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The Chairman of the Board Bought Shares of Cognizant Technology Solutions Corp (CTSH)

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A Form 4 filed with the SEC has disclosed that John Klein, who is the Chairman of Cognizant Technology Solutions Corp (NASDAQ:CTSH)’s Board of Directors, directly purchased 7,500 shares of stock on June 14th at an average price of $62.78 per share. This gives him a total of over 250,000 shares held directly and more being held in a related trust. Economic theory suggests that insiders should generally prefer diversifying their wealth to buying additional shares and increasing their company-specific risks, and so insider purchases should indicate more confidence than usual in the stock’s prospects. Studies do in fact show a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading) and so we like to take at least a brief look at significant insider purchases.

Cognizant Technology Solutions Corp (NASDAQ:CTSH)

Cognizant Technology Solutions Corp (NASDAQ:CTSH) is a $19 billion market cap company whose businesses include consulting and IT services, outsourcing services, and information management services. The company’s revenue grew by 18% last quarter compared to the first quarter of 2012, and with margins holding steady net income was up 17%. With share count falling, earnings per share rose to 93 cents compared to 79 cents in last year’s Q1. Cognizant Technology Solutions Corp (NASDAQ:CTSH) is currently valued at 18 times trailing earnings, and at a P/E multiple of 17 if we annualize the numbers from the most recent quarter. That’s not too high a valuation, and given how well the business has been doing recently we certainly could consider it a potential “growth at a reasonable price” stock. Wall Street analyst expectations for the next several years imply a five-year PEG ratio of 0.9.

In addition to insider trading activity, we also track quarterly 13F filings from hundreds of hedge funds. We use the information in these filings to help us develop investment strategies (for example, we’ve found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and also to track interest in individual stocks over time. We can see from our database that billionaire Stephen Mandel’s Lone Pine Capital owned 8.7 million shares of Cognizant Technology Solutions Corp (NASDAQ:CTSH) at the end of March (find Mandel’s favorite stocks).

The two closest peers for Cognizant Technology Solutions Corp (NASDAQ:CTSH) are Infosys Ltd ADR (NYSE:INFY) and Wipro Limited (ADR) (NYSE:WIT). These companies’ stocks are priced at small discounts to Cognizant, with trailing earnings multiples in the 14-15 range. Interestingly, the sell-side is forecasting little to no growth on a forward basis at each of these companies in contrast to the high expectations at Cognizant Technology Solutions Corp (NASDAQ:CTSH).

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