Is Cogent Communications Ready for Another 50% Rally?

Cogent Communication Holdings (CCOI) is a provider of high-speed internet access and private networks to clients around the world. The company specializes in offering its services to law firms, financial service firms, and advertising and marketing firms.

With so many people working from home, firms are looking to boost their Internet services with faster speeds and increased bandwidth. This is helping to increase demand for the services Cogent provides.

Over the last three years, Cogent has seen earnings grow by 39% per year. Analysts expect earnings to grow by 8.6% this year, even amid the global economic slowdown, and by 30.7% next year. The projections for the next five years show a growth rate of 60.5% per year.

Despite the past growth rate and the projected growth rate for Cogent’s earnings, analysts are rather bearish on the stock. There are 15 analysts covering the stock currently with only four rating it as a “buy.” There are eight “hold” ratings and three “sell” ratings.

This puts the buy percentage at 26.7% and that is well below the average buy percentage which is in the 70% range. This could be a positive for the stock price as there is far more room for upgrades than downgrades.

Post-earnings drop brings trend line in to play

Cogent reported earnings on August 6 and the company’s EPS came up short of the consensus estimate. This led to a big selloff in the stock and it would eventually drop 29.4% from its high on August 3 to the low on August 25.

The decline in the stock seems to have ended at a trend line that connects the lows from December ’18 and September ’19.

The two previous lows were also marked with the weekly stochastic indicators hitting oversold territory in 2018 and very close to it in 2019. The recent selloff dropped the indicators deep in to oversold territory, but the indicators made a bullish crossover this week.

When the indicators did this in 2018, the stock gained over 50% in seven months. When the stochastic indicators made the bullish crossover in 2019, the stock gained 75% in seven months.

There are a couple of ways investors could take advantage should Cogent rally another 50% or more in the next seven months. You could buy the stock outright and 100 shares would cost you around $6,800 right now. If the stock rallies by 50% off the recent low, we would be looking at a price of $102 for the stock and the 100 shares would be worth $10,200. The total gain would be $3,400.

The other possibility is to buy call options on Cogent. Based on the two previous rallies taking seven months, I like the April ’21 option series. The 60-strike calls are priced at $14.50 currently and that means one contract will cost you $1,450. If the stock reaches $102, these options would be worth $42.00 or $4,200 per contract. That would mean a dollar gain of $2,750 and a percentage gain of 190%.

While I believe Cogent has put in a bottom at this point, I would recommend a stop at $59.50. The stock peaked in the $60 range in July ’19 and that area could act as support now. The 104-week moving average is just at $60.59 currently and that gives the stock two potential layers of support should it make another move lower.  

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