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Sell Infosys Ahead of Earnings

The company issued revenue guidance for full fiscal-year 2014 to come in the range of 6% to 10%, which was in line with expectations. However, I didn't see much, if any, confidence at all that the company had the formula to fix the company's eroding margins, which has been one of Infosys' biggest struggles. In that regard, management expressed difficulty in making short-term margin predictions, which suggests to me that things are not going to get better any time soon.

I'm trying to find a silver lining here somewhere, but management has stopped short of outlining how Infosys plans to overcome its lack of leverage against IBM and Accencure. Making matters worse, Accenture just issued fourth-quarter revenue and earnings-per-share guidance that were 7% and 2%, respectively, below Street expectations. This tells me that aside from trying to mitigate margin and pricing pressure concerns, Infosys may have a tougher second half of the year, too.
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The disappointing part about all of this is, the stock price is very attractive. But I just don't have the confidence to recommend it at this point. Although I do believe that IT spending in the U.S. and across the globe will rebound, I question how much of that market Infosys will be able to secure.

Make no mistake, IBM, Accenture, Cognizant and the like, are all anticipating this same recovery.

In that regard, I don't see how it makes sense for Infosys management to maintain its current strategy. The company should look to expand into emerging markets to boost revenue.

Along those lines, it's equally important to try to assess how much profitability management can secure from the business it is able to win, regardless of which direction it takes.

There are clearly more questions than there are answers. In these scenarios, I've found that it's best to stay away from the stock until the business gives better signals.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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