, but our odds seem relatively good.