One of America's Best Companies Is Now on Sale

Cognizant Technology Solutions is among the most successful companies ever to come public. Its newly installed CEO decided to go with more conservative account treatment starting this year, which depressed reported earnings per share, or EPS, a bit this year, according to generally accepted accounting principles. Rarely seen lower year-over-year numbers have given us the chance to buy in cheaply before the crowd figures out they were no big deal. Since 2010, despite this year's expected dip, CTSH ramped out all major metrics by 255% to 290% cumulatively. Those are spectacular numbers. Better still, the stock, which regressed from a March 2018 peak north of $85, closed on Sep. 27 at just $58.76. There is enormous embedded value that is currently not being reflected in Cognizant's share price. That situation is almost always rectified via a catch-up move, which arbitrages away that discrepancy. CTSH is a left to right stock. Every pullback (green-starred below) has been followed by a new all-time high for investors with reasonable time horizons. With higher EPS expected in 2020 and beyond, that is likely to be the case again from today's low price. CTSH is a proven money maker for traders with reasonable time horizons. Its four previous cycles since 2009 showed gains ranging from 68.2% to 644%. The steadily higher lows, followed by higher highs pattern, is quite bullish. Cognizant's typical price-to-earnings, or P/E, has run about 19.8-times. Assuming just a return to that normal valuation on next years' estimate suggests an end of 2020 target price of about $85.50. Achieving that goal would translate into a greater than 45%, 16-month gain. CTSH began paying cash dividends during 2017. Its current yield of 1.36% is now Cognizants' highest ever. That bodes well for future share price action. I'm not alone in my enthusiasm for CTSH. Independent research house Morningstar assigns the shares a 4-star, out of 5, buy rating. Morningstar does not issue year-ahead price targets. It does, though, tell us its view of present-day fair value. For Cognizant, that number is $79, almost 35% above last week's closing quote. CTSH's forward P/E is close to its lowest levels since 2009. Owning shares outright is the very satisfactory, plain vanilla, way to play CTSH. Option-savvy traders might also consider purchasing some LEAP calls or shorting some LEAP puts with expiration dates of Jan. 21, 2022. Buying calls provides a leveraged way to play a future share price recovery. If CTSH hits my target of $85.54 before expiration day the illustrated calls at $40, $45 and $50 strikes would deliver at least 114% to 148% gains on a less than 46% upturn in the stock itself. Put writers willing to stand ready to buy CTSH at lower-than-present day entry points could collect either $15.50 or $19 per share by shorting CTSH's $70 or $75 puts out to Jan. 2022. Worst-case, forced purchase prices would drop by 4% to 7% below the trade inception price. Why do I say that put selling is the lower risk way to play? The chart below documents that CTSH hasn't changed hands for as low as $54.50 since February of 2017, about 31-months ago. It gives me great comfort to know that owning Cognizant at my if put price would have been a winning position 100% of the time over the most recent 2.58-years. Don't miss your chance to own one of the best companies ever. Buy some shares, sell some puts, buy some calls or any combination thereof.

One of America's Best Companies Is Now on Sale

Those who are 'cognizant' of why CTSH shares are priced as they are, will know they can get in cheaply.

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