Cash Machine Trading Cheap – Pegasystems Stock Set to Run?
We think Pegasystems (PEGA) stock is worth a look: It is growing, producing cash, and available at a significant valuation discount. Companies like this can use cash to fuel additional revenue growth or simply pay their shareholders through dividends or buybacks. Either move makes them attractive to the market.
The stock is available at a significant discount to its 3-month, 1-year, and 2-year highs, making it a potential bargain. But before coming to that conclusion, it is critical to understand why the stock has declined, and where its fundamentals – including growth, cash flow, and margins – stand today.
PEGA Has Strong Fundamentals
- Cash Yield: Pegasystems offers an impressive cash flow yield of 9.7%.
- Growing: Revenue growth of 3.5% over the last twelve months is not that great, but your cash pile is likely to grow.
- Valuation Discount: PEGA stock is currently trading at 32% below its 3-month high, 55% below its 1-year high, and 55% below its 2-year high.
Below is a quick comparison of PEGA fundamentals with S&P medians.
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| PEGA | S&P Median | |
|---|---|---|
| Sector | Information Technology | – |
| Industry | Application Software | – |
| Free Cash Flow Yield | 9.7% | 4.3% |
| Revenue Growth LTM | 3.5% | 7.4% |
| Operating Margin LTM | 11.4% | 18.4% |
| PS Ratio | 3.0 | 3.2 |
| PE Ratio | 15.0 | 23.8 |
| Discount vs 3-Month High | -31.8% | -7.2% |
| Discount vs 1-Year High | -54.6% | -12.3% |
| Discount vs 2-Year High | -54.6% | -14.3% |
*LTM: Last Twelve Months
While PEGA may sound like a good opportunity, there is always meaningful risk involved when exposing yourself to single stock trade. One of the ways to understand that risk is look at how PEGA stock has behaved during past market crashes. In other words, how low can it really go, and are you willing to take that risk?
Other Stocks Like PEGA
Not ready to act on PEGA? You could consider these alternatives:
These stocks have positive revenue growth, high free cash flow yield, and are trading at a meaningful discount to 3M, 1Y, and 2Y highs.
A portfolio that was built starting 12/31/2016 with stocks that fulfill the criteria above would have resulted in average 6-month and 12-month forward returns of 25.7% and 57.9% respectively, with a win rate (percentage of picks returning positive) of above 70%.
Portfolios Over Single Stock Picks
The fundamental profile of PEGA – robust cash yield paired with a multi-year valuation trough – represents a potential mean-reversion signal. However, while individual stock trades can look compelling, they trades carry idiosyncratic risks that even elite cash flows cannot fully hedge.
The Trefis High Quality Portfolio (HQ) follows an objective and rule-based approach. By diversifying across 30 high-conviction names, the HQ strategy has outpaced the S&P 500, S&P Mid-cap, and Russell 2000.