Cognizant

Though Cognizant Technology Solutions Corp appears cheap due to heavy downward pressure in the past year, we have capped its rating at 3 stars to factor in the possibility that it represents a value trap. The stock currently trades at a 30% discount to our quantitative fair value estimate of $82.03 per share; however, caution is warranted due to this estimate's high uncertainty rating.

The firm's valuation metrics strengthen our fair value estimate. A company's valuation metrics provide insights into the market's expectations for its future growth and profitability. For example, the firm's enterprise value to revenue ratio of 1.2 falls in the bottom 40% compared with peers globally. The prevailing enterprise value/sales ratio is low relative to the long-term earnings power of the business. We believe this is a sign that shares could be cheap.

The company's profitability is an additional encouraging factor. Highly profitable companies are often more resilient in recessions and are likely to generate stronger future cash flows for shareholders. The firm's earnings yield of 9.6%, a core component of profitability, lies in the top 30% compared with global peers. This suggests that it is generating substantial earnings relative to its share price, which further promotes our favorable price/fair value ratio.

The company's narrow quantitative moat rating indicates it could outearn its cost of capital and maintain robust margins for 10 years or longer. In addition, the company's moderate financial health score is decent and doesn't seriously concern us with regard to financial distress.