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Barry Ziskin’s Favorite Stocks: Cognizant (CTSH)

   

I believe there are some great companies out there to invest in — companies that have the ability to successfully weather the recession, that allow us all to sleep well and not worry about this shaky economy and that are still offering investors outstanding value. Cognizant Technological Solutions (CTSH) is one such stock.

Like PetMed Express (PET), another one of my favorite stocks, Cognizant is right here in the U.S, although it does most of its operations from India, and is another NASDAQ traded stock..

If I were investing new money, PetMed and Cognizant would be among the first stocks I would buy today!

For more on PetMed, click here.

Why Cognizant (CTSH) Is a Top Stock

Cognizant is a company I have followed for quite some time but never thought I could get an opportunity to buy it at an attractive price. However, a steep meltdown among tech stocks gave me the opportunity to buy it on the cheap.

Outsourcing data processing and IT needs has been a long-standing trend to save businesses money by reducing payroll costs, particularly from using quality, cost-efficient outsourcing firms like Cognizant.

It appears to me that the budgetary pressures causing the shift from internalization to outsourcing are going to intensify to the max during the greater cost control pressures which all businesses will find themselves under as the current economic collapse continues and worsens.

Perhaps that is why, despite having their two weakest years of growth in operating earnings on record, Cognizant was still able to achieve growth of better than 36% in 2001, followed by an even more uncharacteristically moderate growth rate below 27% in 2002, the most recent two years of economic difficulty until now.

In every other year on public record (from 1996 on), Cognizant has achieved growth in adjusted pre-tax income of more than 45%.

Because of the general economic outlook, and because it gets more difficult to perpetuate ultra-high rates of growth the bigger you get, I’m assuming Cognizant may be slowed down more noticeably over the considerably more severe economic storm we are now encountering.

As a result of the geographic diversity and spread of their client base, they are aided by their exposure to areas of the world still growing, so, even if we were to conservatively assume that Cognizant’s growth could slow to merely half of the rate they achieved in their prior slowest two years, it would suggest that still respectable 13%-18% annually is doable over the course of the next two years.

The current year has started well and, thus far, Cognizant has exceeded analysts’ expectations with a first quarter performance which showed 24% year-to-year growth in operating earnings.

As a result of this, plus encouraging trends in their current business, I am anticipating growth in EPS for all of 2009 to surpass $1.70 (vs. $1.49 last year) and to approach $2.00 next year.

There’s More to the Earnings Picture than Meets the Eye

Not very many investors know this, but, Cognizant has been reporting its earnings ultra conservatively.

So conservatively, in fact, that just last year its “book” earnings (those that are being reported to investors) were more than 38% below what they declared when paying income tax. The income tax paid was more than 62% higher than the more conservative set of books we see. The company has declared more income when paying tax for five years in a row now, and has averaged declaring more than 64% over what we have seen during the latest four years!

What To Do Now

I do what no other analyst I know of does: I adjust their reported earnings so as to not penalize the company for its conservatism.

As a result, even though “reported” earnings may approach $2.00 per share next year, tax-adjusted earnings for next year could approach $3.30! 

I bought CTSH at last year’s market lows in the $15s and $16s and would still buy it at prices under $37.50.

Because I only pay single-digit P/Es for the greatest quality growth companies which can be found, it may appear I would buy CTSH under $33 (based upon my $3.30 tax-adjusted EPS estimate for next year) but part of the “cost” of buying CTSH is our share of the company’s rapidly growing stockpile of cash and marketable securities — they owe absolutely zero debt of any kind — and making adjustment for our share of their most liquid assets ups my buy price to under $37.50.  


Barry Ziskin has been successfully using his seven stock selection criteria for more than 35 years and has made his findings known through a variety of newsletters during that time, including most recently "Investing With Barry Ziskin." Mr. Ziskin’s flagship offering is the Z-Seven Fund, which celebrated its "Silver Anniversary" as well as its first full year as an open-end mutual fund in 2008. (The Fund operated as a closed-end in prior years.)

To obtain a copy of the Fund’s annual report, visit the Fund’s Web site or you may phone them in Mesa, Ariz., at (480) 897-6214.

The opinions expressed above are those of Mr. Ziskin as of the date of the article and may change at any time.  The stocks discussed in the article have been, and may currently be, held by Mr. Ziskin for himself and/or his clients.


Article printed from InvestorPlace Media, http://investorplace.com/2009/07/top-stocks-cognizant-ctsh/.

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