Taking Profits in Quality Systems on Cerner Hype

Barron's had a nice article out this weekend on medical health records, specifically Cerner (CERN)... ironically Quality Systems (QSII) is getting a better bounce that Cerner itself. This has probably been the most unrelenting stock in my portfolio with the best chart; it does not do the sexy +10-15% moves, but it grinds out wins day after day, week after week. I am going to cut out almost my entire position here as we now approach mid 30x forward PE.

The lion's share of these shares were bought in the $37-$39 range, and we quickly approach $60. I know valuation seems to mean nothing to market participants, but everywhere I turn things are starting to get extremely rich. I am going to look to buy cheaper valuations with similar growth if the uptrend continues, although in this type of market, valuation protects you very little on the downside as the 'student body left' environment sells everything.

If the stock continues, so be it - I will have gotten my pound of flesh. I am selling all but a handful of shares in the $58s. QSII has an unusually long gap in between earnings reports [Jan 30, 2009: Quality Systems Earnings Solid], and the next one appears in early June; with this sort of valuation going in, I could see the potential of a sell off . Stimulus money is going to be a long tailwind, not a near term explosion.

Quality Systems, Inc. engages in the development and marketing of healthcare information systems in the United States. Its system automates various aspects of medical and dental practices, and networks of practices, such as physician hospital organizations and management service organizations, ambulatory care centers, community health centers, and medical and dental schools. The company offers proprietary electronic medical records software and practice management systems under the NextGen3 product name.

Here is the article from Barron's - obviously you can replace much of the bullish reasoning and apply it to any stock in the sector; we mentioned a handful of names in January [Jan 6, 2009: Analyst Throws Water on "Hope" in Medical IT] [Jan 9: Bookkeeping - Starting Quality Systems]

• SHARES OF CERNER, A HEALTH-CARE INFORMATION- technology company, have jumped more than 50% since early March. A powerful driver has been the $787 billion federal stimulus package, which includes billions of dollars of incentives to encourage more widespread use of health-care IT -- electronic medical records in particular.
• "I've been in health-care IT for 17 years, and it's the strongest tailwind I've seen," says Sean Wieland, a senior research analyst at Piper Jaffray.
• THE IMPETUS FOR THAT UPGRADE was the impact of the American Recovery and Reinvestment Act of 2009. Signed by President Barack Obama in February, the legislation includes $36 billion of incentives to encourage wider use of electronic medical records, and penalizes providers that don't make the effort. The goal is to make the sprawling U.S. health-care system more efficient, less costly -- and safer.
• Many health-care providers have adopted clinical information technology slowly, due to its considerable expense and to resistance from doctors reluctant to abandon familiar paper records. Electronic billing systems are common. But in hospitals -- Cerner's bread-and-butter customers -- big IT gaps remain, notably for computerized clinical-order entry and electronic medical records.
• The electronic records are essentially a repository of clinical data, documenting virtually every step of a patient's hospital stay, from test results to vital signs to radiology images. Computerized order entry lets a doctor or nurse request a test or prescription electronically. The aim: improving coordination among the parties that deliver health care, while minimizing mistakes.

[Mar 25, 2009: Stimulus Funds for E-Records Augur Big Windfall for Small Health Firms]

Disclosure: Long Quality Systems in fund; no personal position

Comments

[joseph78:]

What would you say about buying some puts into June or even shorting the stock with some call protection? My bet is the stock will drop to at least $50 level or maybe even $45 level.

May 19 04:01 PM

[Dan Jacome:]

Short squeeze!!!

May 20 08:47 AM

[TraderMark:]

Hi

if you don't want to sell your common, buying put protection makes sense - June is a little tight for me as its only 4-5 weeks from here, unless you are really sure a drop will be imminent. Not sure if your question was from someone who owns the stock long or simply making a bet QSII drops. With earnings between now and the June expiration it will make for an interesting test either way.


On May 19 04:01 PM joseph78 wrote:

> What would you say about buying some puts into June or even shorting
> the stock with some call protection? My bet is the stock will drop
> to at least $50 level or maybe even $45 level.

May 20 11:31 AM

[user41653:]

Where are Those Good Green jobs , ??? my Nephew graduated a year ago from college ,finaly got a job . He works for a ou fit that installs solar panels , there s about a dozen people working there , they work part time usually not enough work most weeks to work full time , they get $9 a hour when they work , No benifits thats it .
Now I guess thats a Ok job for a 23 year old living at home , with no rent or food bills to pay all he pays is his gas and car insurance. But theres NO Future in that job at least no financial future and its not like hes learning a trade he said after a week on the job he as good at it as any of the older guys . Is this what Obama is talking about ?? When he talks about green jobs , ?One of his task force was on TV this morning talking about jobs for people insulating homes , they consider those "green jobs " I wouldnt guess theres much of a future in a job like that either . So were exactly Where are ALL these MILLIONS of GOOD GREEN JOBS going to come from ??? Will they Pay $50K Year , thats just a living wage these days , Well they Have Benifits , Retirement programs I guess We know the answer dont we.
Turns out All Those Good Green Jobs well there Kinda like Hope and Change sound great but really don't happen much in the REAL WORLD

May 20 12:29 PM