Outsourcing Opportunities

A number of smaller companies are benefiting from the trend toward outsourcing various business functions, rather than hiring full-time employees.

Last week, I wrote about temporary staffing firm On Assignment (ASGN) . Hiring temps is another way that companies get the job done, without having to make the commitment to a full-timer or to pay for benefits such as health care.

Consulting and research firms are also beneficiaries of the no-hiring trend. ExlService Holdings (EXLS) , a New York-based firm that provides research and analytics services to financial industry clients, is forming a sideways chart pattern, trading in a narrow price range.

The company reports its first quarter on May 2. Analysts have pegged earnings at 36 cents a share on revenue of $104.43 million. That would be a year-over-year improvement of 9% on the bottom line and 43% on the top line.

It already has a good track record of fundamental strength. Revenue growth was 18% or higher in every quarter over the past two years. Earnings grew between 9% and 475% during that time. The 475% year-over-year earnings increase was in the second quarter of 2010. Comparisons have grown a bit tougher since then, with growth levels still solid but tapering to the double or single digits.

The chart is showing good support above its 50-day moving average. However, there are some chart indicators that I like even better. ExlService's 10-day moving average has just crossed above its 20-day line. That kind of short-term moving-average cross is often a precursor of more price gains.

Of course, the earnings report can spur a big move in either direction. It's not unusual for a stock to either gap higher or get severely punished on the news. ExlService has a market cap of $871 million, and it is very thinly traded, moving just 158,000 shares a day (on average).

While its former high, reached on Feb. 29, could present an entry point of $28.85, the moving-average cross offers an earlier opportunity for more aggressive buyers. With the major indices still in a downtrend, however, any buys are riskier at this time. In addition, the upcoming earnings report is another event to be aware of.

Another provider of outsourced services is HealthStream (HSTM) , which develops Web-based training programs for health care workers. The stock has advanced more than 33% so far in 2012, although it gapped down to finish 5.9% lower on Tuesday.

The plunge followed a first-quarter earnings miss, but there are some positives about Tuesday's chart action.