A Checkup on Healthcare Consultants

 | Jun 14, 2012 | 12:30 PM EDT
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Regardless of what happens with the Supreme Court's decision on President Obama's healthcare reform law, investors and business people tend to agree that healthcare costs are going up and the burden on companies is growing.

In the face of those industry changes, business is booming at healthcare consultancies.

I've written before about HealthStream (HSTM), which provides Web-based training to workers at hospitals, clinics and physicians' offices. This small-cap has been consolidating since late April.

Since the first half of 2009 the stock has climbed ever higher without pulling back enough to undercut prior consolidations. Historically, that type of chart action only lasts through three or four pullbacks.

But markets in the past couple of years have tended to reward winners, so it's not uncommon to see stocks form a greater number of consolidations with higher lows than you might have historically. A prominent example of that phenomenon is Apple (AAPL).

So far in its current consolidation, HealthStream has corrected about 24% from its April 20 all-time high of $26.90. Volume has come in below average as the potential base has been forming, an excellent sign indicating that selling, at least so far, has been muted.

The company is expected to report its second quarter on or around July 23. Analysts are eyeing income of $0.09 a share on revenue of $25.5 million. Those would be year-over-year increases.

The next buy point may potentially occur as the stock eventually clears its prior high of $26.90. But depending on how the consolidation takes shape, and when the market next goes into an uptrend, a technical entry point could occur even sooner.

An even smaller healthcare consultancy -- and one that has sported more erratic trade as it's risen -- is National Research Corporation (NRCI). This company creates performance metrics for various healthcare industry clients.

Not surprisingly given the market conditions, this stock, too, is consolidating. As of Wednesday's close it was about 8% below its May 9 high of $51.95. In a bull market, a buy point may present itself as the stock rallies above intermediate resistance at $49.93. But if market conditions remain weak, it's all too easy for a stock to surpass a buy point, but retrace those gains and then some.

This is a highly speculative stock. It has a market cap of just $322 million and it trades a ridiculously small number of shares per day, around 4,800.

While it's shown good technical strength, this company's earnings growth rates have been erratic. It's seen earning $2.01 per share this year, a 19% year-over-year increase. In 2013, that growth rate is expected to be $2.37 per share, up 18%.

Small, thin stocks like this need to be handled with extra care. I generally set fairly tight stops to keep losses small. On these thin stocks, I also use a trailing stop to keep paper gains from evaporating into losses. These stocks generally end up being trades, rather than investments.

But if they end up riding a trend above a short-term moving average, such as a 5-day or 10-day line, the holding time can be longer. but even in that case it usually means a couple weeks, rather than just a few days.

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