Stock picks to buy: 2 disruptive software firms set to lead industry

  • Chris Armbruster is betting that the software industry will drive returns in the next decade.
  • He detailed to Insider his bullish wagers on two firms he sees disrupting the landscape.
  • Armbruster’s Virtus KAR Mid-Cap Growth Fund has returned 261% over the last five years.
  • Visit the Business section of Insider for more stories.

Chris Armbruster says he looks to hold the stocks he adds to the Virtus KAR Mid-Cap Growth Fund (PHSKX) “forever.”

That isn’t literally the case, of course. When stocks in the fund he co-manages alongside Doug Foreman graduate to large-cap status — meaning they swell to market caps exceeding $10 billion — he has to cash out of them. Such was the case with companies like Netflix and Illumina, which the fund had relatively early stakes in. 

But Armbruster is certainly in it for the long-haul when he steps into a stock. Because of this, he and Foreman look to identify the long-term trends in business and society that will drive returns — and then bet that they will.

It’s worked in recent years. The fund has returned 261% over the last half-decade, better than 96% of similar funds. Since the market’s bottom last March, it’s returned 117%, beating the S&P 500 by 45%. 

So what is Armbruster betting on now, especially as we approach a post-COVID economy? Perhaps surprisingly to some, he’s still bullish on the same trends that have driven gains during the pandemic: cloud computing, digitization of IT infrastructure, and digitization of customer interface. 

Most especially, he likes the software industry.

“Software businesses just in general really lend themselves to being high quality businesses,” Armbruster told Insider on Monday. 

“You have an operating model that lends itself to high margins and gets good cash flow,” he continued. “And a lot of times once software is installed, if it’s kind of a mission-critical piece of software and people get trained up on it and it becomes part of the workflow of a company, it becomes very hard to rip out and make that change.”

2 disruptive software stocks to buy

Armbruster told us two software names he holds in the fund that are among those he likes the most in the years ahead, and which he said he expects to be industry leaders a decade from now. Both of the names have banks as clients, he said, and will benefit from a rising interest rate environment that is better for banks’ bottom lines and willingness to invest in their own growth.

One of the companies is nCino (NCNO), whose software helps banks with things like customer relationship management and credit analysis. Fourteen top banks have adopted the software, Armbruster said. 

“I think what’s important is the traction they’re getting,” he said. ” Once you start to get reference customers, other banks start to trust you as a vendor.”

Armbruster said the nCino’s valuation looks extended by traditional measures, but that he’s still excited about its upside. 

“Our belief of what it can grow into is different than I think what the Street is expecting or what they’re willing to give it credit for,” Armbruster said. “We’re comfortable in the name, and we really think this can grow into a very large company that is an absolutely mission-critical component for a lot of the largest banks in the world.”

The other company is Bill.com (BILL), which has a user-friendly software that helps smaller businesses keep track of their finances. 

He pointed to the fact that major banks are re-selling the software to clients — instead of coming up with a competing product — as a tailwind for the company. 

“So when you go into Wells Fargo, for example, as a small business and you want to have this sort of electronic built-in functionality, they will sell you the Bill.com software,” Armbruster said. 

He continued: “They label it as Bill Manager at Wells Fargo, but Bill.com is the one that’s running the back end of that software, which is a huge validation point for how good of a platform that they’ve built that these big banks instead of trying to compete with them just said…’We’re going to partner with you and recycle your product and use you for our commercial customers.'”

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