As a long-time holding, we liked Cognizant (NASDAQ:CTSH)’s positioning as an IT and BP outsourcing service provider, adding value by helping companies simultaneously manage legacy IT business while ramping up investment in constantly emerging digital technologies. However, over the past few years there has been increasing turnover in Cognizant’s longer-term managerial ranks, and while the company continued to function smoothly, the recent handoff to the Company’s new CEO turned out to be more disruptive than we expected. Despite recently assuring shareholders that its value proposition and positioning were strong enough to drive high single-digit revenue growth along with margin expansion – a good recipe for double-digit earnings growth – the Company came up well short of these expectations and are now outlining, in our view, vague plans to take up investments in building out consulting capacity while refocusing its selling and go-to-market strategy.
We agree with the Company that there are plenty of addressable market opportunities for Cognizant to capture, but we now think there will be a period of higher investment and lower top-line growth as it repositions to better compete relative to more integrated outsourcing and consulting service providers. Despite performing quite well over the years, we had trimmed Cognizant down to one of our smallest positions and decided to liquidate the remaining position in favor of opportunity elsewhere.
From David Rolfe (Trades, Portfolio)'s second-quarter 2019 Wedgewood Partners letter.
