Adding Quality Systems, Inc. (QSII) – S&P 500 Next Stop 2,500

The Company basically simplifies running a practice by managing the business details and streamlining work. They help reduce the burden of documentation and reporting, speed and enhance care to improve outcomes, enable data sharing for value-based collaborative care, and drive better financial results for the medical industry.

At one time, Quality Systems, Inc. (QSII) was a high flying and very promising young healthcare play that ended up like so many small caps looking to make some hay, only to get pummeled. However, from a valuation and fundamental growth perspective, we have plenty of reason to believe QSII could once again be on the turnaround trail.

• There’s no question the entire healthcare and biotech space has been among the clear laggards in recent years, but if there’s one thing we can always count on in the markets, it’s for things to change. With all of the uncertainty surrounding healthcare these days, it’s no wonder the space hasn’t performed, but that will change – and when it does, we could be looking at some tremendous value in certain healthcare, pharma and biotech stocks.
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• It’s on the Trump agenda, and we can be rest assured when there’s clarity – no matter what it is – the space is likely to heat up. That’s just the way Wall Street works, and considering Quality Systems’ solutions is among some of the better medical provider solutions out there in an industry that needs it badly, we do believe the stock could be grossly undervalued around current levels.
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• Quality Systems currently trades at a market cap of $1B, so a larger than most small cap play. Trading at a forward P/E of 20 and a five year PEG of 2.79, QSII’s projected to grow their bottom line by as much as 14% from this year to next, while the Company has managed to exceed analyst estimates for four consecutive quarters, so not bad.
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• The Company currently has over $37M in cash on the books, $16M in debt, and is still heavily insider owned with a current insider ownership level of 26% – that’s pretty good no matter how big a company gets. And, the Company has managed to generate over $100M in cash flow for the trailing twelve months.
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• More importantly, the Company has managed to dramatically improve all of their key financial statements over the last year in fine fashion, so the stock’s recently positive behavior is well warranted.

Technically, like we said above, QSII has seen better days on a long-term basis, which you can clearly see in the monthly chart here. However, when you drill down into the daily chart, you can also see the stock has woken up in a big way over the last few weeks. Assuming this continues, we believe the stock has every right to find its way to a key long-term retracement level on its monthly chart of roughly $25 and change.

With that, we’ll suggest an entry into QSII around current levels. We’ll set an initial SSL in the idea at $14.25, which is just behind a key short-term retracement level, and we’ll set our initial target at that $25 and change level.

We could see shares of QSII pull back following its recent run, which would be fairly orderly, so it would be prudent to allocate 50% of what you’re looking to put into the stock now, and the other 50% in and when it pulls back.

We do expect the healthcare space to heat up soon, so QSII is one stock we believe has nice upside once it finally does.