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Cognizant Nears, ExlService Hits Record As Outsourcing Stocks Rise

You can almost hear the conversation: “That team did such a great job on that project,” said CEO Joe Fiction, “let’s give them the entire product line to operate and save some dough.” Converting traditional business process outsourcing (BPO) into business process management (BPM) framed the Indo-U.S. BPO Summit this week in Orlando, Fla., sponsored by the Indo-American Chamber of Commerce and India’s National Association of Software and Services Companies ( NASSCOM). Billed as a first-of-its-kind conference, the timing couldn’t have been better, as many of the outsourcers were trading near record highs after a slow start to the year. Service-level agreements “are changing to reflect this (BPO-to-BPM conversion), becoming more business-outcome-focused and leading the market to shift from a pure RFP (requests for proposal) procurement approach to a managed-service, end-to-end solution offering,” said Cowen analyst Bryan Bergin in a research note Friday. “This drives the shift from BPO to BPM and a strategic partner position. The effect of this evolution increases the stickiness of the revenue stream but also ties the fortunes of the provider even closer to that of their client base.” Many BPOs were represented at the show, including  Genpact ( G ), Wipro ( WIT ), Convergys ( CVG ) and WNS Holdings ( WNS ). But Bergin focused on Cognizant Technology Solutions ( CTSH ) and ExlService Holdings ( EXLS ) for their “industry depth and value-added service approaches that position each to win in this evolving landscape,” he said. Cognizant stock was up a fraction in afternoon trading in the stock market today , near 63 but still 10% off its Oct. 28 record high. ExlService stock was up more than 1%, near 52.50, just off of Wednesday’s all-time high of 52.92. Wipro stock was up 1%, 5% off its 52-week high. Genpact stock hit a record high Friday and was up nearly 1.5% Friday afternoon. WNS was up 3.5% Friday, just 7% from an eight-week high touched Nov. 2. Infosys ( INFY ) stock was up more than 1% and near a five-year high. Hewlett Packard Enterprise ( HPE ) stock was up 3% and hit a new record high Friday. “We favor EXLS for its traditional BPO model pairing with an operations consulting business and rapidly growing analytics offering,” Cowen’s Bergin said. “CTSH is building its BPM via a vertical-specific approach, leveraging its scale and expertise in health care and financial services to drive its (approximately) $1 billion business that is growing faster than the company average. We favor such approaches in the evolving BPM landscape.” Cowen carries ExlService with an outperform rating and a 63 price target. Cowen too rates Cognizant as outperform, with a 65 target. ExlService is a member of IBD’s Commercial Services-Outsourcing industry group, which hit a record high Friday. Cognizant is a member of IBD’s Computer-Tech Services industry group, which was trading 9% off its all-time high set Nov. 5. Both companies are near the top of their heaps for overall stock and operating performance, with ExlService earning an IBD Composite Rating of 98 out of a best possible 99, and Cognizant a 93 CR.

Financial Software Makers Help Customers Become More Efficient

The financial software industry group has had a good run since the 2008 financial crisis, but has paused in recent months. It might be setting the stage for another advance, led by several stocks, most conspicuously Ellie Mae ( ELLI ). The group ranked No. 58 out of 197 in Friday’s IBD, hardly high enough to warrant special notice, except that five of the 15 companies in the group have a Composite Rating to the north side of 90, putting them in the top 10% of the universe of U.S. stocks, based on a variety of proprietary IBD measurements. Ellie Mae hit a new high Thursday, showing plenty of signs of institutional buying as evidenced by a high Accumulation/Distribution Rating. It has a Composite Rating of 98. The company offers its customers — who include mortgage companies, credit unions and banks — a unified platform, called Encompass, designed to streamline the origination and underwriting of loans in an efficient way. Since the company came public in 2011, mortgage writing has been essentially flat. But the company has managed to grow earnings and revenue at an impressive rate as more players in the mortgage market use its tools. It claims that 1,700 out of 8,000 participants are its customers, including seven of the top 25. But growth might be starting to slow. Earnings per share in the most recent report, although blowing away estimates, was just 16% higher than a year earlier, and analysts are expecting a 6% decline in the next report. Another company with ties to the mortgage business, at least partly, is Fair Isaac ( FICO ), which is known for producing the FICO scores that gauge consumers’ creditworthiness. More broadly, the company provides analytics software to help manage risk and fight fraud. The company says that 2.5 billion credit cards globally use Fair Isaac’s FICO anti-fraud systems. Shares of Fair Isaac hit a new high Friday, and the stock also shows signs of institutional buying. It’s extended from any buy point and has been on a run since reporting better-than-expected earnings Jan. 29. The stock was up 16% the next day. Earnings have been growing at a steady rate the last few years, but revenue growth is mostly a single-digit affair. Analysts are forecasting a 25% decline this year, but a 25% increase in 2017. The Composite Rating is 95. Another leader in the group is software publisher Intuit ( INTU ), which makes the familiar Quicken software for personal finances, QuickBooks for small businesses and TurboTax for tax preparation. It’s benefiting from users migrating to the cloud. It says that online customers have grown from 21 million to 29 million over the past three years while desktop customers have declined from 9 million to 8 million. The stock had a bad break last August in reaction to an earnings report and is basing as it recovers from that. Image provided by Shutterstock .

Israel’s ‘Rough Neighborhood’ Forges Leaders Check Point, CyberArk

Check Point Software Technology ( CHKP ) CEO Gil Shwed tipped the domino in 1994 when he unveiled the world’s first commercially available firewall. Ten years later, CyberArk Software ( CYBR ) jumped into the nascent privileged-account security field. Their commonality? Both are based in security-minded Israel and led by men with military backgrounds. Both have also outperformed the sluggish 2016 cybersecurity market that, in January, was tugged down by gloomy guidance from  LinkedIn ( LNKD ) and Tableau Software ( DATA ). Wall Street quickly panicked, fearing a big slowdown in IT spending. IBD’s 41-company Computer Software-Security industry group is down a collective 11% this year. Check Point stock withstood the fall and is up 6.6% year to date. CyberArk stock is down, but by just 6.4%. That’s not to say non-Israeli cybersecurity firms didn’t also buck the trend. Symantec ( SYMC ) stock is up 9%. Shares of Fortinet ( FTNT ) and  Palo Alto Networks ( PANW ) have fallen a fraction and 8.5%, respectively, also outperforming the sector overall. As the industry recovers, BlueStar Global Investors analyst Joshua Kaplan says investors should turn to the Israeli security software companies Check Point, CyberArk, Imperva ( IMPV ) and Radware ( RDWR ) for innovative products and rising earnings. Israel Steeped In Security Efforts “Israel is in a rough neighborhood. It’s surrounded by enemies on all three sides,” Kaplan told IBD. For that reason, cybersecurity “is a critical part of Israel’s military edge.” Check Point was borne out of Shwed’s Israel Defense Forces (IDF) service, where he was a member of Intelligence Corps Unit 8200. But he began coding long before that: At age 12, he took a coding position at a language-translation software company, according to online news magazine Israel21c . Udi Mokady, too, served in the IDF military intelligence unit before he was tapped to lead CyberArk in 2005. CyberArk made its IPO in 2014, opened at 25 — above the 16 listing price — and ramped 26% in its first two days. (Note that Israeli cybersecurity firms aren’t alone with a military influence at the top. Silicon Valley-based Palo Alto Networks CEO Mark McLaughlin served in the U.S. Army, where he flew an attack helicopter before his 2011 appointment to that security firm’s top spot.) Israel’s innovative tech stems largely from required military service, Kaplan says, noting the silos separating private, public and government sectors are less clear-cut than those in the U.S. Those military skills typically translate well to the private sector. Shwed did as much with his firewall, originally an airtight setup to tie two top-secret Israeli military computer networks. He launched Check Point’s firewall — a software system designed to monitor a network and keep out any unauthorized users — shortly before Silicon Valley-based  Cisco Systems ( CSCO ) entered the perimeter market. Now, Kaplan says U.S. and other firms will have to innovate as quickly as their Israeli counterparts to keep pace. The cybersecurity sector is poised for a shake-up as the industry matures, and a number of companies may not survive, he said. “IT spending is not going to drop, it’s going to stabilize at a higher level than it was before,” he told IBD. “When an industry’s growth starts to slow down a little bit, sometimes there’s forced consolidation and companies that just don’t make it.” Check Point is going to stay ahead of that curve by pushing into the platform market. “Platform” is currently the word du jour for the industry, with pure players and tech giants alike touting their wholesale approach to security. Palo Alto Networks, Fortinet, IBM ( IBM ), FireEye ( FEYE ) and many others market security platforms. “There are going to be several companies who are industry leaders and who gain share,” Kaplan said. “But I do believe Check Point started this initiative first.” Imperva: Not ‘A Household Name’ Cloud-based security firm Imperva also ramped up after its 2011 IPO priced at 18, jumping 47% on day one and peaking last November above 77. Imperva has a heavy focus on data center security. Over the years, though, the stock has had big up and down moves after earnings, Kaplan says. Now that the industry’s highest growth, at least for now, seems to have passed, he says it’s unlikely Imperva will gain much notoriety. “I’m not sure Imperva is ever going to be a household name,” he said. “And Radware, I don’t think it’s ever really going to get that investor excitement that it should have.” But the PureFunds ISE Cyber Security ( HACK ) ETF has helped some under-the-radar security firms get noticed, Kaplan says. “Until the HACK ETF came along, a lot of people probably hadn’t heard of the other three Israeli cybersecurity companies outside of Check Point,” he said. “That’s the reason you want to be invested in these companies. Maybe they weren’t on your radar before, and they should have been.” The PureFunds Cyber Security ETF debuted in 2014 and is down 7% this year, after taking some software-related licks in January. Andrew Chanin, CEO of PureFunds, stresses the fund’s diversification. “Before we launched, there was a lot of demand for investing in cybersecurity, but being it’s a constantly adapting, evolving and changing industry, many people don’t understand the companies, their products and services,” he told IBD. PureFunds tries to do the investing legwork. The HACK ETF currently features 35 distinctive cybersecurity firms, including Check Point, CyberArk, Imperva and Radware. But Chanin questions whether investors know — or care — that the four are Israeli. Israel is an obvious tech hub, “but (the companies) weren’t going around saying, ‘Hey, we’re an Israeli company, use us,’ ” he said. More than ever, big tech companies are taking the security plunge, Chanin says, and acquisition rumors are rumbling, including talk that Check Point might be eyeing CyberArk. “We’ve seen many larger, diversified companies come out and say it’s a goal of theirs to increase their cybersecurity footprint,” Chanin said. “Building something organically isn’t easy and acquisitions could save time and money in that plan.”