JPMorgan shared with its clients the firm's best software stock picks with the biggest profit margin expansion potential.
The firm cited how the average software stock in its coverage universe is up around 30 percent this year compared with the S&P 500's 12 percent return.
"Current valuations in our space tell us we either need to see growth acceleration, a prolonged sideways move as valuations are normalized, or if we get a market downturn our coverage is at risk of a significant negative move," analyst Sterling Auty wrote in a note to clients Tuesday. "But there are a couple of names that still stand out as being attractive under [a] margin expansion framework."
The analyst said expanding profit margins are the most important driver of stock performance in the sector.
"Interestingly, in a sector where much attention is paid to growth and acceleration, it was margin improvement that was most commonly associated with multiple expansion," he wrote.
Here are the three overweight-rated companies that JPMorgan recommended with "significant margin expansion" potential and their year-end 2018 price targets.