Save This One for Later

 | Oct 03, 2011 | 9:30 AM EDT
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When it comes to stocks with less than $500 million in market capitalization, I normally don't fish. But, every once in a while, a name pops up that warrants closer attention, especially when the positives clearly outweigh the negatives.

During a time when small-cap stocks have been under intense fire, one health care name continues to act well, showing signs of accumulation: HealthStream (HSTM). The company has a market cap of $283 million, and it's thinly traded with an average daily volume of just over 100,000 shares. However, the stock has plenty of positive traits, including outstanding fundamentals and increasing mutual fund ownership. The company provides learning and research solutions for the health care industry. It's a niche market, but these often present great growth opportunities, and HealthStream is well positioned for growth.

Valuation-wise, HealthStream isn't cheap, trading at 58x trailing earnings and 40x forward earnings. But growth has been strong in recent quarters, and it's expected to continue. The consensus third-quarter estimate is for profit to rise 50% from a year earlier to $0.06 a share, with sales expected up 23% to $20.5 million. The company hasn't announced a release date for the report yet, but this should be in late October.

In late July, second-quarter earnings jumped 33% from a year earlier to $0.08 a share. Sales rose 26% to $21 million. Revenue from the company's Learning segment rose 29%, while sales at its Research unit rose 22%.

The strong results prompted the company to raise its outlook for the rest of the year. During the second-quarter conference call, CEO Robert Frist said, "The second-quarter performance has given us confidence to raise our growth expectations for 2011 to an increase in revenue of 22% to 24% and an increase in operating income of 39% to 42% compared to 2010."

For the full year, analysts expect HealthStream to earn $0.26 a share, a 44% increase from 2010. In 2012, the company is forecast to earn $0.32 a share, up 23% from 2011.

HealthStream isn't shy about research and development (R&D) spending. It shouldn't be shy, either, because for the company to eventually move from small- to mid-cap status, innovation will be paramount. It's what drives bottom-line and top-line growth.

In its latest fiscal year, 10.6% of total revenue was plowed into R&D. In fiscal 2010, its cash flow per share was $0.41. That's quite impressive, considering it earned $0.18 for the full year.

Another feather in HealthStream's cap is that, earlier this year, the company was added to the Russell 2000 Index of small-cap stocks. The company is also debt-free.

Perhaps most impressive about HealthStream is increasing mutual fund ownership in the stock in recent quarters. At the end of the fourth quarter, 47 funds had a position in the stock. Two quarters later, that number had jumped to 101. It's always good to see increasing fund ownership in a stock, because institutional investors are the real drivers of a stock's price.

The Chart

In terms of its chart, HealthStream broke out above its descending trendline Friday. It was the stock's second straight above-average volume gain. On a day when the Nasdaq cratered 2.6%, HealthStream closed at $12.83, up 2.6%


HealthStream (HSTM) -- Daily

As a whole, the health care sector continues to perform well despite tremendous recent selling pressure in the broad market. When market conditions turn, the sector should continue to do well.

Keep in mind that the current market is unhealthy to say the least. Of course, poor price performers with sluggish fundamentals are declining, but that also goes for strong price performers with outstanding fundamentals. A weak market tends to take everything down with it.

To its credit, HealthStream has been able to withstand the selling pressure so far. While the current market environment is not exactly conducive to multiple-expansion, HealthStream has a lot going for it. When market conditions turn positive again, HeathStream should continue to draw interest from small-cap growth managers looking to pump up their returns.

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