If stocks were Bollywood flicks, all of our investments would end in snappy dance numbers. We'd all be belting out "Jai Ho," which I'm told means "victory to thee."
Unfortunately, not every stock ends in a victory dance. Some companies are destined to disappoint, and that's where I step in. Every week, I single out a stock that has no place being in your portfolio. Once I've stated my reasons, I'll come right back with three stocks that I believe will generate better returns than the stock I'm throwing away.
Who gets tossed out this week? Come on down, Satyam Services (NYSE: SAY ) .
Slam on the brakes!
January feels so far away. That's when Satyam fell apart in the mother of all accounting fraud scandals. The Indian outsourcing specialist had been cooking its books, and it paid the price.
You wouldn't recognize the company these days. The errant chairman is gone, of course, but the board has also gone through a dramatic makeover, along with a welcome ownership change in April.
Restoring the brand will be Satyam's real challenge. The company hasn't posted quarterly financials since last year's September quarter, mired in the restatements of five years of bogus reports. Retaining customers won't be easy, and will likely prompt Satyam to save face by pursuing margin-squeezing deals.
This is certainly not the time to buy Satyam, but don't tell that to Mr. Market. The stock has quadrupled since bottoming out in January. It was one of yesterday's biggest winners, up a sharp 23%.
That's a lot of helium for a stock whose outlook is so hazy that analysts aren't even offering up profit projections. Satyam isn't going away, but with the shares now trading for considerably more than the highest bid for a controlling stake in the company two months ago, one has to wonder whether new investors know what they're getting themselves into.
And now, the good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins, will a global focus this time around:
Patni Computer (NYSE: PTI )
There are several larger India-based IT outsourcing specialists, including Wipro (NYSE: WIT ) and Infosys (Nasdaq: INFY ) , which should all do well in nibbling at Satyam's market share. However, Patni is the only outsourcer to earn our Motley Fool CAPS community's highest five-star rating in Motley Fool CAPS.
The company's most recent quarter won't excite you. Revenue fell 11%, with earnings taking an even bigger hit -- no surprise, given the global slowdown during the first three months of 2009. Thankfully, the company continues to tack on net new accounts. Patni's stock is trading at just 10 times this year's projected profitability, and the company has topped Wall Street profit forecasts in each of the past dozen quarters.
New Oriental Education & Technology (NYSE: EDU )
There is only one country with a larger population than India: China. You're out of luck if you're seeking Satyam-esque tech-support outsourcing companies in China, but New Oriental is a worthy proxy. The company is a leader in educating China's rapidly urbanizing citizenry. Through online and offline campuses, New Oriental is helping train China's workforce, and its courses include global skills like foreign language education. For the fiscal year that ended last week, analysts expect New Oriental's revenue and earnings to climb 35% and 20%, respectively. That's growth in any language.
MercadoLibre (Nasdaq: MELI )
Hopping over to the other end of the planet, MercadoLibre is the leading online marketplace throughout South America. Unlike eBay (Nasdaq: EBAY ) , which has seen its auction business come undone in recent quarters, MercadoLibre is still growing nicely. The stock may not exactly be cheap -- fetching 30 times next year's bottom-line target -- but this is a unique opportunity to buy a network-effect leader in its infancy (like eBay was a decade ago).
Victory to three, indeed.
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