As investors have become increasingly spooked about the economy and the markets, even many of the best technical performers have succumbed to selling pressures. In some areas of the market, such as networking and data storage, former leaders have plunged sharply since the beginning of this year. With the drumbeat of bad news about the financial, housing and tech sectors, it's easy to overlook some areas that continue to get institutional support.
Within the broader info tech sector, medical software makers have stood out as leaders. Investors still retain confidence in that particular slice of tech, anticipating growth as more and more health care industry professional begin using these products.
With new insurance rules and regulations, companies such as Athenahealth (ATHN), Cerner (CERN), Computer Programs & Systems (CPSI) and Quality Systems (QSII) have notched healthy revenue and earnings gains.
In addition to insurance changes, other health care reform shifts and software replacement cycles are helping these companies. Increasingly, paper-based record-keeping is going the way of cassette tapes, so overall industry conditions favor medical software makers at the moment.
Athenahealth has pulled back this month, but shows a year-to-date gain of more than 37%. The company has historically sold its software to doctors' offices, rather than large-scale providers, but it's making the move toward hospital systems.
Even in bear or volatile markets, I am constantly running screens for stocks whose fundamentals or technicals -- or both -- indicate potential in the next market rally. Athenahealth has been getting solid institutional support, outpacing the price performance of the broader market.
ATHN bolted 17.5% in monster volume on July 22, after beating second-quarter views and raising full-year guidance. It pulled back as the general market sold off, but it has gotten easy support above its 50-day moving average. The stock's character of trading has become more volatile than normal this month, but that has been entirely in keeping with the broader market.
Though ATHN has shown a good bounce off key moving averages, upside volume has been lower than average. In addition, with continuing market volatility, investors would be well advised to err on the side of caution, and keep tracking the stock, rather than jumping in now.
A fellow maker of medical-records software, Cerner, hasn't held up as well technically, but neither has it broken down. After falling earlier this month, the stock found support at its 40-week moving average and then vaulted higher with the indices this week. As of Friday, Cerner was trading above its 10-week line. While the revenue gains haven't been as impressive as Athenahealth's, Cerner's has shown increases in the past six quarters. Earnings growth has accelerated in the past two quarters.
The Missouri-based company is a beneficiary of the same trends helping Athenahealth. Cerner has more of a foothold in the hospital market. Wall Street expects 24% earnings growth this year, to $1.83 per share, and 21% growth next year, to $2.22 per share. Earnings have grown every year since 2004. Ideally, the stock will take its time to finish its current consolidation, rather than racing to a new price high. Watch for the next possible entry point as the stock nears its former high of $68.12, reached on July 29.
A small-cap, Computer Programs & Systems has also found support around its 10-week line, though trade has been a bit erratic lately. The stock has a market cap of $714 million, and it trades just 107,000 shares per day. It's not unusual for thinly traded stocks to show big intraday price swings. Of course, general market volatility hasn't helped.
The company's target market is small, community-based hospitals. The earnings growth rate climbed in the past three quarters, and revenue has been trending higher for two years. Wall Street expects to see solid profit increases from the Alabama-based company in the next couple of years. That could spur institutional buying, but keep in mind the small number of shares available. Lack of liquidity can add downside risk to any stock.
Like Cerner, medical-records software maker Quality Systems corrected recently and dropped as far as its 40-week line. The stock rose in the market rally Friday, regaining its 40-day line.
Upside trading volume, though, has not been particularly impressive. That shows that institutional investors have been holding shares and buying moderately, rather than going all-in. Greater certainty about a broader market rally could result in an increase of buying in individual names, such as this. Wall Street expects double-digit earnings growth at Quality Systems in the coming years, so institutional confidence remains.
While the prospects continue to look extremely bright for medical software companies, the market uncertainty should make investors think twice about purchasing even those stocks that have healthy fundamentals and technicals. A widespread downdraft could pull everything lower, so that's a good reason to exercise extra caution with growth names these days.