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In this recent market environment very few stocks have withstood the onslaught of distribution that has wracked this market since the July highs. During this time, there has been much talk about buying the bargains that are out there in anticipation of the recent lows being “the bottom.”

Sadly, history suggests that after such a sell-off from the highs, a further decline in stock prices are in store. Only the hopeful bet against history. Since I do not see that as a wise choice and have a lot of experience under my belt, I know that you have to stick with strength.

The stocks that are holding up now, while we sell off, are telling us something. Some of them don’t tell us much but others tell us that their stock is being accumulated during the selling so that when the uptrend resumes it can become a future leader. How do we know it can become a future leader? By simply looking at the fundamentals and following the big money as they accumulate these stocks.

Merge Healthcare (NASDAQ:MRGE) is a medical computer software company located in Chicago, IL that develops medical imaging, clinical workflow process, and patient information management software applications.

This stock is clearly in a growing industry that is seeing a lot of demand and, no matter if we enter a recession or not, the stock market will start another uptrend again. When the market does turn around, Merge Healthcare has the fundamentals to support it being a stock that produces substantial price gains.

Let’s take a look at the key fundamentals that support further price appreciation. While the stock has consistently made money, it went through a period of slower growth from the December 2009 quarter to the March 2011 quarter. However, that has now changed with the most recent quarter coming in at .06, which is a 300% increase from the one negative quarter it produced in June 2010.

Future earnings estimates look very bright with 2011 and 2012 estimates coming in with expected growth of 90% and 58% respectively. We have to keep in mind that these numbers have been revised down lately and if the economy goes into a slump they will be revised lower. Still the future growth is very strong and even if the numbers are revised down the EPS growth will still be substantial enough to support further price gains.

More impressive is sales growth. During the past eight quarters sales have grown from 16.9 million to 55.6 million with YOY quarterly growth of 16%, 28%, 30%, 89%, 167%, 140%, 164%, and 92% during those eight quarters. The one common characteristic all past big winning stocks have is strong EPS and sales growth.

While debt is quite large at 186%, the company still sports a solid Return-On-Equity of 14%. This along with its growing business should be able to take significant chunks out of that debt in the future.

While a stock might have great growth via EPS and sales, it still needs one very important ingredient to make it a future big winner. That is ownership. You want to see a lot of mutual fund ownership. Well, you don’t want to see too much but you do want to see clear growth. On that end, we have that here with Merge Healthcare. Mutual fund ownership has increased from 102 to 112 funds during the past four quarters. Eight quarters ago only 96 funds held a position, so clearly this stock is whetting the appetites of portfolio managers.

Another important factor for any stock to be a big winner is for it to have other top quality stocks with strong EPS and sales in its group. Here, we have that, with other stocks like AthenaHealth (NASDAQ:ATHN), Computer Programs & Systems (NASDAQ:CPSI), Cerner (NASDAQ:CERN), Quality Systems (NASDAQ:QSII), and a myriad of other names.

While fundamentals are the most important factor to any buy decision I make, technicals will always tell me where I should buy the stock and where I should sell the stock. If Merge Healthcare can base out a bit sideways on lower volume and then bounce off either the 10 or 50 day moving average on very strong volume, I would love to initiate a position in this stock. However, if the market begins to sell off heavy again it might be wiser to wait for a better opportunity to get long this stock as 3 out of 4 stocks follow the general direction of the market.

While the stock might not race higher in the very short term, this stock has all the fundamental requirements and the story behind it to become a very big stock market winner for those who invest in this company's future. However, being a cheap stock it might take a while for it to get on the radar of other mutual funds. Until it trades over $10 a share it might not have the institutional backing to rocket higher right away. However, the future is very bright for Merge Healthcare.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MRGE over the next 72 hours.

Source: Merge Healthcare: Helping Portfolios Stay Healthy