Usually I am pretty short-term oriented, but occasionally I lift my eyes to the horizon and think about the long term. You know, like, three months to 12 months out — what we would call “buy and hold” investing at Trader’s Advantage.
My editors asked me for a one-year idea at the start of 2014, and my suggestion was Emerge Energy Services (EMES), which mines a special sort of sand used in shale “fracking” by energy producers. It’s up about 160% so far, so I am ready to put that in the “win” column and move on.
The cool thing about EMES at the time was that it stood at the front of a major business trend, it was a recent IPO that no one really knew anything about, and it was an MLP that yielded a rather juicy 5.5% annualized dividend. That is a nice combination of factors — and it worked out.
For a stock to hold for a quarter, I decided to look for a more mature company with a rock-solid record over the past five years of performing well from Aug. 1 through Nov. 1. (By “well,” I mean up every one of the past five tumultuous years in that span — and this one fits the bill, including four years with growth of at least 10%.) I also wanted a company that will benefit from the surprise improvement in emerging markets, as that is an unappreciated story at this time.
In particular, I wanted a stock that could benefit, if possible, from a tidal improvement in India, which was bombed-out last year financially but has rebounded already quite a bit this year on the prospect that a new business-friendly government would take the reins. And finally the stock needed to be ranked a 9 or better in my StockScouter rating system and to have an intrinsic value at least 50% higher than the current quote.
When I put all of that in the blender, the top-rated idea was Cognizant Technology Solutions (CTSH), which provides info-tech consulting and business process services to a wide range of companies out of its dual bases in Teaneck, N.J., and Mumbai, India.
Since its start as a division of Dun & Bradstreet more than 25 years ago, Cognizant has developed into a wide-ranging consultancy powerhouse, helping companies in the financial services, healthcare, manufacturing, utility and retail industries manage its data and information systems more efficiently.
Its customer list is incredibly diversified, which helps Cognizant avoid reliance on any one industry. The company’s financial services programs are among its main draws, accounting for around 40% of revenues. Healthcare customers account for another 25% of revenue, as Cognizant consultants help drug and medical device makers corral their IT costs. Most of the rest of its business comes from telecom, media and entertainment industries.
Though Cognizant recently experienced a couple short-term setbacks in its U.S. business due to a profit squeeze from competitors, its eurozone and Asian business picked up the slack. Indeed, installations at European countries grew 35% in the past year, while its American business only grew 16%. Helping most was the need for eurozone countries to deal with recent economic and weather disruptions.
The Affordable Care Act has had a big impact on Cognizant; the company has had to radically adjust the way it helps its healthcare customers — a transition that temporarily hurt margins in the last quarter and created a rare buying opportunity in the shares. Also looming on the horizon is the risk of immigration legislation in Congress that could restrict Cognizant from employing foreign-born workers. Under one version of the bill, Cognizant could suffer an impact of close to 7% of revenue. This is another overhang that has slightly depressed the price in the near term but should be resolved in coming months.
In the past quarter, the company’s outsourcing growth was quite a bit lower than its consulting business growth, which was up 24% year over year. But management expects improvement during the remainder of 2014 as a result of an aggressive hiring plan.
Despite these minor setbacks, Cognizant continues to grow at a much more robust pace than competitors. A shift toward a global delivery model has served it well, especially when backed by its recent acquisitions of companies C1 and Equinox. Furthermore, its stable prices and margins show that it is fending off competitors.
Cognizant shares have performed well outside of the broad bear markets since going public in 1998, rising an amazing 21,000% since going public in June 1998 — a pace unmatched by all but the best stocks of our era, such as Apple (AAPL). The S&P 500 is only up 105% in the same span. Amazon.com (AMZN), which went public around the same time, is up only a third as much, at +7,000%.
No wonder Cognizant placed on Fortune‘s “100 Fasted-Growing Companies” list for 10 consecutive years from 2003 to 2012, and it also has been among the Fortune 500 since 2011. At that same time, Fortune also named it the third-most admired IT services company behind only Accenture (ACN) and IBM (IBM).
Cognizant reports Q2 earnings on Aug. 6. Since it is cheap and largely oversold, shares are likely to rise into the report and could very well get back on their upward path. Buy CTSH now and hold for target $87.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.