A prudent investment decision involves buying stocks that have solid prospects and selling those that carry risks. At times, it is rational to hold certain stocks that have enough potential but are weighed down by tough market conditions.

Here we discuss IHS Markit Ltd. , a stock that has gained 16.7% year to date, outperforming the 16% rise of the industry it belongs to. The company has a long-term expected earnings per share growth rate of 11.8%.

We believe the stock has the potential to exceed expectations moving ahead. The reasons behind our optimism include the company’s benefits from a well-diversified global customer base, strong recurring revenue generation capacity and acquisitions.

Let’s discuss them in detail.

Well Diversified Global Customer Base

IHS Markit is benefiting from well diversified global customer base and strong brand recognition. The company has a consultative product development approach, which means it works closely with its customers in introducing offerings and enhancing established ones. This, in turn, has helped it build strong customer relations over time.

Currently, IHS Markit’s offerings are well established across multiple industries and geographies. The company intends to continue innovating and developing new product offerings, and investment priorities primarily in automotive, energy and financial services.

Strong Recurring Revenue Generation Capacity

IHS Markit’s business model ensures solid recurring revenue generation capacity. Its products and services are offered primarily through recurring fixed and variable fee agreements, which realizes stable revenues and cash flows. In fiscal 2017, the company generated 83% of its revenues from recurring revenue sources.

Furthermore, IHS Markit’s efficient utilization of business model, operational improvement and financial discipline results in solid margin expansion. The company’s adjusted EBITDA margin expanded 250 basis points (bps) in fiscal 2017. Also, IHS Markit’s business requires low capital requirement, which in turn boosts its cash generation capacity.

IHS Markit Ltd. Revenue (TTM)

Acquisitions Expanding Offerings

Acquisition is a key growth strategy for IHS Markit. So far in fiscal 2018, the company acquired DeriveXperts and announced acquisition of Ipreo. Both these acquisitions are aimed at expanding the company’s financial services business. In fiscal 2017, the company acquired automotiveMastermind Inc. (“aM”) and Macroeconomic Advisers (“MEA”).

While the aM buyout helped IHS Markit to improve buyer experience in the car dealer market, the MEA acquisition increased its macroeconomic offerings, especially in the policy and financial markets. In fiscal 2017, IHS Markit acquired CARPROOF and Oil Price Information Service (“OPIS”).

While the CARPROOF acquisition expanded the company’s vehicle history report services to Canada, the OPIS buyout diversified its energy portfolio. Overall, these acquisitions are helping the company expand offerings and strengthen its international footprint.

Zacks Rank & Key Picks

IHS Markit currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Business Services sector include Avis Budget Group, Inc. (CAR Quick QuoteCAR - Free Report) , Vectrus, Inc. and First Data Corp. . While Avis Budget sports a Zacks Rank #1 (Strong Buy), Vectrus and First Data carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the trailing four quarters, Avis Budget, Vectrus and First Data delivered a positive earnings surprise of 35.4%, 25.9% and 2.9%, respectively.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>