Cognizant Tech Passes the Five-Minute Test

The latest Forbes annual 200 Best Small Companies issue is on newsstands, and the top-ranked company is Cognizant Technology Solutions (CTSH - commentary - Cramer's Take).

Never heard of them? Neither had I. But if Cognizant is poised to emerge as one of the great growth stocks of the next several years, I want to know it intimately.

My plan, therefore, is to run Cognizant's numbers through my five-minute test. (This test is adapted from my book It's Earnings That Count, to be published by McGraw-Hill in December.) If everything looks fine, then I'll examine its earnings quality, competitive advantage (including a check on management) and valuation in subsequent columns.

Cognizant provides e-business services and software applications to Fortune 1000 companies located in the U.S. and Europe. According to a recent Business Week online column, the Teaneck, N.J.-based firm can reduce certain IT costs for its clients by 20% to 50%, because many of its programmers work in India, where wages are about one-tenth of what they are in the U.S.

Cognizant started in 1994 as an in-house technology-development center for Dun & Bradstreet. The firm went public in 1998 at less than $2 a share (split-adjusted). Based on a recent price of $42, its market value is $2.7 billion.

Let's move to the five-minute test. By the way, this scorecard isn't chiseled in stone; as your analytical skills improve, you may want to amend it as you see fit. The point is to devise requirements that allow you to quickly dispense with companies that don't deserve your attention.

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Hewitt Heiserman has been a financial analyst for 15 years and has worked for Fidelity Investments, Simplex Time Recorder, American Holdco and Breakaway Solutions. He is now writing a book on the Earnings Power Box, an analytical model he created to gauge the quality of a firm's profits. (The Earnings Power Box is a trademark of Hewitt Heiserman.) At the time of publication, Heiserman didn't hold any securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Heiserman appreciates your feedback and invites you to send it to [e-mail].

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