The following commentary about health stocks was written by Ankit Gupta, who blogs about investing at Selected Financials.

Opportunity: As much as $36 billion is being allocated for healthcare providers that demonstrate the use of Electronic Health Records from the HITECH act, which is a portion of the American Recovery and Reinvestment Act.

On paper, it's listed as $19 Billion, but that's after savings it assumes that will result in the $36 billion in funding.

Significance of 2010: The stimulus package that was passed has lots of funding going to physicians to demonstrate "meaningful use" of electronic health records. Many will be eligible at the physician level to receive grants up to $44,000 over a 5-year period, with payments going out starting in 2011. They need to have it implemented, and so to take advantage of that money, many will be starting the sales process very early in 2010, if they haven't already. This means that revenues should ramp up significantly next year.

What is an EHR? EHR's, or Electronic Health Records, are the set of documents containing a patient's medical history and healthcare. These medical (health) records allow doctors to quickly learn about a patient and reference their past history to make good decisions.

What do these records contain?: Demographics, medical history, family history, social history, habits, immunization records, growth chart, orders, progress notes, test results, and even items that need to be monitored on a regular basis for chronic illnesses.

Electronic Medical Records: Refers to data created and held by the provider, like the hospital or physician.

Electronic Health Records: Refers to easy sharing of data between organizations.

Overall goal? With EHR's/EMR's, you can improve health care quality by preventing medical errors, reduce the cost of health care by increasing administrative efficiencies, decrease paperwork, and enable technologies that require these electronic records - patient discharge technologies and telehealth devices.

Does it work? What's the catalyst this time for even more growth? Advantages: Increased quality of care, better documentation (audit trail), decreases costs, increased access to documents. Disadvantages: Questions of privacy, reliability fears, backups/disaster recovery plans, implementation/training costs, and question of ROI.

Growth Catalyst: This largest catalyst here is the stimulus funding. Physicians will be eligible to receive over $44,000 by implementing a certified solution. This should hopefully make it a good investment for healthcare providers today. In addition, with some EMR/EHR providers offering as Software As A Service solution (SaaS), the initial fears of implementation costs and backup/disaster recovery planning can be significantly decreased. These SaaS providers have already worked through those issues, and through a web interface, can offer full functionality. This also decreases the barrier to use in terms of the computer hardware required.

Who will benefit? The stimulus funds are going to create a lot of business opportunities, and if you look in the right places, even some investment opportunities. The rest of this article will be covering publicly traded companies in the electronic health/medical record space, in alphabetical order. Note: Siemens Medical (SI), GE Healthcare (GE), and MedPlus (Division of QDX) have not been listed because their EHR-specific divisions account for a small portion of their revenues.

MDRX 3-Year Chart

Stock Price: $20.10

Market Cap: $2.91 billion

Latest Fiscal Year Revenue: $549 million

Analysts Covering: 23

Employees: 2,400

Other Information: Numerous insider buys in 4Q 2008

Athenahealth 3-Year Stock Performance

Stock Price: $42.65

Market Cap: $1.44 billion

Latest Fiscal Year Revenue: $140 million

Analysts Covering: 23

Employees: 865

Stock Price: $1.28

Market Cap: $44 million

Latest Fiscal Year Revenue: $6.9 million

Analysts Covering: 0

Employees: 65

Other Information: 990,000 shares purchased by management this year.

Cerner 3-Year Stock Performance

Stock Price: $77

Market Cap: $6.3 billion

Latest Fiscal Year Revenue: $1.68 billion

Analysts Covering: 22

Employees: 7,500

CPSI 3-Year Performance

Stock Price: $46.99

Market Cap: $516 million

Latest Fiscal Year Revenue: $120 million

Analysts Covering: 13

Employees: 886

Dividend Yield: 3.1%

ECLP 3-Year Performance

Stock Price: $19.37

Market Cap: $1.1 billion

Latest Fiscal Year Revenue: $515 million

Analysts Covering: 20

Employees: 2,800

Other Information: 1 Officer purchased 69,479 shares this year

MCK 3-Year Performance

Stock Price: $63.57

Market Cap: $17 billion

Latest Fiscal Year Revenue: $106 billion

Analysts Covering: 18

Employees: 32,500

QDHC 3-Year Performance

Stock Price: $6.70

Market Cap: $55 million

Latest Fiscal Year Revenue: $150 million

Analysts Covering: 0

Employees: 613

Other Information: Major holders have been increasing their position.

With this list of eight companies, how should you pick the best ones?

Referencing the late economist and investor Ben Graham: "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."

I recommend starting with the smallest companies by market capitalization on this list -- ADAT, CPSI, and QDHC. In general, smaller companies will be simpler to understand and are covered by fewer analysts, leaving opportunities for inefficiency that individual investors can take advantage of.

As you dig through these companies I've listed, start learning about the kinds of profit margins these companies see. There is a strong possibility that while revenue might only increase a X%, we could see earnings increase 2-3 times X. The profit margins can be very large -- many of these companies have a 50% or better profit margin. As they scale their revenue, they will be able to take advantage of fixed costs in many parts of the business and drive lots of net income for investors.

Disclosure: At the time of publication, Gupta was long ADAT.