The Season for Stocks Is Upon Us: Here's How to Play It

Nothing in the market is ever certain. That said, we're right at the beginning of what traditionally has been the very best three months to be in stocks on a seasonal basis. Superimpose that favorable seasonality on the presently oversold condition and we appear ripe for a major rally. What type of stock would you look for in that situation? A strong balance sheet would certainly be a plus. So would high earnings predictability. How about a bargain price to go along with those attributes? Cogniznat Technology Solutions certainly meets all three criteria. You can't fault CTSH on its long-term growth either. Over the past decade it excelled across all major business metrics. Better still, after establishing an all-time high north of $93 last March the shares have dipped back to south of $59 in the absence of any bad company-specific news. General market weakness alone has placed high-quality CTSH on the bargain rack. Total return over exactly 10 years reflects just a small fraction of the actual value created. What are Cognizant Technology shares worth? Its average P/E runs about 18.2-times, accompanied by around 1.25% in yield. As of Friday, the shares were asking just 12.9-times 2022 estimated earnings per share and 11.7-times next year's projected earnings. CTSH's current yield of 1.85% is now 48% above normal. Even a partial reversion toward the mean valuation adjustment to 17-times next year's estimate would send CTSH right back to $85 or so. If it takes a full year to do that total return would equal about 47.1%. My target is far from an upper limit. CTSH changed hands above $85 back in 2018 on similar EPS to this year's. It broke $90 during both 2021 and year-to-date 2022. With even better EPS expected in 2023 there's no reason Cognizant can't exceed those old highs. Three of the four of the stock's previous best entry points (green-starred below) launched their rallies from higher P/Es than today's. The lone exception was the exact Covid-panic low. Buyers lucky enough to catch that buy point saw CTSH surge from $40.00 to $93.50 over the following 22-months. CTSH's three should have sold moments (red-starred) all reflected multiples from 18.6-times to 22.8-times, proving investors will pay up for CTSH the mood turns positive again. Yahoo Finance calls the shares undervalued. They see $77.01 by this time next year implying 33% total return potential. I'm calling that respectable, but conservative, as it assumes CTSH only reverts to 15.4-times its 2023 estimate, about 15.4% below its normalized P/E. Quantitatively based FastGraphs research goes the other way. It calls CTSH's typical P/E as 28.05-times, which appears aggressive based on its past decade's trading history. One thing is indisputable. CTSH has traded much higher than its current quote year after year on fundamentals that were well below what is now expected. I tempered FastGraphs' fair value estimates to reflect only 20-times earnings rather that using their 28-times normalized valuation. Based on that CTSH could be worth over $90 right now and close to $99 by Dec. 31, 2023. Independent research house Morningstar assigns CTSH a 5-star Buy rating. Morningstar notes CTSH's significant undervaluation and high potential gain, and sees present day fair value for Cognizant as $96. Reaching that level from here would deliver over 64% plus dividends. Today's buyers are getting a true left to right growth stock at a decidedly non-growth valuation. Do you like CTSH but worry about being early? Consider selling LEAP puts out to Jan. 19, 2024. That would lock in even lower potential purchase prices while providing excellent upfront premiums right away. My guess is that by January of 2024 all this Fed madness will be long forgotten. Buy some CTSH shares, short some CTSH long-term puts or consider doing both.

The Season for Stocks Is Upon Us: Here's How to Play It

Let me explain why we're overdue for some good news and then give you a stock pick that should let you cash in by taking a 'LEAP.'

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