Where to now for Pro Medicus? A chart review.

An unanswerable trading question

Share-price surges quickly attract buyer interest. At the speculative end of the market, this is likely to be transient as profit-takers erode the gains. Would-be investors seeking to capture profitable moves, together with ongoing growth  potential, face a timing quandary. Should they wait for a cheaper entry in expectation of a pull-back, or should they accept the present market-price to not miss out on further gains.

A similar dilemma is faced by contrarian traders of oversold stocks. Should one buy into emerging rallies, or wait for more certain evidence of recovery, and in doing so give up potential profit?

If we knew how the market would respond, we might soon become quite wealthy. This post looks at whether technical analysis can be used to improve decision-making in such circumstances, and confer a trading advantage. The charts reviewed are of Healthcare stock, Pro Medicus.

Pro Medicus

This company, founded by Sam Hupert two decades ago, was floated on the ASX on 6 October 2000 at $1(?) to provide integrated computer software solutions for general practices in Australia. It has embraced software advances over the years, and expanded its operations into the USA. No need today to keep those X-ray films for future reference. They are accessible on your Dr’s computer.

At Pro Medicus, our aim is to deliver success for our customers’ practices. We are a leading provider of radiology information systems (RIS), Picture Archiving Communcation Systems and 3D software across the globe, with over 25 years experience in streamlining medical practice management and helping our clients deliver first-rate patient care by enhancing and streamlining medical practice management. Our expertise is this client visualisation technology and the management of the supporting information. We do this by providing products and services that combine speed, scalability, stability and smarts to help eliminate administrative tasks and workarounds, optimize the efficiency of clinical and administrative staff and maximize profits.

The company believes the future is bright:

Financially we remain very strong, being debt free, with cash reserves of $12.89 million. The Board has declared a fully franked final dividend of 3.25 cents per share, bringing the total dividend for the year to 6.0 cents per share fully franked.

The company is now in a transition period as the new US business model is implemented. Looking forward, the company expects that radiology practices both here and abroad will continue to recognise the significant benefits that can be realised using our broad portfolio of digital technology offerings.

Technical Analysis

The Long-Term View

The share-price of Pro Medicus suffered more than most Australian stocks in the global financial crisis but survived, falling as low as 16 cents in 2011.

Trader community websites of which “Hot Copper” is the largest, are an increasingly popular source of information and gossip for retail investors. PME is one of the stocks that have featured prominently recently.

A fellow contributor to the boutique share-traders’ website “Ten Bags Full” has seen his investment in Pro Medicus increase eight-fold over a three and a half-year period from mid 2011. Purchased at 16.5 cents, the last price was $1.33

 

The big picture

The big picture

Recent developments 

Another contributor this week noted the meteoric jump in the share-price of PME over the past three months following an announcement in November of a 5 year contract to make their Visage 7 radiology viewing software available to the US company Zwanger- Pesiri.

The chart below shows a two-staged rise in the share price from 87 cents within a trading range to a last price of $1.33. This is a 46 cent or 53% rise. Impressive indeed over a 2-3 month period.

 

Target price reached

Target price reached

This stellar performance, while putting smiles on the faces of existing shareholders, raises management issues for both present and would be shareholders, who would like to get a slice of the action.

Unfortunately, there is absolutely no way to tell whether the market for PME shares will strengthen, weaken or mark time, in the coming days.

The Outlook

My view is that many would be buyers will be reluctant to pay still higher prices at present. The RSI is now in over-bought territory. New buyers who have missed out on the these rises are likely to be attracted for the longer-term if the share-price were to fall to the last resistance level at $1.15.

To my mind the likeliest chance is for a period of side-ways trading, perhaps a range between about $1.15 and $1.35. If so there is likely to be plenty of time to get on board if one wishes.

An alternative scenario that perhaps should be considered is the possibility that PME might become an acquisition target, as a result of its recent successes. If so one would expect there to be a take-over premium, possibly near the all-time high at $1.75. If wishing to be certain of having a long position, I would  carefully watch trading at the start of this coming week. A fall back at the open to below $1.25 would suggest lower prices. An open above this and intra-day trading to a new high above $1.33, would then be an entry signal.

Still a buy for investors

Still a buy for investors

A few readers of this blog have been somewhat critical of me using Daryl Guppy’s multiple moving average charts as being unnecessarily complex. This lower chart shows why I like to have MMA charts in my armamentarium. Clearly seen (see marker) is cross-over of all averages in mid-November, when the shares might have been purchased for less than 90 cents.

At the present time both the short-term moving averages (indicative of the decisions of quick acting traders), and medium-long term averages (reflecting the entry of investors with a longer perspective) are both pointing upwards and diverging. This is strongly suggestive that still higher prices could happen.

This is helpful information if one is a holder of shares, and uncertain at what level to sell in a retracement. Traders might well set a stop/loss position at $1.15, whereas investors might retain their position to $1.05.

 

I have no position in Pro Medicus now, and no immediate intention to open one.



Categories: Chart Analyses, Trading opinion

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