Investors with an interest in Business - Software Services stocks have likely encountered both Cognizant (CTSH - Free Report) and Guidewire Software (GWRE - Free Report) . But which of these two companies is the best option for those looking for undervalued stocks? Let's take a closer look.
We have found that the best way to discover great value opportunities is to pair a strong Zacks Rank with a great grade in the Value category of our Style Scores system. The proven Zacks Rank emphasizes companies with positive estimate revision trends, and our Style Scores highlight stocks with specific traits.
Cognizant and Guidewire Software are sporting Zacks Ranks of #2 (Buy) and #3 (Hold), respectively, right now. This system places an emphasis on companies that have seen positive earnings estimate revisions, so investors should feel comfortable knowing that CTSH is likely seeing its earnings outlook improve to a greater extent. But this is just one factor that value investors are interested in.
Value investors also try to analyze a wide range of traditional figures and metrics to help determine whether a company is undervalued at its current share price levels.
The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that help us determine a company's fair value.
CTSH currently has a forward P/E ratio of 15.32, while GWRE has a forward P/E of 72.14. We also note that CTSH has a PEG ratio of 1.52. This popular figure is similar to the widely-used P/E ratio, but the PEG ratio also considers a company's expected EPS growth rate. GWRE currently has a PEG ratio of 7.62.
Another notable valuation metric for CTSH is its P/B ratio of 3.17. The P/B is a method of comparing a stock's market value to its book value, which is defined as total assets minus total liabilities. By comparison, GWRE has a P/B of 4.98.
Based on these metrics and many more, CTSH holds a Value grade of A, while GWRE has a Value grade of F.
CTSH has seen stronger estimate revision activity and sports more attractive valuation metrics than GWRE, so it seems like value investors will conclude that CTSH is the superior option right now.