Cognizant Technology (CTSH) is the top-ranked stock based on a combination of fundamental and technical analysis (our Fusion ranking) for the stocks in this week’s update.
As we shared in the stock selection feature for August 2011, Cognizant Technology (CTSH) is anything but a stranger to the subscribers of Manifest Investing and our long-term investing community.
“Knowledge is power.” — Francis Bacon
Apparently, knowing what to do with information is a path to returns based on the leadership returns achieved by all of the information-based companies in our MANIFEST 40 (Oracle, Cognizant, Quality Systems, FactSet etc.)
Cognizant Technology has been selected five times for the Round Table and $100 invested in CTSH as a top-performing member of the MANIFEST 40 tracking portfolio is now worth $440 — absolute total return of 340% and an annualized relative return of +35.4% since December 2008, one of the top-performing entries in this long-term demonstration.
Business Model Analysis
Using the last couple of actual results for years, in combination with analyst consensus estimates for 2013-2014, the sales growth trend/forecast is 17%. If Value Line’s 3-5 year revenue forecast is feasible, the growth forecast could climb to 19%.
Equity Analysis Audit
We’ll use the lower sales growth forecast of 17%, the consensus on projected net margin at 14% and a projected average P/E of 20×.
The result is a return forecast (PAR) of approximately 15%.
Tracking Momentum & Sentiment
To me, S&P is a little tangled in a knot. They have a “Hold” on CTSH despite a fair value of $99.80 that would suggest CTSH is undervalued by 23.5%. I blame the traders and short-term time horizon herd. The same is true for Morningstar. CTSH has been in a trading range for over a year. But I think the reason for the swoons (speed bumps, breathers, etc. — call it anything you want) is pretty clear. The 2008-2009 Great Recession hammered business at CTSH. And the same is true now with Europe lagging and the impact/influence on CTSH is material.
But if you’re in this for the long term — and we are — you believe that recessionary conditions will abate. In fact, you believe that they’ll be back again some day and you’re not stunned or aggravated by this reality.
And when the next round of meaningful recessionary abatement gets underway, this information technology juggernaut will probably reassume the flight trajectory shown the 5-year trailing average (blue line) on the chart.
CTSH is good at what they do. CTSH has a robust field of opportunity and no debt. I think we’re happy it’s a contributor to our Solomon Select, MANIFEST 40 and Round Table tracking portfolios and we’re not ready to send it packing, yet.
Expecting Alpha 