Baird staying selective in vertical software, makes four rating changes

Baird analyst Joe Vruwink continues to follow a "bear market playbook" for the vertical software sector and is "staying selective." Historically, the second year following a 30% drawdown has seen software stocks trade flattish, Vruwink tells investors in a research note. There are, however, "outperforming ideas distinguished by" positive revenue and free cash flow revisions, best-in-class retention and expense efficiency in vertical software, says the analyst. His top ideas are Cadence Design (CDNS) and Synopsys (SNPS) for large-caps, Bentley Systems (BSY) and PTC (PTC) for mid-caps, and nCino (NCNO) and Phreesia (PHR) for small-caps. Citing "reset valuations and accelerating" free cash flow, Vruwink upgraded Ansys (ANSS) and nCino to Outperform from Neutral. Citing a more balanced risk/reward following the share outperformance, he downgraded both Certara (CERT) and SPS Commerce (SPSC) to Neutral from Outperform.