This screen is designed for investors seeking stocks with worthwhile long-term appreciation potential and low-to-moderate risk. We began by screening for companies where share earnings have compounded at a minimum 15% annual rate over the past five years and that are expected to at least maintain a 10% annual growth rate over the next 3 to 5 years.
Next, we limited the list to stocks with price appreciation potential of 90%, or more, over the next 3 to 5 years, measured from the mid-point of each issue’s Target Price Range. Companies scoring our lowest rank, 5, for Safety were excluded. We also required that each company have a Financial Strength rating of B or better. When those criteria were entered into our stock screening tool, a list of 86 names was the result. We have chosen to highlight two, Varian Medical Systems, Inc. (VAR) and Cognizant Technology Solutions Corp. (CTSH).
Varian Medical Systems, Inc.
Varian Medical Systems designs, manufactures, sells, and services equipment and software products for treating cancer. Its devices enable radiation oncology departments in hospitals and clinics to perform conventional and advanced radiotherapy treatments as well as radiosurgery. Radiotherapy is the use of certain types of focused energy to kill cancer cells and shrink tumors, with the goal of damaging as many cancer cells as possible, while limiting harm to nearby healthy tissue. It also sells X-ray tubes for OEMs and flat panel digital image detectors for filmless x-ray imaging in medical, dental, veterinary, scientific and industrial applications. Lastly, Varian provides imaging processing software and detection products (IntellXTM) for security and inspection purposes, such as cargo screening at ports and borders.
The company put forth a mixed earnings report for the June quarter. Revenues were slightly below the consensus estimate, largely due to foreign currency translation. Still, earnings per share were strong, as margins improved on growth in lucrative service and installation business, as well as lower warranty and factory costs. Orders for X-ray products were down 1% from a year ago due to sluggish global capital spending on imaging systems. Still, VAR believes it is outperforming the broader market and winning market share. In all, management left its 2012 revenue and earnings-per-share growth estimates intact at 8% and 8.5%, respectively.
We are optimistic about the future prospects of the leading seller of cancer treatment equipment. The X-ray business has a proven track record of innovation and serving new types of customers. The company has been selling a lot of panels to Siemens (SI), which is especially encouraging considering they will be used in emerging markets. In general, these countries lack the necessary level of cancer treatment and X-ray equipment. Their increasing wealth is also a long-term driver. In developed countries, an aging baby boomer population also points to strong income growth in the coming years. A head start in proton therapy solutions also makes Varian a quality growth play, in our view.
Cognizant Technology Solutions Corp.
Cognizant is a leading provider of custom information technology, consulting, and business process outsourcing services. Its core competencies include technology strategy consulting, complex systems development and integration, enterprise software package implementation and maintenance, data warehousing, business intelligence and analytics, application testing, application maintenance, infrastructure management, and business and knowledge process outsourcing. In general, the company can provide customers with faster, more responsive, and lower-cost business operations.
Cognizant recorded an admirable performance in its most recent quarter. Revenues were up 20% thanks to strength from financial services, healthcare, and manufacturing clients. North America (80% of revenues) put forth particularly strong numbers. Notable contract wins came from ING (ING) and Philips (PHG). Europe remained weak with 2% growth, but the company indicated the new product pipeline is strong and should lead to growth in 2013, even if economic conditions on the Continent remain challenging. Based on results from peers like Infosys (INFY), we believe the company is winning market share. Further, management kept its 20% year-over-year revenue growth target intact.
The shares have yet to fully recover from a steep price decline in early May that resulted from reduced guidance. The company exhibited caution owing to lower corporate discretionary spending. Still we are encouraged by the newfound willingness of financial services companies to spend on IT, contract wins, and the general efficiency-enhancing nature of Cognizant’s products. With exposure to high-demand IT trends like data warehousing, customer relationship management, application maintenance, and enterprise resource planning, we expect above average long-term earnings growth.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.