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Sunday, 11 March 2007
Quality Systems (QSII) "Weekend Trading Portfolio Analysis"

 

 

 

 

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website. 

I try to accomplish several things at one time on this blog.  My main goal is to see if I can enhance my own ability and skills at 'picking stocks' that might lead to future price appreciation.  I do this with the many 'stock picks' that I write about on this website. As I just did, I try each weekend to review my past stock picks, find out how they turned out, and try to determine if there is anything else I could have done to help identify further stocks of interest.

In addition to my 'generic' review, I also manage an actual Trading Portfolio.  I now have 16 stocks and when I trade them I try very hard to remember to quickly post a note that I call "trading transparency" to keep you, the reader, informed of what I am actually doing in real life.  Sometimes my trades make me look smart, other times I am taking losses as I just recently did with my WOOF stock.  

As I manage my portfolio, I continue to develop my own peculiar trading rules.  And again, this is something that I write about frequently on the blog.  The 'when to buy' and the 'when to sell' thinking.  And how I use these sales on either 'good news' or 'bad news' to direct me in how I manage my overall portfolio 'posture'.  The discipline of having rules has been quite helpful to me and the fact that I am now responsible to you, the reader, has kept me sticking to these rules.  I cannot tell you how many times I have felt like selling a stock when the market was gloomy, or when I wanted just to buy something and held back (even when I bought Kendle outside of the rules, this resulted in a loss and was another tough pill for me to swallow---but I shared even these moments when I strayed from the rules with you!).

Anyhow, as part of my weekend 'homework' around here, I have been trying on intervals to go through my actual trading portfolio and give myself as well as all of you an update on my actual holdings.  

After my sale of WOOF, I am back to 16 positions.  My maximum remains 25, and my minimum is 6.  I shall not go above 25 or below 6.  When I sell a stock at a gain and hold 25, proceeds will go to cash.  And when I sell one of the last 6 at a loss, instead of 'sitting on my hands' I plan on re-investing in a new position, if I ever get to that point.  Every couple of weeks or so, I have been reviewing my portfolio, going alphabetically through my list of holdings.  Last month, on February 17, 2007, I reviewed Precision Castparts (PCP) on Stock Picks Bob's Advice.  Going alphabetically, I am up to Quality Systems (QSII), one of my most successful investments since I started utilizing my current strategy and writing my blog.

Currently I own 88 shares of Quality Systems (QSII) which I purchased with a cost basis of $7.75 on July 28, 2003.  QSII closed at $39.05 on March 9, 2007, for an unrealized gain of $31.30 or 403.9% since my purchase.  I have now sold portions of Quality Systems nine times, representing partial sales at 30, 60, 90, 120, 180, 240, 300, 360, and 450% appreciation levels.  Thus, on the upside, my next partial sale which would be 88 x 1/6 = 14 shares, would be at a 540% appreciation or 6.4 x $7.75 = $49.60.  On the downside, having already sold a portion at a 450% gain, I would sell all remaining shares if the stock should decline to 1/2 of that level or to a 225% gain, which calculated works out to 3.25 x $7.75 = $25.19.

I first reviewed Quality Systems on Stock Picks Bob's Advice on July 28, 2003, when it was trading at $30.67.  Adjusted for two 2:1 stock splits, that works out to a pick price of $7.67. Let's take another look at Quality Systems (QSII) and see if it still deserves a big 'thumbs up' on this blog!

What exactly does this company do?

According to the Yahoo "Profile" on QSII, the company

"...and its subsidiary NextGen Healthcare Information Systems, Inc. engage in the development and marketing of healthcare information systems that automate medical and dental practices, physician hospital organizations and management service organizations, ambulatory care centers, community health centers, and medical and dental schools. It offers proprietary electronic medical records software and practice management systems under the NextGen3 product name."

How did they do in the latest quarter?

On February 5, 2007, Quality Systems (QSII) announced 3rd quarter 2007 results.  For the quarter ended December 31, 2006, net revenues came in at $38.5 million, up 44% from the $26.8 million in the same quarter the prior year.  Net income was $8.7 million, up 81% over the net income of $4.8 million reported last year.  Fully diluted eps came in at $.32/share, up 78% over the $.18/share reported last year.

Within the report was a pertinent comment about the fact that the SEC was examining the Chief Financial Officer's trading record.  The company beat expectations on earnings which were expected at $.30/share, and came in slightly light on revenue, which had been estimated by analysts at $39 million.

How about longer-term results?

If we review the Morningstar.com "5-Yr Restated" financials, we see a very pretty picture.   Revenue, which was $44 million in 2002, has steadily increased to $119 million in 2006 and $148 million in the trailing twelve months (TTM).

Earnings, which were $.21/share in 2002, have steadily increased, quadrupling to $.85/share in 2006 and quintupling to $1.17/share in the TTM.

The company even initiated dividends in 2005, paying $.75/share, and increased it to $.88/share in 2006.   Meanwhile, the shares have been relatively stable, increasing from 24 million in 2002 to 27 million, a little over a 10% increase in the shares outstanding while revenue was up over 200%, and earnings were up over 400%.  I can handle this level of dilution!

Free cash flow has been essentially positive and growing with $16 million in 2004, $20 million in 2005, $28 million in 2006, and a slight dip to $26 million in the TTM.

The balance sheet is solid with $80.4 million in cash, which by itself can easily cover the $54.8 million in current liabilities and the $2.8 million in long-term liabilities combined with literally millions left over.  Calculating the current ratio, when comparing the total current assets of $147.4 million to the $54.8 million in current liabilities, we find a solid ratio of 2.69.

What about some valuation numbers?

Checking the Yahoo "Key Statistics" on Quality Systems we find that this stock is a small mid cap stock with a market capitalization of $1.05 billion.  (The definition of mid cap stocks vary, but this one suggests a market capitalization of $1 billion to $5 billion).  The p/e is a bit rich at 33.21, but the forward p/e is 25.89 (fye 31-Mar-08 estimated).  Thus, with the rapid growth, as reported even in the latest report above, the PEG (5 yr expected) works out to a very reasonable .97.  (1.0 to 1.5 is acceptable to me.)

Checking the Fidelity.com eresearch website, we find that relative to the Price/Sales (TTM), this stock is richly valued with a Price/Sales (TTM) of 7.11, compared to an industry average of 5.31.  However, the company is far more profitable than the average of its group, when measured by the Return on Equity (TTM).  ROE for QSII works out to a 36.50%, compared to the industry average of 19.01%.

Finishing up with Yahoo, we find that there are 26.98 million shares outstanding with 17 million that float.  Currently, as of 2/12/07, there are 4.33 million shares out short representing 25.20% of the float or 10 trading days of volume.  Using my own 3 day rule for significance, this looks to be a lot of shares that have already been sold betting on some bad news, most likely related to the CFO investigation reported by the company.  If the company, however, comes in with good news instead, there is likely to be a lot of buying pressure as these short-sellers scramble for the exits, rushing to buy shares to close out their short positions.

As noted the company is paying a trailing dividend of $1.00, yielding 2.6%.  The last stock split was a 2:1 split on March 27, 2006.

What does the chart look like?

Looking at a "Point & Figure" chart on QSII from StockCharts.com, we can see the incredible strength shown in this chart.  Recently under a little bit of pressure from the cloud hanging over the company from the possible SEC investigation of the CFO, the stock still remains well above its support level. I have included the points at which I have made my partial sales of this stock as it hit my appreciation targets.


All of these sales may seem a little odd, but they are the result of a disciplined strategy of selling gaining stocks slowly and partially as they hit appreciation targets set at the time of purchase.

Summary: What do I think?

Well, this is a fabulous stock.  Of course, I own shares so please take that into consideration.  I suspect the CFO news is a non-story but I have no information on this and this is something that should be taken into consideration.  The latest quarter was fabulous.  I love the electronic medical record field as healthcare facilities are all moving from paper to paperless records.  I also own some shares in Cerner which is another company in this field.  The Morningstar.com report is beautiful, and the valuation is nice with a PEG under 1.0, a ROE that is higher than its peers but the Price/Sales is indeed a bit rich.

In summary:

I STILL RATE QUALITY SYSTEMS AS A BUY

Thanks so much for stopping by and visiting my blog!  Please remember that I am an amateur and that past performance of any stock or even any investor (!) is no indication of future success.  If you have any comments or questions, please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.  If you get a chance, be sure and visit my Stock Picks Podcast Website.  If I get a chance :), then maybe I will be able to post another podcast later this week.

Bob 


Posted by bobsadviceforstocks at 11:13 PM CST | Post Comment | View Comments (6) | Permalink

Monday, 12 March 2007 - 3:57 AM CDT

Name: "Diego"

Hey Bob!

I see that you always talk about how you developed your strategy over time, how you learned from your mistakes, and so on. Would you be willing to share with us some of those experiences? What other strategies did you try? Did you ever trade on a shorter-term basis, like day trading or swing trading? Did you ever short-sell, or trade options?

I'm more of a swing trader myself, I usually keep stocks for days or a few weeks. It provides me with the right load balance I desire: I don't want to be all stressed up and looking at 10 charts at the same time like a day trader would, nor do I want to buy a stock and wait for months/years.

As usual, I congratulate you on your blog, and I hope your investments do well. Cheers! :-)

Monday, 12 March 2007 - 5:34 AM CDT

Name: "Robert Freedland"
Home Page: http://bobsadviceforstocks.tripod.com/bobsadviceforstoc

"Diego" wrote:

Hey Bob!

I see that you always talk about how you developed your strategy over time, how you learned from your mistakes, and so on. Would you be willing to share with us some of those experiences? What other strategies did you try? Did you ever trade on a shorter-term basis, like day trading or swing trading? Did you ever short-sell, or trade options?

I'm more of a swing trader myself, I usually keep stocks for days or a few weeks. It provides me with the right load balance I desire: I don't want to be all stressed up and looking at 10 charts at the same time like a day trader would, nor do I want to buy a stock and wait for months/years.

As usual, I congratulate you on your blog, and I hope your investments do well. Cheers! :-)

Diego,

Simply put, for many years I didn't have any 'system' at all.  I bought stocks because I thought, for whatever reason, that I should.  It might have been a high tech stock that was on 'the move', something someone said something about, or just a 'hunch'.  Mostly I bought stocks based on earnings.

At the same time,  I also dabbled in options.  I recall when I lost a lot of money about 12 years ago buying options on Jefferson Smurfit.  The stock just 'seemed' WAY too cheap, so I piled on buying Calls.  That didn't work and I lost my shirt on that.

After reading O'Neil, I became convinced that CANSLIM was the way to go, but I really didn't know how to read the markets.  It was after reading Robert Lichello that I became convinced that I needed to have something 'automatic'.  It was my belief that as O'Neil pointed out, that you can time the Market, often if you just observe your own portfolio. I guess the rest, as they say' is history.

Anyhow, that's a 'nutshell' of what I have done.  I have never truly been a 'day-trader'.  Or a 'swing-trader' as you say.  Just a lousy trader!

Bob 

Wednesday, 14 March 2007 - 1:00 PM CDT

Name: "zzAido1"

Bob,

 

Your return is not the 405% in total you speak of because you have sold parts of your portfolio at the intervals you mentioned. Also, you have not mentioned the cost of the trade which diminishes your returns along with the tax you will have to pay. I dont think you're telling the whole story.

 

Here's a better question - if you had not sold any of your original purchase, what would the value of your portfolio be today - I would guess much better. Please note QSII is a motley fool stock advisor selection since 2002/2003 (www.fool.com). I purchased around the same time as you - held, purchased more, held and looking at todays prices I might buy some more..........

 Holding great companies over the long haul provides greater reward in my opinion.

zz 

 

Sunday, 25 March 2007 - 8:45 PM CDT

Name: "Robert Freedland"
Home Page: http://bobsadviceforstocks.tripod.com/bobsadviceforstoc

"zzAido1" wrote:

Bob,

 

Your return is not the 405% in total you speak of because you have sold parts of your portfolio at the intervals you mentioned. Also, you have not mentioned the cost of the trade which diminishes your returns along with the tax you will have to pay. I dont think you're telling the whole story.

 

Here's a better question - if you had not sold any of your original purchase, what would the value of your portfolio be today - I would guess much better. Please note QSII is a motley fool stock advisor selection since 2002/2003 (www.fool.com). I purchased around the same time as you - held, purchased more, held and looking at todays prices I might buy some more..........

Holding great companies over the long haul provides greater reward in my opinion.

zz

 

zz,

You have made some excellent points.  I will disagree about not telling the 'whole story' as I have included every single sale and transaction on QSII that I have made.  It is true, however, that my overall performance is lower than the 400% gain on the remaining shares that I discuss.  I have not, in fact, calculated what my exact performance is.  The data is there, and if you are interested, you can let me know.  I am sure that it is quite satisfactory.

While you may find it a good strategy of averaging up, or adding to positions that are doing well, my approach for me is more conservative.  That is, I am trying to avoid collapses on stocks that appreciate quickly and strongly by selling portions of them as they move higher in price.  It isn't the very best way to make money on any particular stock, but it may well exceed your return as you add on to your gaining stocks.  I do something different than what O'Neil suggests in the CANSLIM approach which is closer to your strategy.

I have felt it wise to sell losing stocks quickly and totally and gaining stocks slowly and partially.  It has been very successful for me as I have written and that you are free to read.  I really don't have any idea about how you are doing overall.  I presume you are doing fabulously.  If that is the case, I commend you and wish you continued success.

After many years of investing, I have settled on my current approach that involves quite a few transactions that do indeed have tax and commission expenses.  I am aware of that as well.  But what I am doing is not trying to make the biggest killing possible on any particular investment.  I am trying to develop an approach to be successful overall.  I am trying to develop my own trading rules that will guide me as stocks appreciate or decline in price, help me determine when I need to be adding money into equities or turning equities into cash and has been providing me with the discipline to put together a very strong portfolio from my perspective.

I have never claimed to have anything that is necessarily better than anything else.  I have only been claiming that I am an amateur investor, who is trying to sort out what works and doesn't work for me.  I just want to be profitable long-term, and if possible, do better than the broad averages.

Time will tell if I am successful in this approach.

Thank you so much for commenting on the blog.  So many people stop by, read what I write, and whether they agree or not, move on without taking the time to communicate.  I very much appreciate what you are saying, I do not disagree with your comments, and wish you well in your investing activity!

Bob 

Friday, 6 April 2007 - 9:19 AM CDT

Name: "anonymous"

Whatever makes you sleep well at night is the key really. I think in investing there is no "correct" method for the masses (maybe funds for the masses). Everybody has their style and best to stick to what works for you.

I've done equally well on QSII - buying in the dips. I have done similar with other stocks - buying 1/3 holding, learning some more about the company, buying in another 1/3 in a dip, etc.  Of course over the last 4 years my portfolio has done very well but will it continue? This is where it gets tough I reckon and the 20% yoy returns might be tougher to come  by.

In anycase, I can highly recommend the Motley Fool discussion boards on QSII. They have a lot of able people over there contributing to valuations, discussion of the business going forward and the like. I certainly gain solice from it......

zz

Tuesday, 10 April 2007 - 2:29 PM CDT

Name: bobsadviceforstocks
Home Page: http://bobsadviceforstocks.tripod.com

"anonymous" wrote:

Whatever makes you sleep well at night is the key really. I think in investing there is no "correct" method for the masses (maybe funds for the masses). Everybody has their style and best to stick to what works for you.

I've done equally well on QSII - buying in the dips. I have done similar with other stocks - buying 1/3 holding, learning some more about the company, buying in another 1/3 in a dip, etc.  Of course over the last 4 years my portfolio has done very well but will it continue? This is where it gets tough I reckon and the 20% yoy returns might be tougher to come  by.

In anycase, I can highly recommend the Motley Fool discussion boards on QSII. They have a lot of able people over there contributing to valuations, discussion of the business going forward and the like. I certainly gain solice from it......

zz


ZZ,

My strategy is certainly not about what allows me to "sleep well".  I am trying to provide something more along an "automatic" approach to buying and selling stocks.  I have never claimed that my 'system' was the 'best' way to approach stocks.  Only that I was hopeful that it was a successful approach.

Thank you for participating here on the blog.  I shall try to make a point and visit some of the Motley Fool Boards as well. 

Bob

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