OUTSOURCING IN NEW JERSEY — PART II

But the recent short, sharp correction in the rip-roaring Indian stock market — and its subsequent stabilization — provides us with another opportunity to cash in on outsourcing, one of my favorite Global Bull Market themes. Indeed, according to consulting firm McKinsey, the outsourcing industry could become for India what the automotive industry was for Japan and oil for Saudi Arabia. And New Jersey-based Cognizant Technology (CTSH), a pick that has already provided subscribers with profits of as much as 240% on the options, is my favorite way to play this global megatrend.

Even in an industry where companies are growing like weeds, Cognizant is in a league of its own. Since 2003, Cognizant has enjoyed 69.4% average annual growth in earnings. And with revenues growing at an industry-leading 60% per year, Cognizant is growing a full 50% faster than any of its competitors. And since we had first recommended it back in March, the company has posted glowing quarterly numbers and (yet again) surprised on the upside. Cognizant said it earned $47.2 million, or 32 cents a share (versus a consensus of 29 cents), for the quarter, rising from $32 million, or 22 cents a share this time last year.

If there is one potential chink in the armor of the Indian outsourcing story, it’s staff turnover. But Cognizant has been able to address this problem better than any of its competitors. Over the last two quarters Cognizant has actually lowered attrition rates, and for the March quarter, the company reported a turnover rate of 11%, the lowest rate since 2003. That compares with an industry average of 30%. How does Cognizant do it? A very well-defined process for recruitment, training and development — and above all, a policy of rewarding employees with big bonuses.

It also doesn’t hurt that Cognizant enjoys a uniquely hot reputation in a hot sector. Cognizant hired a record 9,000 employees last year, and people are particularly willing to jump to a company with a favorable reputation. And Cognizant has gathered more industry awards than you can shake a stick at. It was recently named to Business Week’s Hot Growth List for the fifth consecutive year.

Investors in India have endured a roller coaster ride recently, with the Bombay Sensex index declining 20% from its peak — though the market is still up 60% from a year ago. But with the Indian finance minister announcing a record-breaking economic growth rate of 9.3% last week, India’s fundamentals are as strong as ever. And with the Indian currency, the rupee, tumbling to a three-year low against the dollar, Cognizant’s costs have become that much cheaper. This should further improve margins on its business.

So buy Cognizant (CTSH) at market today, placing your stop at $50.50. If you want to play the bounce in Cognizant with options for bigger upside, buy the October $60 calls (UPUJL.X). My medium term target for this fast growth play is $75- about 23% up from its current price.

PORTFOLIO UPDATE

With global markets regaining their footing, we’ve already recorded a quick 10.5% gain on Russian oil play Tatneft (TNT) in two short weeks. Move your stop to $68. Hold on to the stock for more upside.

As commodities markets recover, look for our diversified commodities play BHP Billiton (BHP) to move in step as well.