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Why do I make the statement that Quality Systems (NASDAQ:QSII) is one of the best stocks in the entire market? Why did I include Quality Systems as one of the 53 stocks in my book Best Stocks Now? Why does my proprietary grading system currently give QSII a very rare A+ rating?

I follow more than 2,700 stocks on a daily basis. There are a lot of great stocks to choose from, there are a lot of very good stocks to choose from, there are a lot of deeply undervalued stocks to choose from, and lastly there are a lot momentum stocks that are making new highs to choose from.

Let's first begin with a synopsis of what Quality Systems does for a living. Headquartered in Irvine, CA (a very unfriendly business state), the company develops healthcare practice and electronic records management software applications for medical and dental practices. Here is the stock's basic info from my Best Stocks Now app:

[Click all images to enlarge]

I recently interviewed the CEO of Quality Systems, Steven Plochocki, on my radio show, Positively Wall Street. Here are some takeaways from that interview:

  • About 30%-35% physicians, dentists, and hospitals across the nation have gone to EHR (electronic health records).
  • That leaves 70%-75% that still are still using a paper system.
  • We are in the first year of a government incentive package that gives breaks to those that convert. This package came from the most recent stimulus bill.
  • Quality Systems currently has 60,000 clients that have converted to EHR using their software.
  • The pipeline at Quality System is currently bursting with $180 million in backlog business (as of August 5, 2011).
  • The stock has tripled over the last 2.5 years and they have gone from 400 employees to 2,000 employees. Now that is some job growth.
  • CEO Plochocki expects those numbers to double again over the next five years!

He also believes that the company is in the early stages of a beautiful, five-year run. To hear the interview, click on the following link. His interview is in the second quarter of a 60 minute show:

To say the least, I was very impressed with the CEO and management of this company. I had chosen the stock for my book, Best Stocks Now, well before the interview. Let's quantify the performance of the stock of Quality Systems in a little more detail:

  • Over the last ten years, while the S&P 500 has delivered an average annual return of 1.0%, Quality Systems has delivered an average annual return of 43.7% to its investors.
  • Over the last five years, while the S&P 500 has delivered an annual average return of (-1.5%), Quality Systems has delivered and average annual return of 21.3% to its investors.
  • Over the last three years, while the S&P 500 has delivered an annual average returns of (-1.2%), Quality Systems has delivered an average annual return of 32.0% to its investors.
  • Over the last twelve months, while the S&P 500 has delivered a return of 9.8%, Quality Systems has delivered 57.3% to its investors.
  • Over the last 3 months, while the S&P 500 is down 6.7%, Quality Systems is up 14.2%!
  • Lastly, in 2008 when the S&P 500 swooned and lost 38.5%, the stock of Quality Systems was up 47.4%.

Here is a snapshot from my app, Best Stocks Now that shows a graphic repesentation of the performance:

Now, before you start accusing me of being just a momentum investor, let's also examine the current valuation of Quality Systems and its future prospects. While past performance gives us a good idea about how the stock has performed against the market and its peers, investing is all about the future.

Quality Systems has grown its earnings at an average rate of 15% per year over the last five years. Most of that growth was obviously before the government stimulus program that has put a tailwind behind itsrecent growth. Over the last four quarters, sales have grown by 12%, 30%, 42%, and 55% respectively. During those same four quarters, earnings have grown by 14%, 23%, 24%, and 21% respectively. Remember, this is in an economy that has been growing by about 2%!

One of the big themes to remember while investing in this current market, is to find stocks that are above the fray and flourishing, rather than sticking with stocks that are mired in the muck and dependent upon a vibrant economy. All of my articles here on Seekingalpha have been focused on that theme, and I have given many examples of such stocks.

There are currently 22 analysts that cover the company. I am not one of them. The consensus analyst 5 year growth rate for Quality Systems is 22% per year. The consensus estimate for next fiscal yeas is $3.44.

Growth Est QSII Industry Sector S&P 500
Current Qtr. 45.70% 19.60% N/A 24.70%
Next Qtr. 21.70% 31.30% 494.30% 30.60%
This Year 33.00% 28.40% 18.50% 15.50%
Next Year 22.00% 26.00% 21.60% 15.00%
Past 5 Years (per annum) 15.02% N/A N/A N/A
Next 5 Years (per annum) 21.95% 20.12% 18.65% 10.72%
Price/Earnings (avg. for comparison categories) 31.60 55.18 24.78 12.25
PEG Ratio (avg. for comparison categories) 1.44 1.35 0.70 2.09
Earnings Est Current Qtr.

Sep 11

Next Qtr.

Dec 11

Current Year

Mar 12

Next Year

Mar 13

Avg. Estimate 0.67 0.73 2.82 3.44
No. of Analysts 22.00 22.00 22.00 20.00
Low Estimate 0.57 0.68 2.64 3.19
High Estimate 0.70 0.76 2.90 3.64
Year Ago EPS 0.46 0.60 2.12 2.82

If Quality System can meet those estimates, the company would be earning $7.61 per share five years from now. If that happens, what kind of a multiple (P/E) would the company deserve at that point? The current P/E ratio of the stock is 39 and the P/E ratio has ranged between 29-39 over the last four quarters. The P/E ratio has ranged between 15.6 and 33.9 over the last ten years and the average has been 26.3.

Avg P/E
11-Mar 31
10-Mar 33.9
9-Mar 22.6
8-Mar 24.6
7-Mar 31.4
6-Mar 38.2
5-Mar 23
4-Mar 24.8
3-Mar 17.5
2-Mar 15.6

Avg.: 26.3

I am using a multiple of 24X to compute a five year target price of $182.60.

$7.61 X 24 = $182.60

Here is what that 5 year valuation looks like on my app, Best Stocks Now:

I like to look at a 5 year target price as opposed to the usual 6 month target prices. I also like to buy stocks that have 100% or more upside potential over the next five years. Quality Systems currently meets that criteria.

Now we have a stock that is one of the top performers in the market over the last 1,3,5, and 10 years, a very impressive CEO, and a stock that still has the potential to double over the next five years. Oh yeah, don't forget that the stock was up 47.4% in 2008! I think we can safely say that this stock is currently above the fray and not mired in the muck! Let's not forget to look at a current chart of the stock, just to see how it is holding up this very volatile market:

As you can see, the stock hit a new all-time high yesterday. No wonder, I call this one of the very best stocks in the entire market right now. It is one about only 10 that gets an A+ grade right now and I have currently have it ranked at number 14 out of 2,729 stocks!

Source: Quality Systems: One Of The Best Stocks In The Entire Market