Cognizant Technology Solutions Plunges, But It’s Not a Buy Yet

One of my favorite companies is Cognizant Technologies Solutions ($CTSH). Note that I didn’t say it’s one of my favorite “stocks.” Being a great company and a great stock aren’t necessarily the same thing.

Cognizant has made its mark by running computer call centers in India. This has been a hugely profitable business for them. Check out this growth in EPS since 2005: 53 cents, 78 cents, $1.15, $1.44, $1.78, $2.37 to $2.85. That’s exactly what I like to see–big increases each year.

We had the stock on our Buy List in 2009 and it made 151% for us. But at the end of the year, I thought the stock had become far too expensive at $45 and removed it from the Buy List. For comparison, the company had earned $1.78 per share that year.

Even though I got out early, I didn’t complain. By the end of 2010, Cognizant had run up to $73. By April 2011, CTSH was over $83 per share, meaning it had nearly doubled from a price I thought was too expensive.

This is always the trouble spot for investors. Momentum runs it higher, but anyone with a basic understanding of math can tell you the stock is in trouble. The only question is when. As long as there’s no bad news, the good times can last.

That came to an end today. Cognizant announced that it’s lowering its full-year guidance…are you sitting down?

About 2%.

So the shares are down around 20%. In other words, all the air that had gone into inflating the stock is leaving despite the actual news not being that bad. To be more precise, Cognizant lowered its full-year estimates from $3.69 to $3.62 per share.

The company failed to grow as fast as it had expected, especially in the financial services and pharmaceutical sectors, President Gordon Coburn told Reuters.

The banking sector – which brings in a quarter of Cognizant’s revenue – was flat in the first quarter for the company, hurt by softness among top North American clients.

“In North America … the incredible volatility many of our (banking) clients are seeing right now is causing them to pause,” CEO Francisco D’Souza said on a conference call.

The company counts J.P. Morgan Chase & Co, Rabobank and UBS AG among its core banking clients.

Cognizant said it expects its banking and pharmaceutical sectors to remain sluggish for the rest of the year.

I wouldn’t jump in just yet, but if CTSH can prove that it’s still growing at a rapid clip, I think this could be a very good buy.

Posted by on May 7th, 2012 at 2:49 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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