I began expressing concerns about Cognizant Technology Solutions (CTSH) a year ago. Even when earnings were stronger than expected in February, I stuck to my guns, saying “Cognizant executed so well on so many different metrics this quarter that anything less than perfection in the future is likely to disappoint.”
It didn’t take long. The company’s expectations for the coming quarter are below street estimates, which is very unusual for a company whose typical guidance is for “at least (insert consensus estimate here).” Chief Executive Francisco D’Souza said the company has adopted a more cautious view for the remainder of the year “to reflect the heightened economic challenges over the past two months.”
Since my November RealMoney piece, the stock has lost 6.8%, compared to a 4.0% loss on the S&P 500. I’d call that a push, given that the fundamental thesis appears to be working. Long term, however, I expect the stock price to reflect the fundamentals. While there is still room to grow, I don’t expect returns to be anywhere near the past levels. In fact, the stock is basically at the same price it was two years ago and I expect single-digit returns for the next several years.
Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.
