LabCorp a Good Value at $66

Our Dallas presenter highlights LabCorp's (NYSE:LH) excellent cash flow characteristics and steady if unspectacular growth in top-line. The company's nationwide lab network gives it a clear scale advantage compared to small regional players. As the move to preventative care and personalized medicine gathers pace, LH is very well-positioned to grow its operations. Specialized testing, where prices are a level above regular diagnostics, already comprises over a third of the company's total value and that ratio is poised to increase going forward. Margins are impressive, but recently implemented automation initiatives will further boost LabCorp's bottom line. The presenter's target range is $85-$90, based on historical EBITDA multiples.

Misaligned incentives in healthcare

A Roulston Research technology and healthcare expert has an interesting take on the slow pace for adoption of electronic health care records. He believes that electronic records are not more widely used simply because no one that would use them actually wants them.

Doctors want they very best care for their patients. Pen and paper are very easy to use, allow for accurate notes and are excellent means with which to communicate. The electronic screen makes it harder to take notes, harder to accurately record the specifics of the ailment and harder to use to communicate with colleagues.

Hospitals want to find more revenue streams. More precisely, hospitals only want them for one reason: To direct patients to their in-house pharmacy. Giving patients a paper prescription allows them to walk out and have it filled at their local drugstore.

Our expert believes that this situation is just one example of misaligned incentives in the healthcare space.

Coinstar concerns

Presenter of company and others cite CFO exit and lack of transparency of company on recent asset sale and other issues as reasons for lightening up on positions. A lot of concern here that the company has interesting strategy but transparency during this kind of transition and MCD seeming very cheap sale of position creates concerns.

Dallas visit

Contacts continue to believe pricing just wont change as we go into colder months any more than seasonal adjustments. Now with all new oil finds even more compelling that oil is coming down to historic ratios rather than gas going up. These are locals that might be very close to the trees but they are feeling strongly that a lot of natural gas reserves and needing to be drilled on leased land.

Five Tips for a Recession

Bart Perkins, the Chair of Roulston Research's technology expert community, recently attended a venture capital lunch forum where an editor from WIRED magazine gave a presentation entitled "Five Tips for a Recession". They were:

1. Don't wait for innovation
2. Boost R&D and grab talent
3. Start a company, the technology tools you need are cheap
4. Make innovation central to your business
5. Think like a VC

He used Apple and Dell as examples for #2. During the last recession, Apple grabbed talent and continued to pursue an aggressive R&D program. Dell cut these expenses in response to the economic conditions. For #3, his examples were cloud computing and open source software. Both models have drastically reduced the need to purchase, run and maintain your software. And for #5, his point was that while big companies will kill projects with a 70% chance of failure, VCs will gladly accept a project that has a 30% chance of success.

Dice Holdings Up 70%, but There is Upside Still Left

Our Boston presenter is still very bullish on Dice Hodings (DHX:NYSE). The stock is currently trading at $6.83, a 70% increase from $4 where he recommended the name back in May. This leading provider of online recruitment services is just starting to see a turn in online employment listings, the development which won't show in the results for another 1-2 quarters. The company's platform is a category killer and with the stock trading at 10x its trough EBITDA, 6 times midcycle EBITDA, there is still significant upside left.

At at our last Dallas Small Cap idea forum in June we had 5 stocks presented. One presenter never made it during the horrendous downpour. The five stocks presented(recommendedprice,current price) were;

EMS ($33.89, $47.51)

BLC ($2.02, $4.57)

MIM ($8.36, $13.60)

LFUS ($19.63, $28.07)

FSC ($8.98, $11.17)

Needless to say since June 11 the markets have done well but this is remarkable

FSC No Longer Recommended as a BUY

Our Dallas presenter no longer recommends Fifth Street Financial (NYSE: FSC) as a Buy. The stock is currently trading at $11.04, very close to his target. The company received a $50 million credit facility from Wachovia a week ago. Fifth Street Financial has been approved for an SBIC license, but it hasn't been formally granted yet. Business trends are improving. Still, the presenter has significantly reduced his position and is no longer recommending the name to new investors.

EMS Stable Name with Some Upside

EMS has moved 50% since our Dallas presenter recommended the name in June. He purchased more shares in mid $40's, just below the current price. It's no longer an aggresive buy, but if investors are looking for a stable name with a bit of an upside, EMS certainly fits that criteria. The company raised it guidance by 15% on the last earnings call. The presenter's target is mid $50's, based on 8-9 times next year's EBITDA.

Roulston's Consumer Chair on Bloomberg and Fox

Craig Johnson, President, Customer Growth Partners and the chair of our Consumer Community is a frequent contributor to Bloomberg, Barron's, WSJ and other media outlets. In just the last two days, Craig could be heard and seen on Bloomberg Radio and Fox, giving his perspective on August retail sales, consumer spending, on the recent Best Buy quarterly release. Craig remains unconvinced that we're witnessing a consumer recovery. He believes only the value end of the retail spectrum is seeing some uptick in spending.



Craig's latest Fox appearance can be accessed at
http://www.foxbusiness.com/search-results/m/26433794/is-the-consumer-really-back.htm

Our Boston presenter still likes GLP, despite the stock's 150% move since he recommended it a year ago. GLP has an 8% dividend yield. The dividend is poised to increase after Global Partners have held the payout steady for the past seven quarters. The company has just bought stock around the current price. As long as oil prices stay relatively stable, GLP's inventory carrying costs should remain steady. Whatever the company stores in excess of customer needs, they're making money on it. The big picture is very positive. Global Partners has diversified from a pure heating oil play into gasoline. The company went public at $20 in 2005 and since then its assets have increased dramatically through a number of acquisitions. The presenter targets $30 within a year.

Retail expert sees potential new growth opportunities

Chris Lee is talking to a lot of foreign companies and from his experience with Forever 21 he sees some new changes coming in the US retail environment. Specifically he sees the weak real estate market offering retailers a chance to cross borders in a unique growth opportunity. With real estate pricing cheap world wide foreign players can take advantage to have an immediate impact with more choice locations. REIT's have a lot of vacancy but a new concept may be for the bigger box players who have excessive space and long term leases may look to sub space or reconfigure current locations. As an example WMT's fornt of store 10-15,000 square feet in front of registers where today a lot of fast food and other traffic movers could be replaced in an improving economy to try to keep that customer who traded down in downturn to keep them in subsequent upturn. Does an Apple store replace Pizza express? How about if Federated or Dillards or Sears shrinks their store and brings in Wet Seal, Saphora or others in front of store. With both the need to increase returns and opportunistic foreign tenants potentially available this could be a new paradigm.

The Electronic Trading Debate

The Wall Street Journal published our rebuttal to Senator Schumer's response to our editorial: http://online.wsj.com/article/SB10001424052970203440104574404581166261194.html

Investment management is a business that is easy to leverage, except in the area of trading, where size creates a disadvantage as lack of liquidity can penalize performance. For this reason, I believe managers and their clients all have an interest in defending innovation in trading markets. Innovation provides investors more opportunities to handle their orders according to their preferences, rather than in some monolithic, one-size-fits-all product that we wouldn't even accept for laundry soap. Customers, not Senators, should be the ones to choose which innovations to reward with market share.

Natural Gas feedback in the fields

When the street talks of a 24 month burn off at current prices to allow pricing to return to the natural gas market, our contacts are telling us it looks more like 48 months. A variety of factors from so much new capacity to lower demand. But so much of the capacity now is tied to leases that have to be drilled. To be able to keep leases drillers must move ahead with some drilling even at a loss. There is an issue in next 60-90 days where mark to market rules and loan covenants for reserve valuations and present values (PV10 is present value minus 10%) the haircut at this point will be daunting. High cost reserves are going to force loan covenant resets and the question is does this just affect smaller players or do some of the larger players suffer? Even when wells get shut in they still need to produce at some lower rate. These operate at money losing rates so IRR in whole industry suffers. So much gas has been identified and leased in last few years. if pricing wont change soon the ripple effect as production and reserves cant be turned off eventually has to have iompact on oil prices.

Our San Francisco presenter still likes Fidelity National Financial (FNF). The stock has underperformed since he presented it back in late April, but it's a low risk name so people are not as excited about it in today's market. The refi activity is phenomenal and the earnings power is great.

Chinese Auto Sales

Chinese economic data are sometimes viewed as NINJA loan applications--you need to look to other sources to verify the data. Still the growth in Chinese auto sales, verified by GM (ok, another government enterprise) looks promising in two ways. First, it indicates that china's stimulus and incentive plans may be having some positive demand, and that consumers are spending in China. As the US consumer retrenches from a low savings rate, it is possible that China's consumers might move in the other direction.

What is most interesting about strong auto sales, and it is possible that auto sales in China this year will be greater than in the US, is the transformational effect the automobile can have on society. So much retailing in China consists of very small shops, in walking distance of customers. There is little room for increasing efficiency or developing scale economies in distribution. Walking customers are limited in their shopping by what they can carry, and how far they can travel to find a better price. The automobile changes all that, and begins to facilitate large-scale retailing, as customers develop the means to travel to a mall or supercenter and take advantage of the lower prices and broader merchandise selection. This is also good for the growth of of consumer products manufacturers, as consumer savings can be plowed into more goods and services. As retailers scale, manufacturers will co-evolve and grow as well, and there will be more investable opportunities beyond the typical emerging market menu of power, telephone, and banking companies.

This process should take considerably less time than it did in the US.

Tatum/Roulston Report

The Tatum survey this month clearly reflects the inventory reduction cycle is over and business trends have bottomed. We seem to all know that it has stopped getting worse in the economy. Time has passed and access to capital is available if the balance sheet is there to support it. So now backlogs are improving (seemingly so far to rebuild inventories that had been drastically reduced) and companies thru employment cuts and capital spending reductions have pared costs to the bone. Most executives remember recent downturns and when this one started it seemed worse. Corporate America really downsized in a hurry. With the financial panic that ensued alternatives for capital were perceived to be scarce and budgets were set with as little reliance on outside support as possible. Finally capital spending plans were also ratcheted down dramatically. All of this makes sense. The difference this time is just the quickness and velocity with which this occurred.

Although all signs point to this adjustment period now being over and the downward movement being halted, the fact remains that growth at this point is simply hard to recognize in any numbers to date other than the bounce off the bottom. We have talked many times how the Tatum Survey remains the best real indicator of corporate trends in America. The data base is consistent month to month and the people responding are the same. The data report therefore does not just reflect a mood change but more decision makers and the real data they are seeing day to day. The key is now how does the market, corporate profits and economic growth move forward from here. Government stimulus has had some short term boosting effect but “flat is the new up”. At Roulston, we remain unconvinced that any growth other than a flat environment where cost cutting boosts profits is happening. The most unique aspect of this is how universal this trend is and how many companies seem to be pausing to reconsider what lies ahead. The worst definitively seems to be over not only for their company but everyone they talk to and do business with in their world.

There is a certain calmness in the absence of consumer spending, the bounce in housing numbers and the employment picture that seems so tempting. The question we continue to mull is without a consumer (now saving and not spending) that makes up 70% of the economy and without a healthy financial system (the government tells us 200 banks will fail in the next 12 months) how do we get meaningful growth? Baby boomers inherently know they dont have enough saved for retirement. The numbers tell us this. The savings rate tells us this and the fact that the market scared the ... out of folks. This change has never happened before. It may not be a depression under some terms but it was very depressing. Other than for the economists that continue to point to past cycles where neither of these issues are comparable and we would argue there may be no past precedent, this is a hard time to be doing any forecasting.

Zimmer presented in New York

Our NY presenter likes Zimmer (ZMH) at this level. The company is in a turnaround mode after two years of dealing with issues stemming from 2007 settlement with the Department of Justice. ZMH has seen its market share stabilize in the recent quarters. Demographic and lifestyle trends will help the company return to mid to high single digit top line growth beginning in 2010. The balance sheet is very strong. Zimmer generates $800 million in free cash flow on annual basis.

HealthCare Roundtable

Yesterday had a full house to hear Chris Goff and Andrew Webber tell us that the next 60 days are critical to health reform. Lots of good stuff about hospitals that will benefit and others that wont. What they see happening to doctors, prescription management and other interesting tidbits about why certain parts of legislation may find its way thru while others will not. They think public option is a killer to plan although dems will go down kicking and screaming. Maybe 3-6 year trigger for this option. Maybe employer mandate. To early to tell but politics really creating "dig the feet in" atmosphere. One interesting point. Actions always cause reactions. Some expected some not. Then further reactions as we saw in Massachusetts where the market reactions after initial reactions are where surprises occurred from an investment standpoint as example what about managed care players with high Medicare Advantage exposure like Humana. Are they a winner after all the reactions. Stay tuned.

Market forecasting

Never being one to try to "predict the market" I can't help continuing to ask businesses how the fall is looking. The run up in the market is making folks feel better and as a leading indicator it does seem to be saying the correction overreacted in the winter and that the economy reached bottom in August /September. Thus a spring market recovery indicated not only improvement in the economy but an end to the gloom and doom that the financial/credit meltdown would cause a return to the 30's. So it wasn't as bad as some thought it might get and maybe the worst is behind us. But I am not hearing manufacturers talk about anything other than inventory reductions overshot and rebuilding supply chain. Outside of auto stimulus and government spending economic improvement is very spotty. So how will a market act when it realizes we are not in a "U" or "V" curve and maybe not a "W" even. But what about an "L" what happens in a market. It seems to me after an initial retrenchment it should hesitate to see any signs of sustaining. As a forecaster it seems to indicate stability but from this point earnings wont come from continued cost cutting. Businesses cut fast and hard. Now not much left to cut. Those that cut SG&A the most have outperformed. Now we need revenue growth for any more move. Not seeing it yet in any sustainable form and with consensus saying we are in a recovery the banking system is not going along. When was the last time the economy grew without loan growth or the consumer. Very hesitant right now.

Reasons to Buy?

We have had three down days, for the first time since June. Maybe it's the start of the long-awaited, over-anticipated correction. Or maybe it's not. At any rate, at some point there will be a correction. Given the robust rally we've had, against the backdrop of a halting recovery, we're bound to see a resurrection of D&D (doom and depression) stories in the media if there's a selloff. Just as in March, it will be difficult to pull the trigger and buy stocks at the bottom of the correction. It might be easier to think about the reasons for buying a dip now, before the atmosphere gets poisonous. So we'd like to ask our readers for their thoughts on the reasons to buy the correction. Let us hear your thoughts.

Financial Services Innovation

Talked to a suburban community bank CEO the other day. He's glad his bank is only three years old--very few bad loans. The reluctance of other lenders to commit funds is giving him solid pricing on deals and relationships. He is concerned that a financial products czar will make it difficult/expensive for small financial firms to create new products. This could have the effect of increasing the brand value of big firms by stifling the new product flow necessary for the little guys to compete with the behemoths. But, then, the government owns stakes in the big banks...