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What’s in store for IT stocks in 2014?

Information technology (IT) services provider Oakton (ASX: OKN) has released a copy of a presentation given by CEO Neil Wilson at the BBY Technology Investment Conference. The presentation cut to the core of what has made 2013 a disappointing year for many investors in the IT services sector by declaring ‘significant shifts for traditional IT services companies’.

The change in industry dynamics has forced many of the larger, more established players to review their business models and focus. In Oakton’s case this has led to the company transforming its business to establish a market position as a provider of specialist consulting and IT services which incorporate cloud based delivery models and allow for Oakton to deliver ‘solutions as a service’.

While Oakton’s share price has moved significantly higher (around 30%) in the past few months the company’s full year results and outlook have not been inspiring. Trading profit fell 12% for the full year, while guidance provided during the BBY presentation stated that trading conditions remained challenging and that the firm would be relying on a strong second half in the current financial year.

The adjustments required by the larger, more established IT services companies (with the exception of Oakton) have resulted in their share price performances significantly underperforming the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the past year. SMS Management & Technology (ASX: SMX) has seen its share price fall 21% in the past 12 months, while Data3 (ASX: DTL) and DWS (ASX: DWS) have recorded falls of 10% and 16% respectively. A favourite pick of a number of brokers at the moment UXC (ASX: UXC) has fared slightly better for shareholders with the stock price up 5%.

It’s quite a different story amongst the smaller, more nimble firms however. Empired (ASX: EPD) and RXP Services (ASX: RXP) have seen their stock prices rally 64.5% and 44.4% respectively. The offerings by these two firms and the lack of legacy issues to deal with, have resulted in both companies posting solid earnings growth during the year.

Foolish takeaway

As the larger IT service companies deal with their legacy issues and adjust their cost bases they will be better positioned to deal with a cloud-based future. As trading conditions pick up and earnings improve the market may again start to look more favourably upon these stocks, which would make the sector worth keeping under review during 2014.

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Motley Fool contributor Tim McArthur owns shares in SMS Management & Technology and UXC.

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