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Markman Says Be Cognizant of Cognizant Tech

As blue chips battle, CTSH will profit

By Jon Markman, Editor, Trader's Advantage and CounterPoint Options


If the first year of this decade has been all about building a firm base of recovery, the second year will be about leveraging that success and fighting off newly resurgent competitors. That’s why my favorite investment to buy in 2011 is tech stock pick Cognizant Technology Solutions (NASDAQ: CTSH).

It’s going to be a ground war in 2011.  Companies that survived the financial crises and tech bust of the 2000s by addressing the needs of niche users in a unique and profitable way will now try to attract new customers by scratching, clawing and attacking their rivals.

What a change it will be. Firms that reached out to competitors in 2009 and 2010 because they felt they were all in the deleveraging mess together are going to turn their backs on accommodation and look for opportunities to rip each other apart, limb from limb.

It will be Google (NASDAQ: GOOG) vs. Apple (NASDAQ: AAPL) vs. Microsoft (NASDAQ: MSFT) in the battle cage for supremacy on the mobile Internet; Kellogg (NYSE: K) vs. General Mills (NYSE: GIS) duking it out on store shelves in the battle for families’ cereal bowl; and ConocoPhilips (NYSE: COP) vs. ExxonMobil (NYSE: XOM) clawing each other in an effort to grab new fields, acquisition candidates and drilling rigs; and Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) elbowing each other for merger deals and trading clients.

Handicapping the winners of these fights will be tough, but there is another way to bet in 2011. It may not have as much upside leverage, but it may be a more certain route to an above-market return. It’s a bet that all of these companies are going to want to focus on what they do best — making software, marketing cereal finding oil and investment banking — and less time dealing with the nitty gritty business details at which they are less accomplished.

That is where offshore providers of IT services and business processes come in. They take over the essential but boring stuff that large niche companies do not feel they are good at: Billing, regulatory compliance, merger streamlining, human resources, just to name a few.

Cognizant Technology Solutions (NASDAQ: CTSH) has become one of the world’s leaders at this type of unheralded back-office work over the past 16 year after being spun out of Dun & Bradstreet, growing from scratch to become a $22 billion goliath based in the United States but with roots, management and operations firmly in India.

CTSH has been a major beneficiary of globalization, as revenue has risen 30% on average over the past five years — a stunning number. Analysts applaud its consultative approach to solving clients’ problems and ability to increase its share of clients’ business by delivering consistent cost savings.

The company has consistently reported 20%+ revenue and earnings growth over the past ten years, even during the financial crisis. And its 20% operating margin provides buffer to any unexpected cost pressures from any kind of increases in its costs.

I expect earnings to grow at least 13% next year, netting $2.92 in earnings per share, and 14% in 2012, netting $3.32 per share. The stock has earned a premium 30x multiple for years, and I don’t expect that to change, so I am looking for shares to reach $90.50 in mid-2011 and $103 in mid-2012 for an advance of 24% to 41% above the current price of $73.

For more aggressive investors who want to find the “next” Cognizant, check out HiSoft Techonlogies (NASDAQ: HSFT), which has the same business plan but is based in China.

Check out the other FREE stock picks that make up InvestorPlace.com’s Top 10 Stocks for 2011.

Article printed from InvestorPlace Media, https://investorplace.com/2010/12/cognizant-technology-solutions-ctsh-tech-stock/.

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