Let's Double Our Money… with a Little Help from the Greatest Analyst Who Never Lived

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Editor's Note: As you'll see, Bill is a big Sherlock Holmes fan. That doesn't surprise us at all; Bill's a keen analyst himself, and his own sleuthing has led us to some spectacular profits. Even now, he's tracked down a hidden "back door" for regular investors to hit it big on the Alibaba IPO. Today, he's "teamed up" with the legendary detective to discover a sector with triple-digit gain potential. The game's afoot! Here's Bill...

I've been a huge fan of Sherlock Holmes ever since my Dad introduced me to the fabled detective when I was 10 or 11 and living near Pittsburgh back in the early 1970s.

And two of my favorite stories are The Final Problem and The Adventure of the Empty House.

In The Final Problem, Holmes has finally beaten his nemesis, Prof. James Moriarty, setting the brilliant villain and his gang up for arrest by Scotland Yard.

With the tough work done (and the need to steer clear of the criminals being rounded up by Scotland Yard), Holmes and friend Dr. John Watson head to the Continent for a literal "getaway" vacation. But Moriarty eludes the police dragnet and follows Holmes to Switzerland, cornering him alone on a narrow shelf overlooking Reichenbach Falls...

When Watson arrives later, he finds churned-up earth and a hastily jotted note from Holmes - which Moriarty had "courteously" permitted him to write in advance of the "final discussion of those questions which lie between us."

Holmes' fans know about the premature call that happened next, but what isn't obvious is that it can help us make a killing in the markets...

To Watson, what transpired after Holmes penned his note was obvious:

"An examination by experts leaves little doubt that a personal contest between the two men ended, as it could hardly fail to end in such a situation, in their reeling over, locked in each other's arms," Watson wrote. "Any attempt at recovering the bodies was absolutely hopeless, and there, deep down in that dreadful caldron of swirling water and seething foam, will lie for all time the most dangerous criminal and the foremost champion of the law of their generation."

In a final lament, Watson said that Holmes would always be "the best and wisest man whom I have ever known."

In The Adventure of the Empty House, Holmes stunned his old friend Watson by seeming to "return from the dead." As if that weren't enough, Holmes also cracked a huge murder case and captured Col. Sebastian Moran - an exceptionally dangerous criminal and last member of the Moriarty gang to still be at large.

As Mark Twain would later say about a similar situation involving himself, the reports of Holmes' death were an exaggeration.

I'm relating this tale for a reason: Analysts have similarly "closed the book" on a particular portion of the global tech sector.

And we believe it's created a very nice profit opportunity for folks who are willing to dig for the "real story."

The focus of this "premature obituary" is the software industry.

A Prescient "Call"

Traditionalist tech investors have long assessed the sector's profit potential by looking at sales of personal computers. Historically, an uptick in PC sales was almost always ignited by the "upgrade cycle" that accompanied the introduction of a higher-speed chip or new software operating system.

But PC sales have been slowing - thanks to the zooming popularity of smartphones and tablet computers.

Like Watson, investors looked at the churned-up ground surrounding the PC sector and assumed that the drop in PC sales meant that chip and software sales must've also plunged off the cliff and into the abyss.

But, like Watson, those investors were wrong.

Since January 2013, when I predicted a rebound in the semiconductor sector, we've brought you about a dozen chip-related profit recommendations. And if you'll pardon the cliché, folks who've followed them have made a killing. Those winners included such peak-gain returns as:

291% on Micron Technology Inc. (Nasdaq: MU), recommended on Valentine's Day 2013 at $8.08 a share. It turned out to be quite a gift: Micron has traded as high as $31.60, and analysts are calling for it to zoom even higher.

176.5% on NXP Semiconductors NV (Nasdaq: NXPI), which we'd recommended in May 2012 at $23.40 a share, and then re-recommended a number of times thereafter. Shares of the near-field-communications (NFC) chipmaker hit a new lifetime high of $64.69 this month and are still 168% higher than when we first told you about them.

120% on Ambarella Inc. (Nasdaq: AMBA), recommended on Aug. 8 at $16.60. The stock is still up 60% from where we recommended it, and we believe it could get a nice boost from the looming IPO of extreme sports camera maker GoPro Inc.

And 74% on Advanced Micro Devices Inc. (Nasdaq: AMD), recommended early last January at $2.67. The stock is still up 61%.

A more recent recommendation was the SPDR S&P Semiconductor (ETF) (NYSE Arca: XSD), an exchange-traded fund (ETF) that tries to reflect the performance of the Standard & Poor's Semiconductor Select Industry Index. The fund is already up 11.2% since the April 7 "Buy" call.

Now we believe it's time to take a look at the software sector.

And like our earlier semiconductor call, our push into software goes against the grain.

Avoiding the Chasm

A new report by market researcher IDC says that PC sales dropped 4.4% in the first quarter. It's just the latest decline in that once powerful industry.

For all of 2013, IDC said that PC shipments dropped 10% on a year-over-year basis - a result that fulfilled the researcher's earlier prediction that 2013 would represent "the most severe yearly contraction on record" for the PC market.

"The PC market again came in very close to expectations, but unfortunately failed to significantly change the trajectory of growth," said Loren Loverde, the IDC vice president who tracks worldwide PC shipments. "Total shipments have now declined for seven consecutive quarters, and even the holiday shopping season was unable to inspire a turn in consumer spending."

Indeed, with the full-year numbers in the books, market researcher Gartner Inc. referred to 2013 as "the worst decline in PC market history."

It's almost enough to make you write off any software-related investments.

But don't make that kind of "Final Problem" erroneous assumption.

Michael Robinson, the resident tech expert here at Money Map Press, says software is showing signs of life.

Real life.

"With a long-term decline in PC sales - one, in fact, that reaches all the way back to at least 2012 - many of the big-money guys on Wall Street are writing off software, too," Michael told me during one of our late-night confabs last week. "On the surface, Bill, the logic makes sense: If people are buying fewer computers, they'll need fewer accounting, sales management, and word-processing packages."

As it turns out, the churned-up ground around the PC sector doesn't mean the software business has plunged into Reichenbach Falls. Like Sherlock Holmes, software found a way to escape - and even emerge victorious.

A recent report by Gartner says the software industry scored $407.3 billion in sales last year. Thus, at a time when many on Wall Street were gloomy about software, sales actually advanced by nearly 5%. And that more than made up for the roughly 10% decline in PC sales that IDC says the industry suffered in 2013.

As analysts discovered, while the consumer software market (meaning PCs) was weak, the commercial market was pretty strong.

Expect that particular "dynamic" to continue in the software sector as Big Data, Cloud Computing, and the Internet of Everything (IoE) (and its subset "machine-to-machine" communications, or M2M) drive demand for new kinds of software packages, Michael told me.

"It's a new era in technology, with a confluence of multiple powerful new trends," he said. "That represents a substantive change... and with change comes opportunity."

Just as we did with semiconductors, we're going to start looking for profit opportunities in the software sector.

Michael suggests that we start with the SPDR S&P Software & Services (ETF) (NYSE Arca: XSW).

"This is an all-encompassing exchange-traded fund (ETF) that gives us a broad play on some very intriguing companies," said Michael, who edits the Radical Technology Profits and Nova-X Report advisory services here at Money Map Press. "XSW invests in firms that are involved in e-commerce, social-networking, data-processing, Internet software, cloud-computing, and Big Data. It holds roughly 175 stocks in its portfolio. That big number and its diversity of holdings are part of what I really like about XSW - software in general, and this ETF in particular, touch a wide swath of the global-tech ecosystem."

We're also going to look for companies with unique competencies.

That's just what we did earlier this year with our May 23, 2013, recommendation of Splunk Inc. (Nasdaq: SPLK), an emerging player in the area of Big Data analytics. We spotted Splunk's strong position in a new business area and predicted that would pave the way for a strong rally. The stock zoomed nearly 140% before it got tripped up by short-term earnings issues (illustrating, once again, why we're advocates of "trailing stops").

Now we like Blackbaud Inc. (NasdaqGS: BLKB).

Charleston, S.C.-based Blackbaud focuses on such nonprofits as research foundations and universities. The company has 29,000 clients who use its software to manage fundraising, accounting, and online marketing and payment services.

With a market cap of $1.6 billion, Blackbaud has operating margins of 11% and a 20% return on equity (ROE). Its most recent quarterly earnings zoomed 43%.

Analysts right now have a one-year consensus target price of $44 on Blackbaud shares - 25.7% above the current share price of $34.99.

In fact, Zacks Equity Research gave Blackbaud its top No. 1 "Buy" ranking. I tend to watch what Zacks does (versus other stock-research services): Since 1986, Zacks' No. 1-ranked stocks have generated a market-thrashing average annual gain of 26%.

I'm looking at a couple other software plays, too - including one that could benefit from an additional catalyst: a corporate spin-off.

When Holmes reappeared in The Final Problem, Watson demanded to know how his friend had ever escaped the Reichenbach chasm.

As Holmes recounted, "well, then, about that chasm. I had no serious difficulty in getting out of it, for the very simple reason that I never was in it."

Instead, in an effort to fool the rest of the world, Holmes managed to scale the cliffs above him and hide until the hubbub died down. Then he made good his escape - only to reappear at the most opportune time.

Like Holmes, software avoided the finality of the chasm. And like Holmes, the sector has reappeared as a big profit opportunity... at a most opportune time.

And we're going to keep finding the best profit plays for you.

About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish… and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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