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Time to Take Profits at Cerner

A big move in a short time provides a chance to sell


Cerner (NASDAQ:CERN) is a supplier of health care information technology solutions, services, devices and hardware. Cerner solutions optimize processes for healthcare organizations.

Cerner has had a strong run for us in our portfolio, up nearly 30% in just five months. As we all know, the last few months have been tough for stocks, so CERN has been an exceptional relative performer.

Its 30% move far outpaces the S&P 500, which is up nearly 3% in that same time, as well as healthcare stocks in general (as measured by the Vanguard Health Care ETF), which have gained about 5.5%.

It’s smart to go ahead and lock in gains now, as most of the easy money has now been made. We owned CERN through two earnings reports, and we got a nice pop each time. The stock now trades at a very high multiple of 34X 2012 earnings estimates, which limits further upside. I also believe we will see a slow erosion of this multiple over time as the move to electronic medical records starts to mature.

Cerner remains an excellent company, and while earnings should grow around 25% a year for the next three years or so, the market will start to look ahead, and I expect the P/E to come back closer to 20X.

That’s still a premium multiple that would justify our price in about 2.5 years, but that’s no longer a significant enough return from current prices around for us to stay in it.

Sell CERN. It’s had a good run in a relatively short period of time, and it’s time to book any gains and put that money to work in stocks with more upside potential stocks, like Myriad Genetics (NASDAQ:MYGN).

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