Friday, June 29, 2012

CERN: Medical infotech

Cerner Corp. (CERN) make information technology systems hospitals and other medical organizations. The Kansas City, Missouri company's business plan is to provide complete solutions that encompasses medical records, physician entry of instructions for patient care and financial information.

Medical treatment has long been backward when it comes to information. Records, even in the present century, were kept on paper and plastic x-ray film. Information was compartmentalized so that changing physicians meant a loss of information. That happened to me when I moved from Washington, D.C. to Portland, Oregon as recently as 2007.

Cerner's job is to put an end to information stored in separate silos and make it easily available where it's needed. The company is creating a new environment of highly mobile medinfotech.

Such economies resulting from easy creation of and access to information is an element of the health care reforms that the United States is presently implementing

Unlike its larger competitor, McKesson Corp. (MCK), Cerner has no non-technology sources of income to speak of. It is a pure medinfotech play.

CERN gapped up this morning by 3.3%, due mainly, I think, to the eurozone heads of government reaching debt-crisis agreements overnight. The Supreme Court's ruling on Thursday upholding President Obama's passed with barely a ripple on the chart.

The pattern on CERN's chart has been one of sudden moves up followed by partial retracements and long, sideways pauses. The most recent bump up began June 12 from $77.87. It peaked June 19 at $88.32 -- an all-time high -- before falling to a low on Thursday of $76.52. (The previous lower low was $75.57 on June 1, so it was a substantial retracement.)

On the weekly chart, the price has been on the rise since late 2008 with only two major pullbacks.

I would call CERN a momentum play, yet it's not one that analysts are overly excited about. The analyst enthusiasm index at 18%, down from 22% a month ago. This is not a stock where the gang stands around the water cooler saying, "Hey! How about that CERN!!"

(My enthusiasm index gives positive weight to Strong Buy recommendations, and negative to Holds, Sells and Strong Sells. Simple Buys are ignored with a yawn.)

CERN drew my interest this morning because it landed on the Zacks top-buy list. Zacks each day makes public a handful of its new top buys, while reserving most of them for subscribers only. CERN was among the public batch. The Zacks analyst report is here. I haven't read it in order to guarantee that my analysis is independent of theirs.

Cerner reports return on equity of 15% with a low level of long-term debt amounting to only 6% of equity.

Earnings have rising a little each quarter since the 2nd quarter of 2011. The exception is the most recent quarter, which was down a penny from the quarter before. Cerner has shown an upside earnings surprise each of the past 11 quarters.

Institutions own 80% of shares and have bid up the price to a high level. It takes $5.65 in shares to control a dollar in sales.

On average, CERN trades 2.1 million shares a day, enough to support a good selection of options strike prices and open interest with fairly narrow bid/ask spreads.

Implied volatility stands at 35% in the upper half of the six-month range. It rose from 28% on June 11, peaking Thursday at 37% before declining as a result of the upward gap.

Options are pricing in confidence that 68.2% of trades will fall between $77.27 and $85.23, for a maximum gain or loss of 5%. Option volume is running deep below its five-day moving average, with call activity having a 2:1 edge over puts.

The price is well above the five-day fair price zone, which is not surprising given the size of the upward gap. The fair price zone is one standard deviation either side of the most traded price over the past five days, which is $77.43. The zone ranges from $76.60 to $79.92 and encompasses 68.2% of trades.

The chart shows what may be developing into a new most traded price, post-gap, at $80.88.

Cerner next publishes earnings on July 30.

Decision for my account: I like CERN's chart and fundamentals -- and the story as well. But before opening a position I want to see what will happen after this morning's gap. A move of such magnitude is often followed by a retracement over the very short term. So I won't enter today, but I might next week.

Because of the long pauses after each CERN move, I would tend to play it as a diagonal spread or perhaps a short vertical spread, the sort of position that can profit from non-movement as well as movement.

A fall below $76.52 would invalidate the near-term uptrend, and a rise above $88.32 would validate it. If the rise continues, there is a lot of room for profit between the present level -- about $81.20 -- and major resistance, amounting to 9%.

A move above $82 would suggest that the uptrend is continuing. An upward leap of the fair-trade zone, perhaps to being centered on $80.88, would also suggest that the time had come to open a bull position.

But for now, I'll wait and see.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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