High-Flying Cognex a Buy Again

Without sight, the modern industrial robot is just so much flailing metal. With it, it’s increasingly a difference-maker for rapidly automating manufacturers and distributors.

Success depends crucially on machine vision, a tricky technology marrying the sensors serving as robotic eyes to the software algorithms and artificial intelligence applications essential to processing those signals. How well a machine “sees” is ultimately a function of its proficiency at pattern recognition.

We’ve been recommending the leading machine vision developer for the last six months, and in that time Cognex (CGNX) has returned 52%. It rallied 10% on big volume last Monday in response to another quarter of surprisingly strong results and hugely upgraded guidance.     

Even a blind robot could tell you that this is a favorable trading pattern amid a technology-led bull market. Stocks with upward momentum like CGNX have historically produced excess market returns; it’s one of the few pricing anomalies that has survived the advent of algorithmic trading. Even machines have a hard time fully exploiting momentum strategies, it seems.

And as for humans, some are still stuck on price-earnings ratio, despite excellent odds that Cognex investors don’t care that much about next year’s earnings. (The company is solidly profitable and debt-free, by the way.)

No, what investors care about is that revenue has quadrupled since 2009 and continues to grow strongly even as Cognex reaps a huge gross margin (78% in Q2). What investors care about is what this company might achieve in the next few years; the stock is trading off those high but hazy expectations.

Sure Cognex is expensive; but lucrative high-growth stocks are seldom cheap. And they’re far less likely to cause problems than many equities that are cheap for a reason.

Of course, market sentiment could shift, or Cognex could lose luster. I’m not smart enough to guess when that might happen. I’m only smart enough to know that reversion to the mean and valuation are terrible reasons to stay out of a stock that’s working this well.

Buy CGNX below the increased limit of $110.


Stock Talk

John N

John N

Igor, I always enjoy and respect your analyses. Any guidance as to a fair intrinsic value of CGNX?

Igor Greenwald

Igor Greenwald

I guess my answer is that CGNX doesn’t have intrinsic value, if by intrinsic you mean value specific to Cognex and separable from all the outside factors. I mean this is obviously a company with a great prospects and potentially one that could be worth a lot more than $$9 billion to a motivated industrial buyer down the line. But I don’t know how one would go about separating that market cap and those prospects from relative stock market valuations and stock market trend, interest rates and the economic backdrop, and competitive threats. CGNX is valued like the success story that it’s been and therefore quite expensively in this market, and I honestly don’t think convincing ourselves that it’s worth X “intrinsically” would be useful. What draws me to the stock besides the solid fundamentals is the possibility that it could turn into a home run. Big winners often look chronically expensive and they often look a lot like Cognex. That’s the upside I’m paying up for, in this market. Naturally, things could change.

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