Pro Analysis

Morgan Stanley gives top software stock picks

The GoDaddy banner hangs outside of the New York Stock Exchange as the website hosting service makes its initial public offering on April 1, 2015 in New York City.
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The GoDaddy banner hangs outside of the New York Stock Exchange as the website hosting service makes its initial public offering on April 1, 2015 in New York City.

Morgan Stanley on Wednesday released a list of its favorite software stocks, citing three investment themes that could pay off in the months ahead.

"Our survey work suggests the strong demand environment is set to sustain into the back half of 2016 and even with the strong rebound, software valuations remain reasonable versus historical levels," wrote equity analyst Keith Weiss in a research note.

He points out that software stocks are up 13 percent year to date compared with a gain of 6 percent for the S&P 500, as consolidation in the industry through mergers and acquisitions lured investors into the sector.

"Continued strong secular tail winds, increased activism in the space and the return of software M&A all helped to support the bid for software," said Weiss, who believes the outlook for the industry remains attractive.

Here are the three investment buckets from Morgan Stanley, along with the specific plays from the firm: