Dayanand Menashi

Which IT Outsourcing Stock is the Best?

Madhusudan,
I agree with your point that the core competance of offshoring gained by the Indian IT outsourcing heavy weigths cannot be mimmiced by the MNCs in few years. They would take years before they can achieve expertise in outsourcing field.

Coming back to your point on which stock is best for investment, it should be kept in mind that not all good companies are good stocks to invest. The golden rule of investing is to figure out "IS THE STOCK UNDERVALUED COMPARED TO ITS INTRINSIC VALUE".

In order to explain my point: Just consider the case of Microsoft. It is one of the best companies in the world. Their growth has been phenomenal in recent years (24% growth compounded annually).Following is their growth of net income last five years.

2002 $5.3bn
2003 $7.5bn
2004 $8.1bn
2005 $12.2bn
2006 $12.5bn

Now looking at the stock price, it was $30 in may-2002 and was around the same price in May-2007. The reason being the stock has been overvalued last few years and the market has been contantly correcting its value by reducing its P/E. Which during the dotcom bust was around 84 and has come down to around 20 now.

Following are the P/Es of some of the leading outsourcing companies.

Infy P/E = 28.5
Wipro P/E = 27.4
Cognizant P/E = 36.3

IBM P/E = 17.9
ACN P/E = 19.5
EDS P/E = 18.2

I guess your analysis should be more on evaluating the P/E of the above mentioned stocks and figuring out if they would remain the same in near future.

visit me @ annualreportanalysis.b...