Information technology companies have trailed broader market gains recently, but there's a huge catalyst coming that makes these among the top stocks to buy now.
Through Feb. 22, the infotech sector was only up 2% compared to a 6.6% rise in the S&P 500.
But U.S. companies will be spending more on their infotech needs in 2013.
Infotech spending was up 6% globally last year, according to the International Data Corp. Gartner Group forecasts another 4.2% increase from last year, even facing economic uncertainties - and some analysts say that's a modest forecast.
One reason it's modest is that there's a sweeping change underway that makes infotech companies a necessity, and that's the president's controversial new healthcare system.
Obamacare Needs Infotech
The Obamacare law requires states to build so-called insurance exchanges and for hospitals to maintain electronic healthcare records, which has opened the door widely for firms in the information technology sector.
To get the exchanges up and running is going to require quite a feat of creating the necessary infrastructure to support the expansion of Medicaid coverage - and tech companies will have to make the process simple and easy.
The infrastructure must be created that will allow participants to determine if they're eligible for Medicaid or for a federal tax credit when buying private insurance. As it stands now, Medicaid and Medicare programs don't have one site that can do all this.
That's why in a January report, PricewaterhouseCoopers said "the biggest challenge facing states in 2013 is information technology."
Some companies have been lucky enough to get contracts with states already, but the deals have just started.
"Health insurance is a complicated purchase and it involves interfacing through a number of systems and procuring capability from a number of vendors," Scott Donahue, a director and health technology analyst at Triple Tree, told CNBC. "We're probably 30 percent of where we need to be, so it's going to take a lot more than what's already been awarded to get to have states fully stood up."
And the need for infotech will continue as long as the healthcare landscape in the United States is transitioning to Obamacare.
Rick Howard, research director of the government industry team at Gartner, told CNBC that states will spend the next five years upgrading the legacy infrastructure that links to the payment and data systems of CMS -the Centers for Medicare and Medicaid.
"By CMS estimation, $23 billion will be spent to replace or enhance Medicaid management info systems through 2020 and the Medicaid management info systems," said Howard.
Stocks to Buy Now as the Country Turns to Tech
Obamacare comes at a most opportune time for infotech companies, which have been facing reduced global demand for their financial and industrial sector services.
That's why the healthcare portion of infotech companies' revenue will grow, at least through the first several years of implementation of Obamacare.
And no company by itself can supply the whole gamut of infrastructure and services that health insurance exchanges will need. So companies have been gobbling up other firms or creating partnerships with others who specialize in the business of Medicaid systems.
There are a few firms going forward that look well-positioned to take advantage of this new landscape.
First there is CGI Group (NYSE: GIB) out of Canada. CGI is leading the way in building the Vermont health insurance exchange. However, what makes CGI really special is that in addition to Vermont, it is also creating exchanges in Massachusetts, Colorado and Hawaii. If you add the fact that they are also building the default health insurance exchanges for the 30 states that the federal government will run, you're looking at a tech company that can reap the benefits that are coming over this long process.
IBM Corp. (NYSE: IBM) has been at the forefront of positioning as soon as Obamacare became law by going after contracts to build state health insurance exchanges. IBM acquired Cram - the leading software provider of solutions for social program management - which gave them the ability to not only be a player on the infrastructure side, but also have a presence with the systems necessary to figure out eligibility for the exchanges. IBM also has won work on building out exchanges for Maryland and Minnesota.
Another infotech winner is India's Infosys Ltd. (NYSE ADR: INFY). The company recently won four state contracts, including one worth more than $100 million, to help build these online exchanges.
Two more include Cognizant Technology Solutions Corp. (Nasdaq: CTSH) and India's HCL Technologies Ltd.Cognizant earned a significant 25% of its revenue from doing work for pharmaceutical firms and state agencies in the quarter ended Sept. 30. Those sectors contributed nearly 12% of HCL's revenues in the quarter ended Dec. 31.
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