3 Stocks Susceptible to H-1B Visa Clampdown

In response to mounting Coronavirus-related job losses in the U.S., President Donald Trump issued in June a proclamation barring several categories of foreign workers and freezing immigration until the end of the year. The move has come as a blow to many large U.S. tech firms that routinely hire highly skilled employees from overseas under the H-1B visa category.

The restrictions will bar hundreds of thousands of foreign workers from working in a wide range of sectors in the U.S. The tech industry, heavily reliant on offshore skills, responded promptly and vigorously against the order. From Apple CEO Tim Cook to Tesla boss Elon Musk and Alphabet’s Sundar Pichai, industry leaders expressed disappointment calling the step short-sighted and one that is detrimental to America’s competitiveness.

American companies that take up the largest numbers of the annual quota of 85,000 exceptionally skilled workers from overseas are among the most impacted by the U.S. government’s decision. A smaller talent pool could particularly hurt business interests of some of these companies. Investors may want to keep these names on their radar, as they are among the top 30 H-1B employers , so this restriction could alter their business fundamentals in a meaningful way.

Global IT services provider Cognizant (CTSH) offers consulting and outsourcing services to some of the world’s largest enterprises spanning the financial services, media and communications, healthcare, natural resources, and consumer products industries.

With 13,466 H-1B petition approvals in 2019, the company employed the highest number of foreign employees in the U.S., according to the Economic Policy Institute (EPI), a U.S.-based independent, non-profit research institute.

“We are adding Cognizant to our Best Ideas list, as we see an attractive long-term investment opportunity in the narrow-moat firm,” says a Morningstar equity report, arguing that the market has overestimated the effects of the coronavirus ignoring the company’s long-term potential.

While this will be a tough year owing to tighter IT discretionary spending and costs associated with the Maze ransomware attack, “Cognizant is well positioned in the long term to benefit from expanding operating margins, as the company still has many structural elements to optimize, such as employee bench time or managers’ number of direct reports,” asserts Morningstar equity analyst Julie Bhusal Sharma, who asserts the company’s “financial health will not only help it outpace IT services industry growth in several years, but also keep its dividend safe, even amid near-term weakness.” She pegs the stock’s fair value at US$70 and forecasts a 5% annual revenue growth rate over the next five years.

Enterprise IT firm IBM (IBM) primarily sells infrastructure services (37% of revenue), software (29%), IT services (23%) and hardware (8%). The tech giant operates in 175 countries and has a roster of 80,000 business partners to service 5,200 clients – which includes 95% of all Fortune 500. IBM manages 90% of all credit card transactions globally and is responsible for 50% of all wireless connections in the world.

IBM had nearly 3,000 H-1B petition approvals in 2019, placing it amongst the top 30 U.S. employers that hired foreign workers. Nicknamed Big Blue, IBM “is the world’s largest IT services company, the dominant provider of mainframes and a prominent player in the public cloud, data management systems and other software products, like middleware and integration software,” says a Morningstar equity report.

The large enterprise customers tend to be particularly sticky. “Therefore, any change with IBM will be a slow one,” says Sharma, who appraises the stock’s fair value to be US$118 per share, and projects a 9% revenue decline in 2020 due to COVID-19, but “a rebound with 7% growth in 2021 as macroeconomic conditions improve.”

Leading chipmaker, Intel Corp (INTC) designs and manufactures microprocessors for the PC and data centre markets. As the personal computer market wanes, the company has increased focus on server processor business which has benefited from the shift to the cloud. Intel has also been expanding into such growing markets as Internet of Things, memory, artificial intelligence, supported by recent acquisitions including Altera, Mobileye, Nervana, Movidius, and Habana Labs.

With almost 3,000 H-1B petition approvals in 2019, the company was a leading employer of overseas talent. Intel is well positioned to benefit from the rise in interconnectivity of devices. “Intel strives to provide the most powerful and energy-efficient silicon solution to any product smart and connected,” says a Morningstar report, noting that “the data centres used to facilitate the information stored, analyzed, and accessed by various front-end devices are mostly run with Intel server chips.”

Significant investments in cloud computing has created strong created tailwinds for Intel's lucrative server processor business. “Mobile devices have become the preferred device to perform computing tasks and access data via cloud infrastructures that require considerable server build-outs,” says Morningstar sector strategist Abhinav Davuluri, who recently upped the stock’s fair value from US$65 to US$70, prompted by a stronger near-term outlook.

The chipmaker’s AI-related acquisitions will help maintain its recent growth trajectory in the cloud computing space where customers increasingly need customized solutions. Intel’s sustainable competitive advantage is underpinned by cost advantages and engineering know-how related to making cutting-edge microprocessors.