Salesforce is surging again — but the best software setups may be elsewhere: One Big Investment Idea

Software stocks are experiencing a resurgence, with Salesforce (CRM) and CrowdStrike (CRWD) leading the charge. Salesforce surged by approximately 20% on Thursday morning following earnings, while CrowdStrike jumped nearly 20%. This software rally has disrupted the dominance of chip stocks. However, the landscape within software is evolving rapidly.

Cybersecurity initially led the initial rally but faltered in August before rebounding strongly on Thursday. Vertical software companies, which specialize in industry-specific tools, have shown steadier, more persistent growth since mid-June. Research by Yahoo Finance looked at 68 software stocks across six categories. The median vertical software stock has gained around 60% since June 22 and remained positive throughout the market recovery.

Cybersecurity's performance has been more volatile, with a 25% gain through mid-July, a 10% dip, another 26% rally, and significant losses after August 13. Analysts are still upgrading sales expectations for several major cybersecurity companies. The positive outlook for cybersecurity hasn't waned because of the recent stock decline, keeping the group viable as the First Trust Nasdaq Cybersecurity ETF (CIBR) has moved closer to its 50-day moving average, a key technical indicator.

The recent winners, such as Salesforce and CrowdStrike, have benefited from strong cash flow and higher stock prices. However, investors should be cautious, as buying the stock with the best earnings reaction can be risky. The most promising opportunities often combine 1) ongoing price strength, 2) improving sales expectations, 3) robust free cash flow, and 4) a price with a good risk-reward ratio.

AppFolio is a notable example, having recovered half of its prior decline and now approaching its 52-week high. While these comebacks are compelling, they do not warrant a rush to buy. Investors should be patient, using technical levels to manage risk and stop-loss orders if the rebound falters. The broader takeaway is that software leadership does not follow a linear path.

The next potential winning investment could emerge after the comeback of a former leader, provided the fundamentals remain robust, rather than simply after the market-wide rally resumes. Jared Blikre is the global markets and data editor for Yahoo Finance. For more detailed analysis of market trends and stock movements, you can follow him on X (@SPYJared) or email him at jaredblikre@yahooinc.com.