Analyst firm Canaccord Genuity has named four favorite software stocks going into earnings season.



NEW YORK (TheStreet) - Analyst firm Canaccord Genuity notes that software stocks have been rallying in January, and its four favorite names going into the fourth-quarter earnings season are salesforce.com(:CRM), Constant Contact(:CTCT), Carbonite(:CARB) and Monotype Imaging(:TYPE).

Canaccord analyst Richard Davis selected the names based on their valuation, core fundamentals and near-term upside as the companies get set to report fourth quarter earnings.

Problems in Europe could create buying opportunities in these names, according to Canaccord, particularly for patient investors.

Read on for more details on Canaccord's top software picks:

Salesforce.com

Share price: $114.13

Canaccord Genuity believes Wall Street analysts did the cloud software company a "disservice" last quarter when it missed calculated billings. "Single quarter calculated billings are variable (changes in currency, changes in invoicing duration, accounting of acquired revenues, etc.) and not necessarily indicative of a firm's outlook," explained Davis, in the research note. "Revenue and cash flow trends are positive, and we think a look at the firm's off-balance-sheet backlog in Q4 could produce an upside surprise."

Salesforce.com is expected to report earnings on Feb. 16, and analysts polled by Thomson Reuters expect earnings of 40 cents per share on revenue of $622.5 million.

The research firm recommends buying shares now, as shares are cheap, trading at 4.7 times enterprise value divided by revenues, and 27 times 2012 free cash flow.

There are, however, potential caveats to buying shares, says Canaccord. Salesforce.com has increased its headcount by 40% and this may not payoff if the new employees are not as productive as previous ones. The analyst firm also notes that the software maker does not have free cash flow support, and could move lower.

Canaccord sees six-month upside potential of $135 per share in salesforce.com, almost 20% upside from current levels.

Salesforce.com sales have lost 13.45% over the past 12 months, but have gained 12.81% year-to-date, according to Google Finance.

Constant Contact

Share price: $26.07

Canaccord says that 2011 was a "lost year" for the on-demand marketing company, mostly due to a social CRM product being at least six months late.

However, the service is now live, and the analyst firm believes that Constant Contact management will speak about this favorably next month, explaining how they plan to monetize the product.

Shares trade 22 times expected 2012 earnings, and Canaccord believes a few tidbits of good news may result in potential upgrades from research firms that have downgraded Constant Contact.

Should the Social Media CRM product fail to help customer additions or help increase ARPU (average revenue per user), then Canaccord believes shares could fall into the "mid-teens." Its 52 week low is $14.46, set back on July, 29, 2011.

Canaccord sees upside potential over the next six months to $33, approximately 25% higher than where shares are currently trading.

Constant Contact reports earnings on Feb. 2, and analysts polled by Thomson Reuters expect earnings of 24 cents per share on $56.96 million in revenue.

Year-to-date shares have returned 13.44%, but over the past 12 months, shares have lost almost 7%.

Carbonite

Share price: $10.43

Online backup specialist Carbonite went public in August 2011 at $10 per share, and Canaccord believes shares are attractive, now that they are close to the IPO price.

Davis believes Carbonite is likely to be the second fastest-growing public SaaS (software as a service) company this year, behind Cornerstone OnDemand(:CSOD).

"Like any good IPO, near-term numbers are likely to be sufficiently conservative that Carbonite should have several more quarters of meeting or beating expectations," Davis noted in his report. The analyst believes now is a good time to get bullish on Carbonite, but would be bearish on the name at $ 9 per share. He sees six-month upside to Carbonite's stock at $14, close to 35% higher than current levels.

Davis notes that Carbonite does not make money, and could be subject to selling pressure should investors get nervous.

Year-to-date, shares have lost 5.5%, and have lost 15.06% since shares were open for trading.

Carbonite reports earnings on Feb. 9, and is expected to lose 26 cents per share on $15.93 million in revenue, according to Thomson Reuters.

Monotype Imaging

Share price: $14.75

Monotype Imaging potential acquisition of the font technology component of Bitstream(:BITS) would strenghten its intellectual property, allowing the company to grow faster, notes Canaccord's Davis.

The analyst firm believes that a deal could add at least 2 cents per share to the imaging software specialist's earnings in 2012, and 7 cents in 2013. With roughly half of the company's revenues tied to royalties from high-end laser printers, there is the potential for revenue risk should the economy slow down. The firm does note that new initiatives, such as Web Fonts, GUIs, display imaging technologies for new platforms could help accelerate organic growth.

It sees the potential for shares hitting $18 over the next six months, 22% higher than current levels.

Shares have lost 5.52% year-to-date, but have gained 21.64% over the past year.

Monotype Imaging is expected to report earnings on Feb. 16, and is expected to report earnings of 23 cents per share on $31.62 million in revenue.

Interested in more on Monotype Imaging? See TheStreet Ratings' report card for this stock.

Check out our new tech blog, Tech Trends.

--Written by Chris Ciaccia in New York

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