3 Medical Software Names In Good Setups

08/30/2012 11:30 am EST

Focus: STOCKS

Kate Stalter

CMO & Senior Financial Advisor, Better Money Decisions

The medical software sub-sector has long been home to growth winners. While some of the tried-and-true names consolidate, some smaller players may be ready to make moves, writes MoneyShow's Kate Stalter.

Since the market began its uptrend in March 2009, medical software makers have done a few rotations into leadership roles.

Companies such as Athenahealth (ATHN) and Cerner (CERN) are known to growth stock investors and traders, although they are now trading off their highs.

Athenahealth is in a potential buy zone, consolidating above its ten-week line, and below its all-time high of $97.37, reached on August 6.

Cerner is not faring as well technically, although the fundamental case remains strong. The stock is 19% off its June 19 high of $88.32. It has been getting support at its 200-day moving average, a good sign, but that’s still too weak for me to attempt a buy. I want to see the stock above shorter-term averages.

The earnings estimates indicate more potential ahead. Analysts expect the company to earn $2.36 per share this year, up 26% over 2011. The company is expected to grow earnings by 18% next year, to $2.78 per share.

Earnings growth tends to attract institutional buyers, so it may be worth watching Cerner in the background, to see what kind of price progress it makes in the coming weeks and months.

But there are some other medical software names that could have potential to break out even sooner. A big price mover Monday was a recent IPO, Greenway Medical Technologies (GWAY). The company, which makes practice management software, made its NYSE debut in February.

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This is a small company, with a market cap of $471 million. It moves a paltry 64,000 shares per day, meaning that investors and traders need to be cognizant of the possibility for a sudden shakeout.

The stock vaulted 6.7% Monday in heavier-than-normal turnover. The move came on the heels of an announcement that Greenway would supply health-records software to Walgreen (WAG).

Greenway reports its fourth quarter after Wednesday’s close. Analysts have pegged income at 9 cents per share on revenue of $34.36 million. That would be no change in the earnings column, and a gain of 17% on the top line.

This will be its second quarter as a publicly traded company. Last time, it beat earnings views by 4 cents per share.

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The stock is a bit extended out of its buy zone for my taste. It closed Monday at $16.22, 4% above its five-day exponential moving average, and 5.5% above its 50-day line.

Another stock that’s been on a tear, and is also out of buy range, is MedAssets (MDAS), maker of software to help hospitals manage revenue and spending. This is another small company, with a market value of $996 million. It has decent liquidity, moving about 577,000 shares a day.

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The stock was rallying to 52-week highs on Tuesday, and was trading about 2% above its five-day line. That’s a little too frothy for me to enter a trade, but as always, a pullback to the five-day or even the 15-day could offer a buy opportunity.

For a low-priced, speculative stock with a promising chart, take a look at Simulations Plus (SLP). This is a stock to handle with extreme care, as it has a market cap of just $70.5 million and moves only 12,000 shares per day. As of Tuesday, it was trading at around $4.43 per share.

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The California-based company makes simulation software used by the pharmaceutical industry, among others. It’s had an erratic history of earnings growth, but it’s expected to increase profit at a 6% rate this year, and another 28% next year.

The stock is now holding above its key moving averages, below its March 52-week high of $4.69. You may want to wait for a pullback to a short-term line before taking a position.

And always remember: With a thinly traded stock, you’re naturally going to see sparse institutional ownership. That can add to the risk of a sudden downdraft.

At the time of publication, Kate Stalter did not own positions in any of the stocks mentioned in this column.

Related Reading:

The Time Is Right for Athenahealth

CVS Keeps Rising on Walgreen's Fall

11 Health-Care Names Poised for Gain

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