This Tech Stock on the Verge of Breakout

Tech-StocksIT Services Firm Infosys Aims to Please Trump

President Donald Trump is all about bringing back jobs to America. In the technology space, which employs a high degree of outsourcing, there are concerns because Trump will radically change the widely used H1B Visa program. A large-cap outsourcing company in the midst of this battle is Infosys Ltd ADR (NYSE:INFY), which is struggling to find ground on the widespread changes that could happen.

Infosys is a major provider of consulting and technology services to companies in North America, Europe, India, and other regions. The company is also a major outsourcer of technology jobs to the U.S., which accounts for over 50% of its revenues.

This poses a big problem under Trump. To try to appease the White House, Infosys announced it would be hiring 10,000 American technology workers and opening four new development faculties over the next two years.

The olive branch put forth by Infosys may or may not be enough to make Trump look the other way, but it’s a good start given how much the President likes the optics of creating jobs.

Advertisement

For traders, INFY stock is down 22% of its 52-week high, but Infosys stock has rallied 6.21% over the past three months and could be heading higher.

The monthly chart of INFY stock shows the indecisive trading. Infosys staged a strong rally from $5.00 in 2009 when the current bull market took form, and it traded as high as $18.00 at the start of 2011.

INFY stock chart

Chart courtesy of StockCharts.com

Infosys then drifted lower to the $9.00 level in mid-2012 prior to a second up wave to $19.00, breaking above its previous high.

Unfortunately, INFY stock failed to hold again and drifted back to the $14.00 level prior to a small rally to the current $15.28.

While Infosys has failed to establish a steady uptrend, there were some positive overtones as Infosys stock recorded multiple higher bottoms over the last eight years.

The weekly chart shows a slight upside trade gap with INFY stock holding the 50-day moving average with a clear eye towards another attempt at testing $19.00. A breakout could establish a new range at above $20.00, but much will depend on what Trump does.

INFY price chart

Chart courtesy of StockCharts.com

INFY Stock Looking to Retest Record High

Flipping over to the fundamentals, they support a higher price for Infosys stock.

Revenues have increased sequentially in two straight years, from $8.5 billion in 2014 to $8.71 billion in 2015 and $9.50 billion in 2016.

The growth is slated to continue at 7.60% and 7.80% to $10.98 billion and $11.84 billion, respectively for 2017 and 2018. (Source: “Infosys Limited (INFY),” Yahoo! Finance, last accessed May 12, 2017.)

There are high estimates calling for $11.27 billion and $12.46 billion for 2018 and 2019, respectively.

Infosys stock is highly profitable with a positive earnings trend and predictions for continued growth over the next two years.

From a valuation perspective, INFY stock is trading at 14.65-times 2018 EPS and has a PEG ratio of 1.42, which allows for a higher share price.

For those familiar with options, there is a wide range of strike prices and expiries. The premiums aren’t that expensive so it wouldn’t take much for a move in INFY stock to return profits for call buyers.

For instance, investors could buy the Infosys $15.00 call expiring in January 2019 for around $1.80. Under this simple trade, the breakeven point is $16.80 or a move of 9.16% prior to expiry (see table below for various situations).

Strike Price Profits/Loss ($)
$10.00 ($1.80)
$12.00 ($1.80)
$15.00 ($1.80)
$16.80 $0.00
$18.00 $1.20
$20.00 $3.20
$25.00 $8.20