Cognizant Is Top Quality, Reasonably Priced

Nothing makes a stock more attractive than steady and predictable growth. Companies like that are rare. Finding one at a good price is even rarer. Cognizant Technology Solutions currently meets both criteria. In the past decade the firm's key metrics have soared by more than 500% across the board. The shares have done well, too, but the 265% rise represents less half the increases posted in revenues, book value and EPS. That discrepancy makes CTSH a relative bargain right now. Cognizant has a fortress-like balance sheet along with its very steady earnings stream. The stock's long-term performance outran 80% of the 1700 companies covered in Value line's main research universe. You'd think those characteristics would make for low share price volatility. Instead, CTSH moves around enough to offer some interesting trading opportunities. Early in 2011 CTSH peaked at $41.70. Four months later it fell to $26.60. Cognizant hit almost $70 a share in November of 2015. During autumn of 2016, just ahead of our last Presidential election, it retreated to under $46. Just weeks ago the stock carved out a new all-time high of $76.51. It was offered on Jan. 3, 2018, as low as $70.90. Over the most recent eight years Cognizant carried an average P/E of 20.1x. Each of its six best buying opportunities (green-starred below) launched from a lower than typical valuation. The worst two times to buy, or hold, CTSH (red-starred) came when the shares were clearly pricier than normal. Even then, long-term holders with patience ended up making money eventually as fundamentals caught up to the valuation excesses. CTSH's present multiple is just 16.3x the firm's consensus estimate for 2018. That puts it squarely in an attractively priced neighborhood based on past performance. A simple regression to the mean valuation would support a 12-month target price north of $87, about 23% above Wednesday morning's quote. Standard & Poors see it pretty much that same way. Cognizant garners S&P's top 5-star buy rating along with a one year goal of $84 and a fair value estimate above $94. Merely reaching that fair value level would generate a better than 32% gain. Note, topo, that Standard & Poors' 2018 EPS estimate is a few cents higher than Value Line's view. Cognizant is a superior company now selling for a pedestrian valuation. Options traders can pocket some serious premiums by selling long term puts on CTSH with expirations out to Jan. 2020. The graphic below shows the actual prices with the stock at $70.95. Committing to own at strikes of from $65 to $75 dropped the worst-case, forced purchased levels down to $58.50 to $63.90. Maximum profit on any option sales is keeping 100% of all premium received up front. In these examples that would translate to from $650 to $1,110 per 100-share contract written. Being forced to own CTSH at prices 9.9% to 17.5% below an already attractive entry point doesn't seem scary at all. An activist hedge fund has taken a large stake seeking to promote actions to further unlock shareholder value. Since the hedge fund got involved, cash dividends were initiated for the first time during 2017 and additional share buybacks have been authorized. Cognizant's clean balance sheet suggests financial leverage could ramp up the effort to goose the stock price as well. Buy Cognizant shares, sell some puts or consider doing both.

Cognizant Is Top Quality, Reasonably Priced

Shares of Cognizant Technology Solutions are well below their typical valuation.

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