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This Stock Shouldn’t Be Going Up

Stock (Symbol) Stock Price

Cognizant Technology Solutions (CTSH)

$82

Data is as of Expected to Report Sector

April 5, 2011

May 2

Technology

Sharek’s Take
David SharekCognizant Technology Solutions’ running higher on the backs of 40% profit growth and 45% sales growth. In the beginning of 2011 I thought this would be a good year for outsourcers. So far this year has been CTSH’s, but there are signs of slowing growth ahead. Three and four quarters out profit growth is expected to be in the single-digits. CTSH has had a good run — so good that the P/E is 30. Those kind of earnings can’t support a 30 P/E.
One-Year Chart
A year ago CTSH’s P/E was 25 and I thought that was fair. Now the 30 P/E has arived. Now that’s not high for a 40% grower but I remember back-in-the-day when this stock got a 35 P/E and was growing at 40% over the long term. Now the estiamted Long Term Growth Rate is 20%. 
 
I think all is fine for now — the trend is our friend and the trend is up — but its getting to a point where long-term investors should think about selling some stock.
Earnings Table
Cognizant had profit’s up 40% last quarter on a 45% rise in revenue. The past is great, its the future I’m concerned about.
 
CTSH only beat by a penny – after beating by 6 cents the quarter before. Momentum in the earnings table is slowing, the stock shouldn’t be going up.
 
Annual estimates continue to rise slightly each quarter. CTSH has a recurring revenue stream which makes the stock dependable — you know the company is going to have solid sales years in advance. These contracts are long-term.
 
Quarterly estimates show profit growth is expected to slow to 6% and 9% three and four quarters out. I also don’t like that next quarter’s estimates didn’t increase during the last month.
Fair Value
Last quarter I stated “CTSH has the ability to be worth 30 times earnings”. Well, its there. Now I think that P/E should go back down to 25.
 
 I also thought Fair Value was $80 and now the stock’s $82.
Ten-Year Chart
CTSH, a former #1holding of mine, used to be my favorite stock. I loved the 40-45% profit growth the company always kicked out. Now profits are supposed to grow only 15% this year. Maybe the company can beat this but that’s still only 20-25% growth — not enough to take this 30 P/E any higher.

The angle this stock has made since 2009 is very steap — too steap for

Power Ranking Bottom Line
Growth Portfolio

10 of 21

I have hope CTSH will beat estimates later in the year, but think the stock is a little ahead of itself. I think short-term investors and traders should stick with the stock and ride the tide. Long-term investors should consider taking profits or selling half your position.
 
CTSH is ranked 10th in the 21 stock Growth Portfolio Power Rankings because its trend is up (the stock is showing power). This stock was recently sold from the Aggressive Growth Portfolio
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Aggressive Growth Portfolio

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