Should you sell IT stocks?

IT stocks have taken a beaten recently. Equity analyst Andrew Lange takes a look at the latest issue concerning these stocks.
By Morningstar Analysts |  03-02-17 | 
 

In the wake of a sweeping immigration ban within the U.S. in late January, we are seeing repercussions and volatility for the IT services industry, which relies on the movement of both temporary and permanent immigrants.

According to early reports, programs like the H-1B visa programme (which is used by offshore IT service providers to import skilled labor) are expected to face reform. U.S. attorney general nominee Jeff Sessions has been vocal about reforming visa regulation, while a bill introduced to the House of Representatives by Democrat Zoe Lofgren aims to raise the minimum H-1B salary from $60,000 to $130,000.

While there has been much discussion from both sides, the extent of the finalized legislation and its passing remains unclear. At this stage, we recognize the risks associated with higher costs that could pressure both revenue and operating margins for several IT services leaders. However, we believe there are some important factors to consider such as outsourcing, automation, local mergers and acquisitions, rolling H-1Bs, and political pressure that may help to alleviate long-term pain for providers whose business models rely on help from legal immigration.

Despite near-term uncertainty, our long-term opinion of the industry is unchanged and Cognizant remains our favored undervalued name. We are maintaining our fair value estimates and narrow moat ratings for firms such as Cognizant, Infosys, Tata Consulting, and Wipro.

 The U.S. government appears to be concerned about employing overseas IT workers to the detriment of U.S. IT workers. The biggest issues for this argument are that overseas workers get paid less than (and thus undercut) the local workforce, while there are many unemployed U.S. workers in the IT field that can do the same job.

Yet based on our analysis, we're not convinced that this notion holds true in a majority of cases.

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