Outsourcing Opportunities

 | Apr 25, 2012 | 1:30 PM EDT
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A number of smaller companies are benefiting from the trend toward outsourcing various business functions, rather than hiring full-time employees.

Last week, I wrote about temporary staffing firm On Assignment (ASGN). Hiring temps is another way that companies get the job done, without having to make the commitment to a full-timer or to pay for benefits such as health care.

Consulting and research firms are also beneficiaries of the no-hiring trend. ExlService Holdings (EXLS), a New York-based firm that provides research and analytics services to financial industry clients, is forming a sideways chart pattern, trading in a narrow price range.

The company reports its first quarter on May 2. Analysts have pegged earnings at 36 cents a share on revenue of $104.43 million. That would be a year-over-year improvement of 9% on the bottom line and 43% on the top line.

It already has a good track record of fundamental strength. Revenue growth was 18% or higher in every quarter over the past two years. Earnings grew between 9% and 475% during that time. The 475% year-over-year earnings increase was in the second quarter of 2010. Comparisons have grown a bit tougher since then, with growth levels still solid but tapering to the double or single digits.

The chart is showing good support above its 50-day moving average. However, there are some chart indicators that I like even better. ExlService's 10-day moving average has just crossed above its 20-day line.

That kind of short-term moving-average cross is often a precursor of more price gains.

Of course, the earnings report can spur a big move in either direction. It's not unusual for a stock to either gap higher or get severely punished on the news.

ExlService has a market cap of $871 million, and it is very thinly traded, moving just 158,000 shares a day (on average).

While its former high, reached on Feb. 29, could present an entry point of $28.85, the moving-average cross offers an earlier opportunity for more aggressive buyers. With the major indices still in a downtrend, however, any buys are riskier at this time. In addition, the upcoming earnings report is another event to be aware of.

Another provider of outsourced services is HealthStream (HSTM), which develops Web-based training programs for health care workers. The stock has advanced more than 33% so far in 2012, although it gapped down to finish 5.9% lower on Tuesday.

The plunge followed a first-quarter earnings miss, but there are some positives about Tuesday's chart action.

First, the stock found support right at its 50-day average, which shows that some institutional investors stepped in to buy shares at a lower price and were not discouraged by the earnings news.

Second, after the initial gap down, the stock spent most of the session working its way higher, so a good part of Tuesday's volume was actually due to buying, not selling.

Third, the stock ended the session just above its 20-day moving average, closing above its final price from the week ended April 13.

It's not unusual for a stock to slide after a disappointing earnings report but keep its uptrend intact. One thing to be aware of on HealthStream's chart: It has repeatedly pulled back on higher lows. Historically, that has meant a stock's uptrend may be running out of steam. In the past year or so, however, that characteristic has had less of an impact.

What does that mean for HealthStream?

Although the stock is overdue for a sharp correction that flushes out buyers lacking conviction, recent history shows that a shallow pullback could set the stage for further price gains.

As always, though, general market health looms as a determining factor for many stocks' individual run-ups. A buy point for HealthStream could occur at its prior high, $26.90, or even sooner, depending on how its consolidation takes shape.


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