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Will Infosys Survive The Economic Downturn?

Infosys Chief Financial Officer V. Balakrishnan stated the U.S. is "facing a fiscal cliff," and added that Infosys has limited revenue exposure to General Motors (GM), whose IT chief recently made a comment that suggests the automaker is cutting back on outsourcing spending in its technology budget.

TheStreet's Timothy Collins wrote a valuable Real Money Pro article about how to use options to play the earnings release titled Two Earnings Plays to Watch . (You need a Real Money Pro subscription, but if you don't have one take a look at the free trial offer so you can read it.)

Based on my experience with gap-downs following earnings misses similar to Infosys, investors will see short-term lows Friday or Monday. Thursday's low testing $38 with a strong bounce higher suggests it won't take much time for the market to figure out the first knee-jerk reaction may be overdone.

Bargain hunters and short-sellers covering positions could push the price up quickly in relation to the gap down price this week. Looking at the chart, I expect short-term resistance near $40 and again at $42. Round numbers often attract like a price magnet and repel, causing a bounce.

Expect a lot of volume to trade near $39-$40 a share, but also be prepared for bargain hunters to start positions under $38 as an entry. Infosys doesn't have debt (relative to the cash on hand) and the price-to-earnings multiple is not out of line for the growth rate and well under 15.

If you are looking for Thursday's drop to signal a buying opportunity, you may find early Friday or next week to offer the best opportunity. There is no hurry jumping on board with Infosys. Stocks dumped as a result of poor guidance outlooks like this one take time for sellers to rotate out of and buyers to find value. Watch for the second break above $42 as the one that "sticks."

Two other very good choices to look at in the Software & Programming space are Microsoft (MSFT) and Oracle (ORCL). Both companies are old school technology, but offer real value for investors seeking safety, growth, and dividend income.

MSFT Chart MSFT data by YCharts

Microsoft and Oracle have revenue growth at a slower rate than Infosys. However, the starting point numbers are much greater. This chart does help illustrate Infosys' ability to execute.

INFY Revenue Chart INFY Revenue data by YCharts

For stability, I am a big fan of Microsoft and, to a lesser extent, Oracle. Microsoft offers a 2.7 percent dividend. Oracle offers a dividend, but it's less than one percent. I like buying on both using put options as an entry vehicle.

What's the best play with Infosys? There should be a very attractive trade coming up Friday and or Monday. Near the end of the day, if still trading lower, sell out of the money puts. Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time the stock should bottom.

It's not one to get greedy with, hold on for a few days and as the implied volatility falls (hopefully with a nice dead cat bounce) exit out with a quick hit and run for profits. Otherwise for longer term investors, the best play is to wait until a few weeks to ensure Infosys has found a base of support and we are closer to the next earnings release.

At the time of publication the author did not hold a position in any stock mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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