) -- Shares of

HMS Holdings

(HMSY) - Get HMS Holdings Corp. Report

, a cost manager for government-sponsored health programs, have returned 18% since's

Nov. 11 recommendation. The


continues to record 52-week highs.

HMS on Monday announced its acquisition of

Verify Solutions

TheStreet Recommends

, an Atlanta-based auditor of employer-sponsored health-care plans. The stock rallied 7% on the news, bringing the one-year gain to 65%.

Third-quarter net income increased 36% to $8.4 million, and earnings per share climbed 30% to 30 cents. Revenue grew 21% to $59 million. HMS Holdings' operating margin extended from 22% to 25%. Its cash balance more than doubled to $70 million, as total debt decreased 33% to $13 million. HMS Holdings posted a quick ratio of 4.3 and a debt-to-equity ratio of 0.1, demonstrating its fiscal prudence.

HMS Holdings has an appealing business model: identifying inefficiencies in the health-care system, namely in Medicaid and Medicare, and correcting them. This business, which entails reviewing expenditures and mining data to recover erroneous charges, is tedious, but profitable. A health-care system as convoluted and inefficient as that of the U.S. is rife with errors. Duplicate payments, transfers to and from deceased beneficiaries, and fraudulent behavior is commonplace.

Despite a market value of just $1.1 billion, HMS Holdings is a pioneer in this niche industry. As government budget deficits rise and coverage reform is enacted, officials will demand improved efficiency. Over the past three years, HMS Holdings has enlarged its revenue by 44% annually, on average, and boosted its net profit 65% a year. HMS Holdings has proven immune to broader economic trends. Its stock has a beta, a measure of stock-market correlation, of just 0.1.

The shares have returned 48% a year since 2007. Currently, valuation is rich. The stock trades at a trailing price-to-earnings ratio of 49 and a projected price-to-earnings ratio of 37. Those figures represent a hefty premium to averages of the health-care providers and services peer group. At roughly six times book value per share, HMS Holdings is ill-suited for value investors. Its PEG ratio, a measure of value relative to growth expectations, stands tall at 1.4. By comparison, the industry average is 1.3.

Despite similar caveats in our Nov. 11 article, the stock quickened its upward pace. Other health-care companies capitalizing on the reorganization of our system are

Transcend Services

( TRCR),

Emergent Group

( LZR) and

RehabCare Group

( RHB). These companies offer attractive near-term investments.

-- Reported by Jake Lynch in Boston.