Look at iGate for a Holiday Bargain

Includes: GE, IGTE, PTI-OLD
by: Robert Weinstein

I went long iGate (NASDAQ:IGTE) fading the move down thinking the sell off was overdone. It was not and I traded my day back and forth with this stock believing that it would pop higher. I still do believe it will pop back higher - and here are my reasons for thinking so. I don’t hold stocks usually for a long time but I do hold a few and this is one that a few shares may warrant. If I do hold it would be added to Corinthian Colleges Inc. (NASDAQ:COCO) and CitiGroup Inc. (NYSE:C), where I am currently long.

iGate goes on sale just in time for the holidays. People looking for a bargain this time of year may have stood in lines for hours to get a great deal, but one is being handed to those investors looking at iGate. You don’t even have to wait out in the cold.

On the last day of November iGate dropped over 19%, giving investors another kick at the can to get into a company that may become a takeover target at these levels. The real surprise is why the stock fell so far Tuesday. Recently iGate had been climbing higher and higher, rewarding those who owned shares handsomely. It's interesting to see that iGate lost the whole month on the last day of the month. Usually, when I see a massive sell-off it's due to a CEO resigning or earnings not meeting expectations. This sell-off is unique in that it was not bad news that caused the sell-off - it was the possibility of news that the company may be growing too fast. This is about as good a problem as one can ask for when their stock falls further than is comfortable. This is not in my opinion a sell-off due to a company that is no longer worth as much. This was pure panic that the price would trade lower regardless of what the company really is worth.

The surge in volume is what caught my eye with iGate, but it was the key numbers that have me believing that the odds favor going long right in the middle of the storm. It is the panic that allows those with an outlook greater than the next trade execution to really capture something on sale. Some of the numbers that caught my eye include the massive 18% short interest reported on November 15. While the volume was heavy Tuesday, this is a very large short interest in terms of what can cause a short squeeze. My guess is that a lot of shorts did cover today for a very nice gain but I would be surprised to find out that the short interest fell by that much after today. After all, momentum traders will jump on to see what they can get, and with a large gain some shorts will see if there is carry through in the next day or two.

The next number is the amount of debt that the company has. This is really important as it's the level of debt the company is looking at taking on that gave a moment of reflection on iGate to begin with. Currently iGate has no debt. zero, nada, none. While iGate may be looking at adding a lot of debt in relation to the company size, this deal is very far from done and in fact it is my understanding that no ink is even wet, much less dry. So if you are short and you try to become a pig with your gains you may find out that iGate backs away from trying to borrow to do the takeover and the stock jumps $3+ on that news alone. Also in a backward way the price drop actually helps iGate with the purchase if they move forward. IGate's price drop gives management a clear signal to be mindful that they are not to over pay for the acquisition and that they should reflect carefully on what move to do next. I would not consider it out of the question if iGate does move forward to very carefully outline the reasons and benefits to the plan and to show why it works. Either way today becomes a net positive for the company.

If iGate walks away we will own a company with over 10% of the stock price in cash on hand, no debt, a quarterly earnings growth of over 60% year over year, along with an over 50% quarterly growth in revenue year over year that has a forward PE ratio now of 19. That is a lot of love from a company that also allows exposure to the fastest growing economic regions of the world. With centers in Asia, Australia, North America and a headquarters in the US that complies with US standards of accounting, a lot of the danger of investing in foreign companies is removed while much of the potential remains.

There are several larger players in the field that includes iGate. It looks clear to me that by increasing its size and influence, iGate will be able to grow the balance sheet and become that much more attractive to suitors that may also be looking to buy earnings growth. Companies like NTT Data, Hitachi (HIT), Advent International and the Carlyle Group, which all have very deep pockets, may turn their attention toward iGate either with or without the Patni (NYSE:PTI-OLD) buyout. Looking at PTI, it's hard to see how a company doing as well as they are at the current price floating around would devalue iGate, so once again I can only conclude that what started out as profit taking and turned into stop losses kicking in turned into a full fledged panic sale regardless of value that will not last long. Having the overall market down Tuesday only added fuel to the fire. As if kicked one last time when IGTE did start to make a solid comeback the Portugal news hit the wire and the S&P fell fast and hard, taking many with it, including IGTE.

iGate may not have seen the total bottom of the move but my guess is that it is more likely that once cooler heads with a longer-term view take another look, they will either buy into or add on while the holiday season sale is on and not wait until the sale pricing is over.

Disclosure: Long IGTE