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Broken Company, Broken Stock or Broken Market?


I get questions from readers on how to know whether its time to buy or sell a particular company. This is particularly the case when you have a company that investors see has good numbers but that their stock price does not reflect it due to the market not rewarding the company’s success.

I thought I’d share with everyone some of the things I look at when making a decision to buy or continue to hold a company in this situation. I picked a company that has a pretty ugly chart but one that I feel pretty strongly about as being one that should remain in client portfolios: Computer Programs and Systems, Inc. (Ticker: CPSI).

When looking at a company, I always make sure that there is a reason to either buy it or to continue to own it. I document an Investment Thesis for the company which is a good discipline to adopt for anyone that invests in common stocks. Remember, you are an owner of a company when you buy its stock – not just an owner of the stock. For CPSI, the Investment Thesis looks like this:

INVESTMENT THESIS: CPSI is the leading provider of electronic health record systems for hospitals. The company has over 30 years of experience in the community and rural hospital markets for healthcare IT and has a leading position in its market. The company focuses on Electronic Health Records, order processing, documentation, and picture archiving and communication systems. CPSI’s business has benefited strongly from government action over the past few years. First, ARRA both increased compliance requirements for electronic healthcare records and provided subsidies to help organizations attain IT products. Obamacare required digitization and electronic availability of patient records. As a leader in small/midsize markets, CPSI is in a strong position to benefit from these additional regulatory requirements put on health care providers.

To me, this thesis says the company is a leader in its field and that the market for its services is growing in a large way due to escalating governmental regulation that will ultimately increase demand. A pretty compelling thing in my book.

Next, I want to verify the company’s earnings growth and financial strength. Fortunately, I have a tool that none of you have access to – its our proprietary Earnings Growth Model and Financial Strength Model. These two models had their origin in my Master’s Thesis many years (who am I kidding, three + decades) ago. Back then, my thesis aimed to prove that there are specific combinations of analytic ratios that would lead to accurate forecasts of stock price movement. One model focuses on 17 different ratios that pick apart the earnings growth potential of a company and the other uses a dozen ratios to pick apart how safe of an investment the company is based upon the solidness of its balance sheet.

In the beginning, it was a very cumbersome task to acquire annual/quarterly reports for companies and make the calculations. Today I have an automated service that downloads the most current data on +6,000 publicly traded companies and using the ratios in each model ranks them on a bell curve from zero to one hundred, with one hundred being the highest score attainable.


As you can see from the above graphic, this company rates very highly in terms of earnings growth and financial strength.

Which leads me to think about whether this is the time to buy more shares of it or just to hold onto the ones we have. There are two analyses I make that guide me in this decision. One is to determine if the stocks is over or under valued at its current price level. The other is to determine within what range of values I’d like to be a buyer of this company, what range of values I’d just hold onto it, and finally what range of values would I consider selling it.

Lets look at the first issue: is the company over or under valued.


My analysis here involves looking at three standard valuation ratios from a historic standpoint. I take the average of the Price to Book ratio, Price to Free Cash Flow ratio and the Price to Earnings ratio over the past ten years and extrapolate a stock price based upon forward earnings estimates. This stock price basically tells me what this company would trade at if it were trading at the average valuation of the past 10 years. I then compare it to the current price and it gives me an over or under valued reading. In the case of CPSI, this reading says that the company’s stock price is 26% below its average historic valuation and we should consider buying more of it.

Now lets look at the other issue: what price level makes analytical sense to be a buyer of this company.


This graphic documents for me the analysis we perform to determine the range of prices that make sense to be a buyer, a seller or just an investor that should hold onto their shares.

This analysis starts with a calculation of the earnings per share the company should expect five years into the future based upon its earnings growth rate. It then multiplies that five year forward number by the high and the low Price to Earnings ratio of the past 10 years to give you a feel for the possible trading range of the company. It then stratifies that trading range into thirds, with the top third indicating that its time to consider taking profits, the middle third telling you to consider holding onto this stock, and the bottom third telling you its time to consider buying more shares.

In the case of CPSI, the current stock price for the company is nearly at the bottom end of the trading range and we should consider buying it. I also include a risk/reward calculation to help back-up the trading range calculation. As you can see from this graphic, the potential reward far outweighs the potential risk.

All of these calculations are simply tools that I use to help me make informed decisions. Ultimately, the decision to buy, sell or hold is made based upon analysis of the company, analysis of the market, and analysis of extraneous factors that could impact the future that are not part of any financial analysis of the company’s current operations – things like the likelihood that government regulatory over-reach will continue in the future.

Ultimately, based upon my use of these tools and analysis of the extraneous factors, I believe I will be a buyer of this stock after the first of the year once I take time to analyze the various technical indicators that I’ve discussed on the blog several times in the past which will help me determine the timing of the purchase. And to answer the question posed in the title, I’d say its a broken market for not recognizing the investment potential of this company.

All of this takes a lot of time – but that is important if you are going to be successful as an investor.

If you don’t want to put the time into investing your own money, why not make a New Years Resolution to give us a call here at BankChampaign (351-2870) or drop me an email ( and open an investment account. We can then use our time-tested systems to manage your portfolio as described above.

Have a Merry Christmas, Happy Hanukkah, and Prosperous New Year!

I hope you enjoy this selection of music for the season…