What Success Really Looks Like

by Mitchell Clark, B. Comm.

Recently, I’ve been writing about a lot of successful companies in this column and why they are doing well on the stock market. I have to be honest in saying that I’m amazed at the strength of the broader market since March. After the stock market hit its low in early March, I wasn’t surprised that it bounced back. In my mind, it was a technical rebound in an oversold market. But I have to say that I didn’t think the bear market rally would last this long and that the S&P 500 Index would be well over 850.

The stock market’s been trading on any bit of good news it can hold on to — what I really mean by “good news” is actually bad news that just wasn’t as bad as expected. Investor sentiment is focused on the slowing of carnage and it’s willing to accept any bad news if there’s any hope for the future.

As I wrote recently, my best guess is that we’re in for a sustained period of range-bound trading in the main stock market averages. At this point, I just don’t have any defined sense as to where the stock market could be a year from now. There are still a lot of obstacles to overcome in the Main Street economy and I just don’t see how Wall Street can be overly enthusiastic about the future. Really, I think the current strength in the broader market is still part of a technical bounce from hitting a new low in March. Regardless of the reason, I’ll take it. The S&P 500 over 850 is better than below 700.

It’s earnings season and I can’t help but be enthusiastic about companies that are actually doing very well in the current recession. If a company is doing well in a recession and the stock is going up, I figure it’s a business that’s worth keeping an eye on.

Back in March, I wrote in this column about a very interesting business called Quality Systems, Inc. (NASDAQ/QSII). This company is based in Irvine, CA, and is a healthcare information
systems provider. Selling to doctors and dentists (one of the greatest target markets there is), this company sells products and services that help automate medical and dental practices. The business is doing great and the stock has been extremely strong over the last six months. Not only this, but the company pays a dividend to stockholders, which, at its current stock price, is yielding about two percent.

This stock just hit a new 52-week high and is getting overvalued. But, Street analysts keep revising their earnings expectations for the company, with upward earnings per share revisions occurring as recently as the upcoming first quarter, as well as all of 2009 and 2010.

In my view, this business is worth analyzing, because it has done just about everything right. The company is growing, selling products that are in demand from well-heeled customers. The company has a strong balance sheet, little to zero debt, and a strong ownership position from management.

Recently, Quality Systems’ Chairman of the Board, Sheldon Razin, won the “2009 Excellence in Entrepreneurship” award from the Orange County Business Journal. According to the magazine, there were 99 nominees in the competition with five companies represented by seven entrepreneurs named as winners. Now, I know this kind of recognition isn’t financial, but awards like this do matter when you’re evaluating a business for investment. What awards like this convey is a corporate culture of innovation and entrepreneurship that you cannot put a value on.

Of course, because of all this success, Quality Systems’ stock price has already gone up tremendously. I write about this company because I think that, for equity investors, it’s worthy of study in terms of getting to know what a successful business and a successful stock market investment look like. Here’s a company that’s growing its revenues and earnings in a recession, the stock is hitting record highs, and the prospects for the future are strong. Congrats Quality Systems. I think you’re worthy of a case study in business school. It doesn’t get much better than that.