A Bet on Indian Outsourcing… And New Options in “China’s Twitter”

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

But that turned out to be a mere blip in the relentless progress of global outsourcing companies. In 2000, the Indian software and outsourcing business stood at a mere $5.7 billion. Today, that sector has grown by more than 10-fold, coming in at just over $60 billion a year. And a study just released by Gartner has confirmed that India remains the world’s favorite destination for offshore outsourcing.

This week’s Global Bull Market Alert pick, New Jersey-based Indian outsourcing play Cognizant Technology Group (CTSH), is a bet that after a strong 2010, this sector will continue to yield big profits for investors. Here’s why I think CTSH, a U.S.-based company with more than 75% of its 100,000-plus employees based in India, is set to continue performing well as the global economic recovery gains momentum.

Cognizant does more than just staff low-end call centers, or process online catalog orders. Cognizant’s workers test drugs, develop software and engage in a host of other sophisticated activities. As global growth picks up, companies need to allocate more work to more people. At the same time, these same companies are reluctant to hire new employees. Cognizant offers the perfect solution.

So what’s Cognizant’s secret? High operating margins that consistently exceed 20%, thanks to low-cost software development centers and employees who are located in India — with a dash of Argentina, China and Hungary thrown in for good measure. And although they are rising, Indian salaries still are a fraction of the starting-level base pay for a U.S. programmer.

Cognizant’s strong position is reflected in its consistently strong performance. Sales grew a whopping 43% last quarter, and earnings per share jumped by 44%. Analysts expect earnings per share to hit $2.67 for 2011. Based on Cognizant’s consistent outperformance of expectations, I think this number might end up closer to $2.90. We’ll get a hint of what’s to come when the company announces Q4 earnings on Feb. 7.

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Cognizant also recently authorized a share repurchase program of up to $150 million of the company’s common stock during the next 12 months. That indicates management’s own confidence in the company’s shares.

So buy Cognizant Tech Solutions (CTSH) at market today, and place your initial stop at $64.50. If you want to play the options, I recommend the April $80 calls (CTSH110416C00080000), which last traded at $2.77.

On Dec. 27, you were stopped out of your position in Credicorp Ltd. (BAP) for a modest gain of 2.58%. We also turned a profit on Dec. 13, when we stopped out of the ProShares UltraShort Euro (EUO) for a gain of 2.75%.

As we are at the cusp of a traditional new year’s rally, I am recommending that you buy some more options in Sina Corporation (SINA) — specifically, the March $72.50 calls (SINA110319C00072500).

Otherwise, you’ve had 10%-plus bounces in several oversold positions, including Bank of Ireland (IRE) and North American Palladium Ltd. (PAL). Spreadtrum Communications, Inc. (SPRD) hit record highs as well. With the first two weeks of January traditionally a strong time of the year, look for this trend to continue.

Portfolio Update

China MediaExpress Holdings (CCME) has traded flat during the past two weeks. This stock should pop nicely when the shorts in the stock are squeezed out. CCME is a BUY.

iShares MSCI Chile Investable Mkt Idx (ECH) ended the year back up near the record level it hit on Dec. 20. Chile reported an earthquake measuring 7.1 on the Richter scale yesterday, but there appears to be little damage. ECH remains a BUY.

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Bank of Ireland (IRE) jumped 10.87% over the past two weeks. IRE’s example shows why it’s important to pick the right stock. While IRE is holding on, rival Allied Irish Bank (AIB) has been nationalized and is expected to be de-listed from stock exchanges in the next two months. If one bank will make it, it will be IRE. But the risks remain there. IRE is a speculative BUY.

Ivanhoe Mines (IVN) is behaving poorly, and now is near the bottom of its trading range, and not far off of its stop price of $22.00. You’ve already sold off the bulk of your options for some big gains. Although there is no reason to think this stock won’t recover over the medium term, it definitely is running out of gas. IVN is a HOLD.

Melco Crown Entertainment Limited (MPEL) continued its recovery. Macau’s latest gambling-revenue figures continue to impress. For the month of December, it was up 66% from a year earlier to 18.88 billion patacas (US$2.36 billion). For 2010 as a whole, revenue soared 58%, far exceeding earlier estimates. Asia’s Las Vegas is a BUY.

North American Palladium Ltd. (PAL) jumped a solid 10.16% over the past two weeks. With Palladium one of my favorite commodities for 2011, PAL remains a BUY.

Sina Corporation (SINA) continued its short-term pullback. As we are at the cusp of a traditional new year’s rally, I am recommending that you buy some more options — specifically, the March $72.50 calls (SINA110319C00072500). “China’s Twitter” is back to a BUY.

Spreadtrum Communications, Inc. (SPRD) hit a record high of $18.60 this past week. With momentum solidly behind it, this Chinese semiconductor manufacturer and bet on technology remains a BUY.

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Silvercorp Metals Inc. (SVM) jumped 3.6% in the past two weeks, as it paid out a dividend of 2 cents per share on Dec. 29. With silver outperforming gold, and some analysts predicting silver prices of $125 per ounce, as the world’s lowest cost silver producer, SVM remains a BUY.

Uranium Energy Corporation (UEC) jumped 7.86% during the holidays. UEC’s price target was raised by Rodman Renshaw to $7.50, even as the firm upped its uranium price target to $75 per pound for 2012. The bounce in uranium has begun. UEC is back to a BUY.

P.S. Don’t miss out on The World MoneyShow Orlando, February 9-12, 2011, at The Gaylord Palms Resort. This event will be your one-stop resource for the education, research and advice that you need to make smart investment decisions in 2011 and beyond. Join me there and hear leading experts reveal where they see growth opportunities in stocks, bonds, ETFs, commodities and options. Click on this link to The World MoneyShow Orlando to register or call 800/970-4355. Be sure to provide priority code 020758!

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