Editor's note: When you understand the underlying fundamentals of a business, it's much easier to take advantage of "Mr. Market's" mood swings...

Sometimes, shares of good companies fall due to macro trends or certain "forced selling" situations. But if you know what to look for, when these scenarios take place, you can buy great businesses at fantastic prices.

Other times, Mr. Market falls in love with a particular corner of the market... but doesn't immediately catch on to all of the opportunities within the space. That's true with Software as a Service ("SaaS") stocks today...

As Stansberry Venture Value editor Bryan Beach explains in today's Masters Series – adapted from the January 29, 2020 edition of our free DailyWealth e-letter – SaaS is one of the market's hottest sectors. That's why finding the right stocks in this space is so important today...

You Can Still Make Big Money in Software... If You Know Where to Look

By Bryan Beach, editor, Stansberry Venture Value

Guidewire Software (GWRE) is the one that got away.

The market loves this software giant. While growth has slowed slightly in the last couple of years, Guidewire's revenues steadily compounded at a rate of 15% per year for more than five years.

It's no wonder the stock is up roughly 865% since it first went public... a return that trounces the overall market (up "only" 246%, including dividends, over that span).

Back then, I wrote for our company's large-cap service. I didn't have an outlet for high-growth, tiny companies. So I wish this were still a small company just starting out today. Now the big gains are over, and the stock is fairly expensive.

Finding stocks like Guidewire – before they skyrocket – has become an obsession for me. Fortunately, we have other opportunities. You just have to know where to look...

You see, Guidewire is a special kind of software company. The market loves this sector right now, and it has bid up prices accordingly. Investors can still make life-changing gains in stocks like these... but you have to find the "hidden" names – the ones the market hasn't caught on to yet.

Today, I'll show you why this is one of the market's hottest sectors... and why it's so important to buy the right stocks in this groundbreaking field.

Guidewire's co-founder Marcus Ryu once called his business "one of the largest vertical Software as a Service ("SaaS") companies in the history of software."

That's probably an overstatement. But any kind of SaaS business is enough to make the market fall in love...

Roughly a decade ago, most software companies sold "perpetual licenses." This means customers had to buy both the software and the hardware on which to run it. Customers also paid a service fee to have the software installed... then paid a support fee every year to have access to a customer help desk and to receive the latest bug fixes and software upgrades.

Wall Street used to love the perpetual license model because companies would earn a large chunk of revenue when they sell the initial license. The downside was that the sales could be lumpy. (Guidewire, when it first went public, sold "perpetual" licenses.)

But times have changed...

Wall Street loves something else, now – the SaaS model. Instead of buying a license for the software, SaaS customers essentially rent the software. A company loads its software product on servers that it maintains, and the customer uses the software via the Internet.

Customers like this arrangement because they don't need to buy or service their own hardware. Software companies like it because SaaS revenue is less lumpy and more predictable...

And the stock market loves it because the SaaS model is incredibly "sticky," meaning customers tend to renew year after year. So as long as the company is relatively successful at booking new customers, revenues naturally pile up over years and decades.

The market loves the SaaS sector now. In my Stansberry Venture Value newsletter, we have been maintaining a fascinating study about this corner of the market...

We track more than 60 SaaS initial public offerings ("IPOs") that took place since customer-relationship software company Salesforce (CRM) went public in 2004. (Salesforce is credited with popularizing the SaaS model.)

The results were staggering...

On average, SaaS companies have returned more than 757% in the years following their IPOs. That works out to an annualized return of 67% per year.

However, those numbers assume you could have gotten in right at the IPO price. Most folks didn't get in that early... So we reran the analysis assuming you bought shares in these 60-plus businesses 30 days after their IPOs.

It turns out, even if you missed the excitement of the initial "market pop," you still would have earned more than 518% – or 56% annualized gains.

I want to reiterate... this is both the duds and the darlings. And this study's eye-popping returns didn't even count Guidewire's 750% return. (The company isn't a pure SaaS business, so we didn't include it in our analysis.)

But the glory days of easy money are over. You can't buy both the duds and the darlings today and expect to make these kinds of profits...

SaaS companies have become expensive. Most of them have rich price-to-sales multiples of up to 30 times revenues, versus two to 10 times revenues for companies that still operate under the perpetual model.

That's why we've been looking for the "hidden" SaaS companies... the ones that the market hasn't spotted yet.

And the good news is, you haven't missed this trend at all...

The COVID-19 pandemic took an already unstoppable technology trend that was creating millionaires and accelerated it... That's because this technology has become essential to our economy and even national security, almost overnight. And it's what has allowed all of us at Stansberry Research to keep sending you our investment research even as our employees continue to work from home.

Looking forward, there's no question this group will continue to offer some of the best investment opportunities in the world.

That's because companies that execute this model well are virtually guaranteed decades of consistent revenue with minimal operating costs. They're reliable, cash-producing businesses that also happen to occupy a skyrocketing corner of the technology industry.

Better yet, most of these companies are still young. And every year, there are more and more popping up, relatively unnoticed by the general public.

SaaS companies are fantastic businesses. And you can still make triple-digit gains in this corner of the market – while no one else is paying attention – if you make the right bets today.

Good investing,

Bryan Beach

Editor's note: Every year, more and more SaaS companies are popping up, relatively unnoticed. And due to the COVID-19 pandemic, even more businesses are getting on board the trend – or getting left behind... The sector is expected to nearly double by 2026.

In his Stansberry Venture Value service, Bryan recently uncovered three "hidden" SaaS opportunities that could soar over the long term. He believes the massive surge they could see in the coming years could be one of the most lucrative opportunities you'll ever find in the markets... But you must act fast, before the opportunity disappears. Learn more here.