Cognizant Technology Solutions Corp (CTSH), International Business Machines Corp. (IBM): Is This Sympathy Sell-Off a Buying Opportunity?

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So What Is a Sympathy Sell-Off?

A sympathy sell-off occurs when investors in one company react to another company’s bad news. If two companies manufacture widgets and company A reports a weak quarter investors may sell company B anticipating earnings will be weaker than expected. The sell-off may be a buying opportunity when fears are unfounded or already discounted.  Perhaps, company B makes better widgets and the poor results of company A are the result of a loss in market share.

Cognizant Technology Solutions Corp (NASDAQ:CTSH)

Alternatively, company B may have already been priced for a slow-down in orders. The sell-off may then be over-discounting a real problem, but investors could be more bearish than is warranted. Clearly the first case is the best buying opportunity, but the second may offer a good chance to pick some shares up on the cheap if you are constructive on the the company long-term.

Ok, Makes Sense: But What’s On Sale Today?

Last Friday Accenture Plc (NYSE:ACN) delivered profit that exceeded Wall Street’s expectations at $1.14 per share versus $1.03 for the previous year. However, the company came up short on the top-line with revenues declining 5.8% year-over-year from $7.42 billion to $7.20 billion. Accenture Plc (NYSE:ACN)’s shares were hit quite hard on the disappointing news, declining by over 10% to $72 per share.

Due to Accenture Plc (NYSE:ACN)’s results, shares of several companies in the same sub-industry declined in sympathy. Accenture Plc (NYSE:ACN) is a global leader in information technology and consulting with operations in 54 countries serving 19 industry groups. While the IT and consulting sub-industry performed quite well in 2010 and 2011, more recently levels of caution have risen for discretionary spending among businesses, particularly in Europe. Let’s examine a few competitors that sold off and see if they represent buying opportunities.

Technology Solutions Corp (NASDAQ:CTSH) declined only 0.73% in sympathy, but had already declined 15.2% YTD. Cognizant Technology Solutions Corp (NASDAQ:CTSH) serves the IT sector offering outsourcing services with the majority of its oversees workers in India. The company’s shares have experienced disappointing returns due to a decline in revenue growth, which has slowed from an average of 28% over the past five years to an expected rate of 17% going forward. Cognizant Technology Solutions Corp (NASDAQ:CTSH) is attractively priced and outsourcing should still garner demand even in a weak environment as businesses seek to control costs.

The challenging aspect of investing in Cognizant Technology Solutions Corp (NASDAQ:CTSH) is that buying shares in a hyper-growth company after growth has slowed can be very frustrating. Since May of 2011 the TTM P/E of the company has compressed from 33.75 to under 18. If growth continues to slow, price appreciation may be difficult for several additional years and Cognizant Technology Solutions Corp (NASDAQ:CTSH) may continue to lag the market. The company is a good name to watch, however, I would wait to buy until revenue growth has stabilized.

International Business Machines Corp. (NYSE:IBM) declined by 2.3% in sympathy sending shares back to roughly where they were at the beginning of the year. International Business Machines Corp. (NYSE:IBM) operates in several segments including: global technology services (38.7% of revenues), global business services (17.9%), software (24.5%), systems and technology (17.0%) and global financing (1.9%). The current selling in International Business Machines Corp. (NYSE:IBM) is likely a buying opportunity because the market had previously discounted nearly identical results.

In mid-April International Business Machines Corp. (NYSE:IBM) reported earnings that were very similar to Accenture, with earnings missing slightly at $3 per share, while revenue fell 5% from one year earlier. While this might seem familiar to you, the market apparently has a very short memory and promptly sent International Business Machines Corp. (NYSE:IBM) shares lower for a second time.  However, if IBM’s disappointing results were already discounted, what difference does the Accenture report make? Furthermore, because the price of International Business Machines Corp. (NYSE:IBM) already recovered after its own disappointing report, it seems very likely that it will be able to recover from a competitors disappointing report.

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