5 Stocks That Just Won't Quit

In my monthly Fool column "Get Ready for the Fall," I run Nasdaq.com's 52-week highs list through the "wisdom of crowds" meter we call Motley Fool CAPS. The result: A list of stocks that have flown so high, investors are starting to get nervous about that whole "gravity" thing. But while many stocks will indeed plunge back to Earth, some seem immune to gravity, steadily riding a rising megatrend to ever-greater heights.

Today, we'll move beyond stocks that have hit 52-week highs, and identify companies now surpassing five solid years of outperformance. Which of these will thrash the market averages for another half-decade? Here are this week's leading contenders:

Companies are selected from the "New 5-Year Lows" list published on MSN Money on Thursday. CAPS ratings from Motley Fool CAPS.

Everybody loves a winner
As we've come to expect on CAPS, the vast majority of investors who drop by to "vote" on our stocks remain those most bullish on their chances (see the high "Bull Factors" above). That said, happy thoughts don't always translate into happy results.

Are we pleased as punch to see Motley Fool recommendations dominating the multi-year highs list this week? Sure. Quality Systems and Netflix both hail from our Motley Fool Stock Advisor portfolio, while Motley Fool Rule Breakers picked Shanda and Green Mountain, and Changyou.com spun off from another RB pick, Sohu.com (NASDAQ:SOHU). But for all their success to date, our CAPS supercomputer is telling us that only one of the stocks currently hitting five-year-highs today is likely to continue doing so.

I'm speaking, of course, about electronic medical records (EMR) specialist Quality Systems, one of the most venerable -- and most successful -- recommendations on the Stock Advisor scorecard. Today, though, let's find out what has rank-and-file Fools so enthused about Quality's prospects.

The bull case for Quality Systems
claygrant1974 points out that:

Lots of hospitals still need to go digital. Big push from current administration. Baby boomers. Everything becoming more accessible and expected to be efficient, paperless, etc. Stock still not known or followed by many.

(Indeed, on those rare occasions when Quality Systems does receive mention in the mainstream press, it's nearly drowned out by descriptions of how the EMR revolution will benefit larger companies like Dell (NASDAQ:DELL) and General Electric (NYSE:GE).)

Fortunately, andcheese believes there's plenty of room for Quality Systems to prosper alongside the big boys. Writing back in November, andcheese highlighted a relevant study:

The RAND Corporation, a leading health care think tank, estimates the industry could save $162 billion per year through the simple IT upgrades. ... Last year, health care IT spending by doctors, hospitals, pharmacies, insurers, and the U.S. government totaled about $20 billion. So Obama's $50 billion plan is a significant boost. Even accounting for a decrease in IT expenditures due to the recession, Obama's plan is enough to drive revenue and earnings to new heights for the sector.

Meanwhile, the company itself has "Lots of cash flow, strong insider holding" (according to a post by NCJensen last summer), and: "No DEBT!" as Horton29 pointed out in January.

In short, there's a great macro trend supporting Quality Systems' business, and a pretty darn fine business from the get-go. To be honest, all of this has me wondering why the stock's getting only four stars, rather than busting out of CAPS's five-star ceiling.

Here's why
The problem with Quality Systems is simple: valuation.

It's true that insiders hold a sizeable stake in the company, and that there's no debt and strong growth prospects. (Analysts predict 18% long-term profits growth). But it's also true that enough people have now clued into that story to eliminate any reasonable margin of safety from Quality Systems' stock price.

Priced at 30 times trailing earnings, and with reported earnings vastly overstating the company's true profitability (trailing free cash flow amounts to only $30.2 million), Quality Systems currently sells for roughly 46 times its free cash flow. To me, that looks like an optimistic valuation at best, and at worst, severe overvaluation.

Time to chime in
Of course, that's just my opinion -- I could certainly be wrong. And that's where you come in. Here at the Fool, we welcome contrary opinions. So if you've got a bullish case to make for Quality Systems, you're free to contradict me. Click on over to Motley Fool CAPS and sound off.

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