Newsletter guru Jim Oberweis says he’s finding value in software firms that have competitive “moats”.

In his latest Forbes column, Oberweis says companies with extremely predictable earnings and a high growth rate command higher price/earnings ratios from investors. He uses three criteria to assess a company’s future earnings potential:

• Are revenues recurring?
• Does the company have a sustainable competitive advantage?
• Will profit margins fatten as sales increase?

“Software-as-a-service” companies are good examples of firms with strong recurring revenues, Oberweis says.

“These firms offer their products for periodic licensing fees rather than as one-time purchases,” he explains. “Once products are implemented they become ingrained with customers, who generally continue to renew.”

Software companies are also fertile ground when looking for companies whose margins will increase when sales increase, Oberweis says. Development costs tend to largely be fixed, so new sales have a big impact on profits.

Oberweis also discusses how he defines “competitive advantage”, saying such firms have “(1) superior products; (2) high barriers to entry for competitors; and (3) high switching costs in the event that the first two hurdles are eclipsed.” And he offers a few picks that meet his earnings assessment criteria.