Is LKQ Corp a Buy, & More: Invest In Stocks With A Margin of Safety To Reduce Risk And Enhance Returns

Cognizant Technology Solutions Corp (NASDAQ:CTSH)

For those not familiar with this incredibly consistent high-growth stock, I offer the following excerpt business description courtesy of Capital IQ:

“Cognizant Technology Solutions Corp (NASDAQ:CTSH) provides information technology (IT), consulting, and business process outsourcing services worldwide. The company operates through four segments: Financial Services; Healthcare; Manufacturing, Retail, and Logistics; and Other. It offers consulting and technology services, such as IT strategy, program management, operations improvement, strategy, and business consulting services; and application design and development, systems integration, and enterprise resource planning and customer relationship management implementation services. It also provides enterprise information management services, such strategic, advisory, and management consulting; enterprise data management; descriptive analytics/business intelligence; strategic corporate performance management; and packaged analytics services, as well as big data services that assist clients in managing and deriving actionable insights from the explosion in the volume, variety, velocity, and complexity of data… Cognizant Technology Solutions was founded in 1998 and is headquartered in Teaneck, New Jersey.”

With Cognizant Technology Solutions Corp (NASDAQ:CTSH), we once again see an example of earnings continuing to strongly advance, while only fear drove stock price down.  Consequently, as we’ve seen with all of the examples cited in this article, recessions can be as much about opportunity as they are about risk.  At the end of 2008 and the beginning of 2009, this powerful growth stock could be purchased at a P/E of only 12 (Note: I have added a 12 P/E overlay-the magenta line).

The following Earnings and Price Correlated Graph since the beginning of 2009 provides an additional perspective on the margin of safety concept.  Notice that Cognizant’s earnings growth rate did slow down from 35.7% to 23.7%.  Nevertheless, the margin of safety provided by its lower-than-average valuation, mitigated the risk of slower growth.

The following performance results associated with the above Earnings and Price Correlated graph illustrate the profit opportunity afforded by investing in a high-growth stock, even when earnings growth slowed a bit.  Simply stated, buying Cognizant at a low valuation reduced risk while generating a compounded annual rate of return of 36.8% per annum that exceeded its earnings growth rate by a wide margin.