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Bobby Raines's Analyst Insights

Options Analyst Writer
Bobby Raines
Author Bio

December 9, 2013 - Discerning Investors Should Consider Cerner

This year has been a good one for stocks. All the major indices are up more than 20%, with the blue-chip Dow Jones actually serving as the laggard with a year-to-date gain of almost 23%. The technology-heavy Nasdaq has outperformed this year, gaining 34% so far in 2013.

Of course that 34% increase doesn?t apply to everything in the NASDAQ 100. Some stocks, like Tesla (TSLA) and Netflix (NFLX) have posted gains of 300%, reminding a lot of people of the late 1990s tech boom. The other side of that coin is that traditional tech giants like Apple (AAPL) and Intel (INTC) have posted relatively weak gains this year, adding 6% and 15% respectively.

I?m not interested in chasing the high-fliers or trying to find value in the laggards. Those can both be fine strategies, but in a year like this, matching the broad market is nothing to sneeze at an anything above that should be considered excellent by any objective measure.

One company I?d like to highlight is Cerner Corp. (CERN). It?s not a household name, but the stock is up 46% so far this year and while it isn?t in the red-hot social media or solar sectors, it is in the underappreciated, but critically important healthcare information technology business.

The company has posted an average earnings growth rate of 22.89% over the last five years. Analysts project that the trend will continue, with current estimates pointing toward a 17.87% average growth rate over the next five years.

The company isn?t particularly new, nor is it small. It was founded in 1979 and had revenues of $2.67 billion in 2012. The reason it is largely unheard of is that healthcare IT isn?t marketed to consumers. Cerner?s services and systems are sold to hospitals and doctors? offices that are still working to move away from paper records.

In the recent past, the company benefitted from parts of the American Recovery and Reinvestment Act, commonly known as the stimulus, which offered incentives to medical practices to upgrade their IT systems.  The law provides $35 billion in total funds starting in 2011 and to be paid out over four years. Individual healthcare providers can get up to $44,000 over the four-year period, while hospitals can qualify for up to $4 million. Meanwhile, healthcare organizations that fail to adopt new healthcare IT standards will start to face penalties starting in 2015.

The Affordable Care Act, also known as Obamacare, is another  positive for Cerner. In addition to record-keeping requirements, the law?s focus on costs means that software that can help treat patients in the most efficient and cost effective way possible is going to be in high demand.  

Like other IT companies, Cerner has followed the lead of companies like IBM (IBM) in that it isn?t just selling hardware. It is a full-service operation that not only sells hardware, but also software and provides the service to keep everything running. Sales of new systems last year will lead to steady streams of service revenue in the years to come.

Traders looking to take advantage of Cerner's strength could consider a January 47.50/52.50 bull-put credit spread for a 30-cent credit. That's a 6.38% return or 58.24% on an annualized basis (for comparison purposes only). This position will return a full profit so long as the stock closes above $52.50 on January 18, giving it 8.5% downside protection.

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