Cognizant (CTSH) of the Risks
We have written several times on Cognizant Technology Systems’ (CTSH). The IT outsourcing firm has been growing rapidly and gaining market share, and trades at a price/earnings multiple in line with its growth rate, which is to say uncommonly low compared to other high-growth technology names. We noted before our belief that the greatest risk for Cognizant is managing its growth. We still believe that, although recently the stock is trading down due to some of the other risks it faces.
For one, Cognizant is a high-growth, high-beta Nasdaq name, and when the Nasdaq rises or falls one might expect Cognizant to do the same, in spades. However, due to its exposure to India Cognizant also tends to trade in line with that market. As the chart below demonstrates, over time Cognizant tends to perform somewhere in between the Nasdaq markets and the Indian market (we use The India Fund as a proxy for that market.)
Both Bloomberg and the New York Times highlighted yesterday’s 10 per cent drop in Indian markets. They make Cognizant’s 3.5 per cent drop look tame. Seeking Alpha has charts of the weekly performance of US-traded Indian stocks that highlights just how well Cognizant has reacted (it had the third-best performance).
Bloomberg pinned the blame for falling India shares on Japanese investors taking money off the table. Alternatively, it could be one of a host of other risk factors, including political risks, perceived risks in the Indian rupee/US dollar exchange rate, etc. It doesn’t much matter while the shares are falling.
Cognizant is the type of high-quality company that are worth buying when the market turns sour. However, it is also worth waiting until the bottom has been put in. No sense trying to catch a falling knife, as they say.
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