Software’s Comeback: Why Luke Lloyd Sees More Upside Ahead

SPEAKER_1 (0:00)

I do want to broaden out the conversation, though. Welcome in Luke Lloyd this morning, President and CEO of Lloyd Financial Group. Luke, great to have you on. Now, we've been talking, I think, for months, correct me if I'm wrong, that you are pro software, bullish software, and you say that call is continuing to work for you. What's continuing to drive your bullish sentiment right now?

Luke Lloyd (0:20)

Yeah, I mean, I was on Nicole Pedolini's show on Schwab in February, or talking with her at least, and our conversation was focused around software back then, and I checked just before this, two of the stocks I talked about was Fortinet and Palantir. Fortinet doubled since then, and Palantir is up 50%. Fortinet is a little different, actually. We sold Palantir about a month ago at this point, because Fortinet was kind of a hardware stock disguised as software, and when that narrative shifts, I think it's going to be a little bit different conversation with that, but we rode the software mentality for a while. But look, software is so cheap. I mean, if you look at any other parts in the market, you can say they're a little bit more expensive than historically the price to earnings ratio on the market. For example, the average S&P 500 stocks trading at 20 times forward earnings, which historically trades at 17 or 18 times. So you can see the market is 20% over price, or semiconductors, I believe, is at 25 times for price to earnings, which actually is not that expensive. It's really only about 30 or 40% above the market with insane amounts of growth. But then you look at software, a lot of these software names are trading at 14 or 15 times forward earnings, or growing their earnings at 30%.

So if you want a discounted valuation with insane and still amounts of earnings growth when historically, remember, a lot of stocks in the S&P grow at 6% historically, software is still the place to be. So IGV I've talked about, if you want to play it just holistically through an ETF or something like that, you can play it through an ETF, or you can play it through stocks. We are stock pickers, so we play it through stocks. But the ETF is up 20 or 30% the past few months, probably up 40% from the lows in the mid 70s earlier this year. When software was going to get replaced by AI, AI is not going to replace software, which me and you talked about I believe last time.

SPEAKER_1 (2:06)

Yeah, we certainly did. So as a stock picker, where are you seeing the opportunity right now? What are you buying? You said you exited Palantir. Where are you looking? Are you looking at some of these more beaten down names where the sentiment hasn't shifted and people haven't adopted your viewpoint that AI is not going to kill software? Are you looking for established companies that have recurring revenue? How are you approaching software? Yeah.

Luke Lloyd (2:29)

Well, we exited Fortinet, just to clarify. We did not exit Palantir. We still own Palantir. We think Palantir is probably going to 250 to 300 at some point, but you play it by figuring out where the market discrepancies are. So right now, obviously, I'm very bullish on software. We have the software positions we like, probably about 10 of them. I'm more than happy to go through them, but really the next iteration of this whole trend, we started really calling this earlier this week with our addition of NLY, which is a Mortgage Real Estate Investment Trust, is the top in interest rates. So it's interesting this week, we got harder than expected CPI and PPI data, which you would think interest rates would go up, but it was almost the opposite mentality. So there's almost this really roundabout way of thinking or roundabout math you have to get or go through to get to the endpoint. So the math that, basically, the conversation is this week in the stock market is hotter inflation is gonna hinder some parts of growth. Now, I don't think this inflation story is here to stay very much because once oil prices do come back down, the energy shock is gonna get figured out and you'll see inflation come back down. But that being said, if the expectation is growth slows, you'll see interest rates come down, which is actually gonna benefit most of those tech areas. I don't think it's necessarily gonna benefit the semiconductor space. That's why you're seeing semiconductors sell off this week. But like yesterday was a great example. You know, our portfolio, I think, was up 2% yesterday when the market was barely up or flat at least because it was being carried by software. A lot of our software names like Guidewire or HubSpot were up 6% or 7% yesterday. Or Adobe, I think, was up 6% or 7% yesterday. So I think that rotation of money as money becomes cheaper with interest rates going lower is really gonna flock to this underloved, undervalued areas like software because again of my reference of it being way below historical P-E ratios.