When I last wrote about Motley Fool Stock Advisor pick American Healthways (NASDAQ:AMHC), I concluded with a warning that because of the stock's high valuation, even the perception of minor bad news could periodically drive the stock lower in the short run. It looks like that's what we're seeing today -- the stock has been taken down about 5% despite a pretty decent quarter.

Sales climbed 20% and net income rose 14% for the company's fiscal third quarter. American Healthways increased the number of lives under management by 35% (10% sequentially) and the backlog tripled, showing good growth even after $20 million related to an agreement with the government is subtracted.

The problem with the quarter, such as it was, is that the company saw some added expenses tied to a new pilot agreement with the Centers for Medicare and Medicaid Services (CMS). Now that this agreement is completed, the company can move ahead with implementing programs for diabetes and congestive heart failure to about 20,000 Medicare beneficiaries in the Maryland/Washington, D.C., area.

The CMS agreement is a very real investment in the future. While the pilot program is expected to last for about three years, a successful outcome could literally double American Healthways' addressable market. Accordingly, I'm not all that bothered by the notion that the company will see some higher-than-normal expenses for a few quarters to get this program moving.

Befitting the company's performance, the stock has done quite well this year -- just as it has for most of the past five years. And why not? It has a huge addressable market, and though there is some competition, it is still very much in the lead. Moreover, satisfied clients continue to expand and extend their contracts, and the company continues to launch new programs and expand its service offerings.

Although I really like the business, I'm a bit cooler on the stock right now. I realize that you often have to pay for high-quality growth, but I'm not willing to pay more than 40 times trailing earnings. Had I bought these shares earlier (and at a lower valuation), I certainly wouldn't be selling, but that isn't quite enough to make me more enthusiastic about buying shares today.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).