Will Infosys Survive The Economic Downturn?

NEW YORK (TheStreet)--If you're a current Infosys (INFY) investor, Wednesday's earnings release and subsequent gap lower in price may have you wondering if chasing growth is such a great idea.

Infosys has lost about 11 percent of its market cap from Wednesday's close. The loss in market cap isn't the result of an earnings miss. Infosys reported 73 cents a share, in line with estimates and an improvement of 6 cents (8.2 percent) from 67 cents during the same period last year.

Unfortunately, what truly captures Wall Street's attention is guidance. Infosys was already trading below the widely followed 200- and 90-day moving averages, adding fuel to the liquidation based on chart technicals.

In my Infosys earnings preview I warned about guidance. Investors looked for at least $3.08 in earnings (for ADRs) for the year, and Infosys is guiding lower towards $3.03 for a year-over-year growth of 1%.

Revenue for the current year is expected to be at least $7.34 billion according to the company, while the average estimate was $7.47 billion based on 15 analysts. Despite Infosys' efforts to maintain its margin, earnings in the latest quarter was affected by a sharp 3.7% drop in billing rates. The falling Indian rupee against the dollar hindered Infosys' growth rate. In constant currency terms Infosys is growing at 6%, nevertheless after adjusting for the strength in the U.S. dollar the growth is cut to 5%.

INFY Chart INFY data by YCharts

The chart to watch for Infosys is the monthly chart. In the monthly chart, you can find this month's drop moving through the 60- and 90-month moving average. Both these levels offer support and resistance. More important, both offer a history of reactions with price retracements that suggest Infosys will once again trade above $40 soon. The next level of support doesn't come into play until $22. Infosys is far from testing the key support.

Revenue is a bright spot for Infosys. Infosys is running at a full sprint with revenue hurtling over $7 billion annually. That is an extension of over 50 percent over 2010. Infosys' management blames reluctance of corporate buyers to purchase due to the economic situation. Based on sales it appears reasonable, and likely a short-lived obstacle.

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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