I wrote a bit about the recession situation and what it means to investors in Investing in Recessions, now I want to scrutinize all my holdings to see exactly where I stand in all of this! The only thing that matters is that my companies are priced significantly less than they are worth, that provides me with all the safety I need in any market condition. Because of that, I will focus my attention on what I think they are worth and what I think they will be worth in five years.

In Alphabetical Order:

Activision Blizzard, Inc (ATVI)

- Technically it is still Activision, Inc. but I see no reason for the merger not to go through and my shares will be converted 1:1 so it’s close enough to the same thing. On the Activision side we have consistent 25%+ annualized returns for the past 10 years and an almost legendary brand name that has proven it has exceptional staying power with decades of hits. On the Blizzard half we have annualized returns of over 60% for the past 14 years (best number I can find, I would guess 50% over the last 10) and a team of management and developers that can hardly produce anything except a number one seller. While every other game company is spending truckloads of cash throwing out title after title trying to land one hit in twenty and maybe even making a little profit, Blizzard produces a game once every couple of years and earns profits about equal to every other major player combined (that’s being generous, they probably make twice that). They still make up a very small portion of the entertainment industry and if recession fears really set in they could benefit greatly by providing some of the most affordable entertainment there is.

Bottom Line: Their growth prospects make it worth an easy $40 billion on current earnings (after combining Blizzard). In five years I would be really surprised to see anything less than a $100 billion market cap on $2.5b in earnings. Considering it is now trading for a mere $16b (add $8b for Blizzard), it should be clear why I have a double position in Activision.

Barr Pharmaceuticals (BRL)

- This is an ultimate recession play. When economic growth is slow, generics are in. They also have a substantial line of proprietary drugs that will continue to sell in even a major recession; drugs are drugs, it’s hard to say no. They are probably best known for their oral contraceptive drugs (both generic and branded) and I can’t imagine those sales dropping in a recession (there’s probably a low cost entertainment/baby-boomers joke to be had in there somewhere). Their financials are a bit tricky because they recently bought Pliva for $2.5 billion in cash (Barr is currently trading for $5.8b) which temporarily skews their numbers until they start realizing the company synergies and paying off the debt. Looking at them long-term however shows impressive 16-17% annualized growth rates and increasing margins that top their competitors. With improved efficiency, Pliva synergies, and new drugs coming off patent I don’t think 20% growth is unreasonable for the near future. Analysts are estimating it to be around 23% on average.

Bottom Line: I think Barr is slightly undervalued now trading at $5.8b when their predicted growth indicates something closer to $6.5b-$7b, especially considering the recession safety they offer. I agree with the analyst consensus and expect market thumping growth for the next five years putting them at an easy $17-19 billion market cap on an average $1 billion in annual earnings.

Cognizant Technology Solutions (CTSH)

- This is an India growth story: an IT consulting firm with 50% annualized earnings growth over the past 5 years and this is a $7.5 billion company! Their fundamentals put their competitors to shame and their price makes them look average. Analysts are also predicting 30-40% forward earnings growth and in the past have consistently underestimated their actual earnings! So for a market leader with dizzying growth rates and financial ratios held only by a select few, earning $300 million this year gives them a market cap of only $7.5 billion?! Does everyone think high growth to business clients is impossible in a recession or what? I certainly don’t.

Bottom Line: $15 billion would be a more realistic valuation of this company on current earnings. I will admit predicting five years out is more difficult for this company than my others, but I think a $40 billion market cap on $1.5-2 billion in earnings is an easy target.

You might think I’m overly optimistic with my estimates considering historical averages and current economic conditions, but that’s alright, I just think you’re confused. I still have the rest of my current holdings to cover in part 2, so stay tuned!

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