The Top 10 IT Services Stocks of 2010

It's been a pretty kind year to stock investors, with the S&P showing a 12.8% gain in 2010. Of course, kindness might still feel relative after a lost decade of negative returns that included the nauseating depths and panic of the financial crisis.

However, while the general market might have edged up at a low-double-digit pace this past year, quite a few stocks poured in monster performances either by riding new trends or by rebounding much stronger than investors expected.

Here's a list of this year's top 10 performers in the IT services industry.

Source: Capital IQ, a division of Standard & Poor's.
Prices valid through Dec. 23. Only includes companies listed on U.S. exchanges that contain a market capitalization greater than $500 million.

Companies that provide data processing services, like VeriFone and Cardtronics, ruled the IT services list in 2010. Verifone produces countertop electronic payment systems, which are booming in popularity, leading to 26% revenue growth last quarter. Cardtronics is an ATM giant, offering more than 33,000 ATM locations.

Yet when investors think of IT services, outsourcing and consulting companies are the dominant players. From that grouping, Cognizant Technology Solutions reigned supreme. Thanks to the company's run-up, it's now 70% the size of peer Accenture (NYSE: ACN).

However, there are threats to the industry in the year ahead. First of all, the tax holiday law meant to fuel exports from software companies in India is set to expire in 2011. Also, rising wages threaten to cut into profit margins. As the Indian economy continues to grow at rates far exceeding those of developed world economies where customers of major IT firms reside, wage increase fears will be a long-term threat to the industry.

In the long run, though, the future continues to look bright for IT services. While areas like cloud computing pose a threat, the complexity of the task still requires outside consultants to implement. Likewise, demand for areas like enterprise resource planning that are commonly outsourced should continue growing in the coming years.

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