• Research

Nov 28, 2016

S3 BLACKLIGHT: Cognizant Hits Record Short Interest Despite Elliott Letter

Activist hedge fund Elliott Management, which owns 4% of Cognizant Technology Solutions Corp (CTSH US), sent a letter to its board members outlining a three part action plan to increase its share value. The stock is up 8% in morning trading in response to Elliott’s plan which they claim would lift Cognizant’s stock price 50-70% by the end of 2017. The plan includes a $2.5 billion stock buyback and implementation of a yearly dividend; a change to their margin targets and operational improvement; and a reshaping of their board of directors.

Cognizant’s stock price is down 4% year to date as it has cut its 2016 revenue forecast in August due to “macroeconomic headwinds”; has instituted an internal investigation over payments in India that may have violated the U.S. Foreign Corrupt Practice Act; and had its president, Gordon Coburn, resign and be replaced by Rajeev Mehta. Cognizant has rallied recently, up 21% since its year to date low of $47.71 on September 30th, but short sellers have sold into this rally with short interest climbing to $696 million by mid-November after averaging only $442 million in the first three quarters and $372 million in 2015.

S3 Blacklight’s Crowding Indicator, a measure of the magnitude of real time shorting activity relative to market cap and float, spiked on November 16th and 22nd as shorts continued to build their positions with Cognizant’s short interest topping $1 billion for the first time in its history. Short interest is now at $1.3 billion, up $1 billion or 314% for the year and up $925 million or 232% since the end of the 3rd quarter.

With Elliott’s interest in the company inducing a short term pop in Cognizant’s stock price, short sellers are still looking for the stock to retest its $50 floor it traded around for most of October. In addition to its “macroeconomic headwind”, dubious Indian payments and board issues, short sellers may be feeling a tailwind from President-elect Trump’s immigration plans which would negatively affect H-1B visa statuses and therefore a significant portion of Cognizant’s 255,800 person workforce.

With Cognizant short interest at record levels and climbing steadily since the end of the 3rd quarter despite the recent stock price rally, this looks to be more than a short term momentum play and more of a value or fundamental trade on the short side. Short sellers, with $1.3 billion in shorts, have almost equaled Elliott Management’s $1.4+ billion long position and we will see which thesis is correct in both the short and long term.


For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.


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