Don’t Forget About Software Stocks This Month
Workday is one of 24 stocks that outperform in August, historically, the last 10 years
Subscribers to Schaeffer’s Substack, The Contrarian Edge, received this commentary on Saturday, August 1.
Finance Twitter couldn’t get enough of Citadel and Ken Griffin’s Thursday power play on Situational Awareness. To the terminally online, Citadel’s leverage play was the missing piece of the puzzle to the enigmatic July semiconductor selloff. It reopened the high beta, growth stock flood gates, and validated theses of AI bulls. Tech stocks were tremendously oversold before the massive Thursday melt-up and Friday. After such a dour July, the month’s strong finish restored confidence among tech bulls.
But before piling back into AI-driven names, contrarians should heed Agamemnon’s words to Odysseus in Hades.
For the unfamiliar, Greek overlord Agamemnon was killed by his wife Clytemnestra despite coming home victorious after sacking Troy. When Odysseus met Agamemnon’s spirit in the underworld, Agamemnon urges Odysseus not to return home a hero, “expecting garlands and praise.” Instead, he urges Odysseus to ‘take your time. Assess.’
It’s a pretty cool moment in the movie and something to think about heading into August. Maybe semiconductors and the AI trade come roaring back, as the last two days of July hint at. But there are still plenty of overhangs throughout the market. Inflation and Iran headlines aren’t going away. Capex concerns are very real. In the event the strong close to July was a pump fake rally, there’s one sector and one stock poised to take advantage of any continued tech chop.
Workday Inc (NASDAQ:WDAY) is a human resources management software company, the cream of the crop. The stock, despite a 27.6% year-over-year deficit, has been resilient in the face of the ‘SaaSpocolypse’, rallying 27% in July while AI-adjacent names sold off and corrected. WDAY traded as high as $160.55 on Wednesday but closed the month trading around $155.
On Thursday, when semiconductors picked up the slack — thanks in large part to Citadel’s cheeky move against Situation Awareness — WDAY sold off by 5.9% on Thursday, trading as low as $149.54. The shares followed that up Friday with a 1.4% drop.
At the height of WDAY’s Wednesday rally, the stock’s 14-Day Relative Strength Index (RSI) crossed ‘overbought’ territory at 70. It’s since cooled to 60.
The stock formed multiple bottoms since April but was stymied on Wednesday at a trendline of March-to-July highs. An area that conveniently coincides with its 200-day moving average, a trendline toppled once (Wednesday) since November.
However, that trendline is working against some seasonality and technical signals. Workday is the best stock to own in August, historically, per Schaeffer’s Senior Quantitative Analyst Rocky White. Going back 10 years, WDAY averages a 9.7% return in August, with a 90%-win rate. No other name on the S&P 500 comes close. No other software name other than Palo Alto Networks (PANW) — a cybersecurity company in its own right — appears on the list.
You’ll never guess the best-performing ETF in August as well. None other than iShares Software ETF (IGV), of which WDAY is a top 20 holding (1.3%). A tidy 1.9% average August return in the last decade, with a commendable 60% positive rate.
Workday reports second-quarter earnings after the close on Thursday, Aug. 20. The stock has a mixed post-earnings history; it gapped higher by 5.2% in May but four of the last eight have resulted in next-day moves to the downside. Regardless of direction, the average post-earnings move the last two years is healthy 6.9%, so there’s likely to be some mid-month action.
Options traders have been loading up on puts during this rally. WDAY’s 10-day put/call volume ratio of 1.03 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) ranks in the 92nd percentile of its annual range. It’s 50-day ratio shows calls ruling out on an absolute basis (0.76), but four percentage points from a 52-week high.
Short term options traders are also bearish, with a Schaeffer’s put/call open interest ratio (SOIR) of 1.12 in the elevated 72nd annual percentile.
The pessimism doesn’t end in the options pits. Per the first chart above, the 27.4 million shares sold short accounts for 13.4% of WDAY’s total available float. Shorts have been starting to cover since July, but there’s still ample room to squeeze bears. At the stock’s average pace of trading, it would take shorts nearly six full trading days to buy back their bearish bets.
The late-week rally from the Nasdaq-100 (NDX) — coinciding with the Workday pullback — sets up this opportunity. If Workday and the SaaS sector surged into August, they’d be overbought and stretched too thin. Instead, the Thursday and Friday pullbacks took some heat off and put intriguing entry points in play. While the rest of Wall Street breathes a collective sigh of relief and cheers rallying semiconductors, don’t forget about the stocks that stood tall during the July storm.
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