CTSH has come off of its 52-week high and is down to start 2022 – is it a good buying opportunity?

The Technology sector has been a bright spot throughout the past two years, and one of the big reasons that I think the economy has shown to be pretty resilient during the COVID-19 pandemic. One of the reasons the sector has led the market for most of that time is because so much of the shift to remote, work-from-home operations for corporate America, contactless sales and delivery methods now being used by a lot of retail businesses, and many of the safety protocols factories and production facilities were forced to put in place are driven or enabled by technology solutions. That’s driven investors to flock to stocks that specialize in remote networking, conferencing and cloud-based solutions, including digital transaction handling and CRM services. Many of these companies have defied the broader economic trend and managed to post impressive results.

Cognizant Technology Solutions (CTSH) is a professional services company that works with companies in a variety of sectors that focuses on software development and digital platform engineering services for its clients. That puts CTSH in the IT Services industry, which is, at least in part, an area that has continued to see healthy demand as more companies have been forced to identify ways to use technology to shift their business focus. Economists are putting a big focus on companies with healthy balance sheets to help ride through any uncertainty that may extend into a longer-term period of time, and CTSH is company that, despite experiencing its own pressures over the course of the last two years, looks to fit that bill as well. From its own bear market low at around $40, the stock rallied to a peak in December 2020 at around $83. After dropping, then retesting its high in May, the stock dropped to a low in mid-July at around $66 per share. From that point, the stock has moved into a new, strong bullish trend that peaked at the start of 2022 at around $92 per share. 

The stock appears to be hitting a good support level at around $86 and is showing some signs of strength, which suggests that it could be setting up for a new buying opportunity for short-term traders. What about value? Are the stock’s fundamentals strong enough to suggest it could be a good value at its current price? Let’s find out.

Fundamental and Value Profile

Cognizant Technology Solutions Corporation is a professional services company. The Company operates through four segments: Financial Services, Healthcare, Manufacturing/Retail/Logistics, and Other. The Financial Services segment includes customers providing banking/transaction processing, capital markets and insurance services. The Healthcare segment includes healthcare providers and payers, as well as life sciences customers, including pharmaceutical, biotech and medical device companies. The Manufacturing/Retail/Logistics segment includes manufacturers, retailers, travel and other hospitality customers, as well as customers providing logistics services. The Other segment includes its information, media and entertainment services, communications and high technology operating segments. Its services include consulting and technology services and outsourcing services. Its outsourcing services include application maintenance, IT infrastructure services and business process services. CTSH has a current market cap of $45.9 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased by about 9.3%, while sales increased by about 11.8%. In the last quarter, earnings improved by 7.07% while Revenues were 3.47% higher. CTSH’s Net Income versus Revenue is healthy, at 10.46% over the last twelve months and strengthening to 11.47% in the last quarter.

Free Cash Flow: CTSH’s Free Cash Flow is healthy, at about $2.26 billion. That number increased from the quarter prior, when Free Cash Flow was $2.1 billion, but is still below its $2.9 billion mark from a year ago. The current number translates to a Free Cash Flow Yield of 5%.

Debt to Equity: CTSH has a debt/equity ratio of .06, which is extremely low and a good reflection of the company’s very conservative approach to leverage. Their balance sheet shows about $2.4 billion in cash and liquid assets (up from !.85 billion a quarter ago) against about $636 million in long-term debt. Their operating profile and high liquidity are good indications CTSH has the financial flexibility to adapt to ongoing changes in the markets it operates in.

Dividend: CTSH pays an annual dividend of $.96 per share, which at its current price translates to a dividend yield of about 1.12%. That is modest, but it is also much less than 50% of the stock’s earnings per share over the last twelve months – a conservative payout ratio that actually helps bolster the company’s balance sheet strength. It is also noteworthy that in the early part of 2021, CTSH’s dividend was $.88 per share.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at about $74.58 per share. That means that the stock is overvalued, with -13% downside from the stock’s current price. It also puts its “bargain price” at around $59.50 per share.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The chart above covers the last year of price activity; the diagonal red line traces the stock’s upward trend from its July 2021 low around $66 to its peak at the start of 2022 at around $92. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock has dropped off of that high, but in the last three weeks found support on two different occasions, including earlier this week, at around $86. A drop below $86 does suggest next support should be found around $82, where the 38.2% retracement line sits. Immediate resistance is at the stock’s recent peak around $88, with additional upside to test the 52-week high at $92 if buying activity increases.

Near-term Keys: The stock’s fundamentals are very strong, showing that CTSH has weathered the difficulties of the past year well; even so, the stock is overvalued right now, which means that there isn’t a strong argument for the stock as a useful, value-oriented investment. If you prefer to work with short-term strategies, a bounce off support at $86 could offer an interesting signal to buy the stock or to work with call options, with $88 providing a useful, quick-hit profit target on a bullish trade and additional upside to $92 if bullish momentum picks up. A drop below $86 would offer a strong signal to consider shorting the stock or buying put options; in that case, next support at around $82 offers a very useful profit target for a bearish trade.