If you’re looking for sector of the economy that tends to lead the broad market higher or lower, a good place to start is Technology.
The Technology sector was a bright spot throughout 2020 and 2021. It also led the market lower throughout 2022, with a lot of Tech stocks extending their losses well past traditional bear market levels. One of the reasons the sector led the market higher until 2022 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 during 2020 and 2021 are driven or enabled by technology solutions. That drove 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 defied the broader economic trend and managed to post impressive results even as the pandemic raged in 2020 and forced broad shutdowns and self-isolations.
With persistent pressures on chip production and supply that extended over more than the past three years, and are only now beginning to fade, and mixed with broader concerns coming from high inflation and the continued hawkishness of the Fed’s interest rate policy, it should be no surprise that the market is off to an uncertain start so far this year. Global, geopolitical pressures that are also a reality from Russia’s continued war in Ukraine have exacerbated supply constraints in the energy sector, raising the price of crude and natural gas across the world compared to pre-2022 levels. While those prices have come down significantly from their mid-2022 highs, they still remain above pre-pandemic levels. Another effect of war in Ukraine is its impact on Food, where more than 60% of the world’s grain supply comes from the Russia and Ukraine regions. While the Tech sector hasn’t been immune from broad market uncertainty, many of the stocks that make up this industry, and the companies that drove the economy’s success in 2020 and 2021 continue to show healthy bottom-line results that the market didn’t factor into their stock prices last year. For some of these companies, 2023 has provided a rally point off of those lows, which has made selected Technology stocks winners so far this year.
Cognizant Technology Solutions (CTSH) is a professional services company that works with companies in a variety of sectors with a focus 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 operational and business focus. Economists and smart investors are likewise 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 three years, looks to fit that bill.
CTSH pushed to as high as $93.50 in March of 2022 before following the rest of the market into its own bear market, hitting its latest low at the start of November at around $51. The stock has rallied from that low to its current price at around $67, which is more than enough to make short-term, momentum and trend-based trading strategies take notice. For bargain hunters, however the stock’s latest rally begs the question of whether CTSH offers bargain hunters an attractive long-term opportunity to buy a good company at a nice price. Let’s dive in to the numbers and to see what we can find.
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 $34 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by about -8.2%, while sales increased by 1.3%. In the last quarter, earnings shrank by -13.68% while Revenues growth was flat, but negative, at -0.37%. CTSH’s Net Income versus Revenue is healthy, at 11.79% over the last twelve months, and tapering somewhat, to 10.77% in the last quarter.
Free Cash Flow: CTSH’s Free Cash Flow is healthy, at about $2.2 billion. That number is up a down from last quarter’s mark at about $2.4 billion, as well as its $2.3 billion mark from a year ago. The current number translates to a Free Cash Flow Yield of 6.44%.
Debt to Equity: CTSH has a debt/equity ratio of .05, which is extremely low and a good reflection of the company’s very conservative approach to leverage. Their balance sheet shows about $2.5 billion in cash and liquid assets (down from $2.7 billion two quarters ago) against about $638 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. They are also using that flexibility to expand their digital services organically, through in-house research and development, and inorganically via acquisition.
Dividend: CTSH pays an annual dividend of $1.16 per share, which at its current price translates to a dividend yield of about 1.72%. That is modest, but it is also less than 25% 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 and reinforce the stability of the dividend itself. It is also noteworthy that in the early part of 2021, CTSH’s dividend was $.88 per share, and $.96 per share prior to the first quarter of 2022, and $1.08 in the last quarter when management announced the last dividend increase. An increasing dividend payout is an additional, strong sign of strength and management confidence.
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 $76 per share. That means that the stock is undervalued, with 13% upside from the stock’s current price.
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 downward slide to bear market territory from its March 2022 high at around $93.50 to its latest low, reached at the start of November at around $51. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock’s upward trend from that November 2022 low, pushing above the 38.2% retracement line at around $67.50 briefly to start February before dropping back again, marking immediate resistance at $67.50, with current support at around $64, where the stock’s most recent, prior pivot high occurred last month. A push above $67.50 should see upside to about $71 before finding next resistance, while a drop below $64 should find next support at around $61.
Near-term Keys: The company’s fundamentals continue to be very strong, showing that CTSH has weathered the difficulties of the past three years well. The stock’s value proposition is still attractive, even with the stock’s rally over the last few months, and that is something that I think is worth noting as value seekers look for useful targets of opportunity. If you prefer to focus on short-term trading strategies, you could use a push above $67.50 as a signal to consider buying the stock or working with call options, with $71 offering a practical, near-term profit target. A drop below $64, on the other hand could be a good signal to consider shorting the stock or buying put options, with an initial profit target at around $61 on a bearish trade.