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Positive Developments To Drive Growth At MHH And HSON

|Includes: Hudson Global, Inc (HSON), MMHTF

The view that better days are ahead for staffing and outsourcing firms has been at least partially validated in recent months, but the rally is unlikely to stop here. In fact, a slew of corporate developments at Mastech Holdings Inc. (NYSE: MHH) and Hudson Global Inc. (NASDAQ: HSON) mean these stocks could surge even higher. Here is a closer look.

Shares of Mastech Holdings, a Pennsylvania based IT staffing firm, have advanced nearly 20 percent over the last three months. It is not difficult to see why the market loves this stock. The company has turned out to be a reliable performer with higher sales and profits quarter-after-quarter. In 2013, the company reported 17.7 percent jump in top line, but profits jumped even more sharply at 78 percent to $3.8 million. This performance continued in the latest quarter as well with a 20 percent increase in top line and 51 percent jump in profits.

Staffing is evidently not a business which can grow at double digits for an extended timeframe and barriers to entry are also not very high. However, the company has done well to restrict itself to IT staffing only, which is a growing segment. In addition, the company's clean balance sheet plays a big role in allowing a larger proportion of revenue growth to filter down to net income. The stock comes across as reasonably priced at a forward earnings multiple of 12.4.

Another staffing stock posting impressive gains recently is Hudson Global, which moved up 12.6 percent over the last month. The company offers permanent recruitment, contract consulting, legal eDiscovery, RPO and talent management solutions to its government and corporate clients. The company's operations have deteriorated substantially in recent years, causing the stock to slump to historically low levels. The late surge is on account of a comprehensive assessment of its operations, which may lead to a restructuring and divestitures of some operations. The company has hired turnaround specialist AlixPartners LLP to provide a comprehensive assessment of operations while Duff & Phelps has been retained to evaluate the possible divestiture of its legal eDiscovery business.

Meanwhile, the company seems to have hit a bottom and appears to be recovering with first quarter revenues and gross profits ahead of Street expectations. The company is at a point where divestiture of the underperforming and low-margin businesses can transform it from an ugly duckling to a swan. While it is too early to say if the company is out of the woods yet; thankfully its balance sheet would not require a massive change as it has little debt.