50+ Tactical Trade Ideas: Software Upside

From the TightSpreads Substack.

Many have argued Software P/E ratios are at historic lows, hence are great buying opportunities. An argument was made that this does not necessarily mean that they are a good buy. Their low P/E ratios reflect a higher risk future with uncertainty for which companies will be cannibalized by the evolution and adoption of AI. I subscribe to this rationale, but I do see the tactical upside in going long a certain set of software names for their own idiosyncratic edge and extreme short crowding.

Hedge funds — especially long/short equity and quant pods — are more short than at any point in the past 1, 2, or 5 years. They’ve added to shorts even as prices fell hard last month. No covering. That one-sided positioning creates real “gap risk” to the upside, and it’s exactly the kind of asymmetry smart hedgers love.

This post walks you through MS provided data on crowding in specific names that are tactically positioned for the most upside. There are 50+ ticker that translate to high-reward with moderate risk tactical investments below due to extreme positioning. This would be high risk and high reward, but 75% of the names below are at their max short interest level. As soon as one piece of positive news or a market unwind occurs, these extremely crowded institutional trades will unwind.. sending stocks soaring.

Note, the following data comes from data from MS specifically. This is an excellent proxy for broader institutional (hedge funds, etc) positioning, because MS is a top bank that holds relations with most firms on the street.

This is available to Premium Subscribers of the TightSpreads Substack.