>A New York presenter is liquidating his position in American Eagle (NYSE: AEO, $13.48). The stock has gained 15% since the presentation at one of our small cap idea forums. The company reported its fiscal Q2 results yesterday. The presented believes the performance was OK, but he is no longer positive on the name, due to the unprecedented promotional environment. The near-term outlook is very challenging (AEO is running 50% off the entire store inventory) and no longer justifies owning the stock, in his view.

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>Aaron Lehmann has partnered with Roulston Research to review our consultant Roundtables and to add a 40 plus year investor perspective on the experts’ industry comments. The opinions and points below are from his experience. Roulston delivers his thoughts to give our clients a summary of the event and a market insight of possible investment actions that might parallel the conclusions that the experts delivered. Let us know your thoughts, or if you would like to talk to Mr Lehmann directly, we encourage further dialogue.

Aaron Lehmann has since 1968 been engaged in the investment industry as a securities analyst, director of investment research, portfolio manager, and investment banker. His previous employers include Bank of America, Goldman Sachs, Hartford Insurance, Westinghouse Pension Investment Corp., Chase Investors, Steinhardt Partners and several investment boutiques. Mr. Lehmann has performed consulting services for corporations and investment firms. Although retired, he is actively involved in the investment markets and may periodically perform consulting services.

Roulston Research hosted a healthcare forum in Boston on July 21, 2010 with industry experts Mark Lindsay, Director, The Livingston Group, Health Care & Pharmaceuticals Practice, and Ronald Hollander, Principal, Reform Exchange. The audience’s main concerns were:

Will the healthcare bill be repealed and if so what is “plan B” (alternative plan)?
Who are the likely beneficiaries or losers?
What will happen to costs, especially in light of the Massachusetts healthcare plan?

A summary of the panel’s responses are as follows:

The bill will not be repealed.

The bill contains over 800 issues that need clarification, which could take many months or even years.

Industry lobbyists will attempt to “educate” the legislatures in order to make the bill understandable and pragmatic so that businesses can adjust their policies to the final bill.

The panelists feel that companies such as Aetna, HCA, United Healthcare, Kaiser Permanente, and WellPoint are big enough and have the depth to alter their strategies to conform to the new policies.

There will be fewer hospitals, as they expect significant industry consolidation since smaller hospitals and private practices will not have the resources to remain independent.

Converting handwritten medical records to electronic data bases. (The present legacy data must be digitized)

PPO’s, HMO’s, etc. will need to address their cost issues. Current programs are still too expensive but the industry must await the new rules before implementing their measures to deal with the new realities.

Medicare and Medicaid costs and pricing will have to undergo changes in order for the system to remain viable.

End of life costs will have to be seriously addressed since a significant part of patient care expenses are associated with this period.

Insurers must get more data from the rulemaking before they can make changes to their policies and the pricing in order to generate satisfactory profits.

Supposedly, according to Mr. Hollander the Massachusetts healthcare bill only increased the state’s budget by 1%. (The audience found this hard to believe and this is difficult to not view as an issue of semantics).

Employers will have to scrutinize their healthcare costs and realign their efforts to preventive care and perhaps more self insurance.

Establishing more cost effective medical screening to reduce absenteeism and changing the attitudes of workers to help themselves.

Establishing different type of community health services along the line of urgent care centers.

Medical staffing may become more of an issue because of uneven hospital bed occupancy.

Although record keeping changes may occur rapidly, observers would like to see what cost benefits will ensue.

Investment Implications

Investors are urged to look “outside the box,” beyond the current industry leaders, to those businesses that could benefit from some of the likely changes. In addition to the traditional companies mentioned by the panelists (see point 4), one should consider CR Bard, Abbott Labs, Baxter Labs, and other big pharmaceutical and biotech companies that have a good pipeline, and large insurance companies that can come up with new policies to address the changes.

Some points to consider before being able to invest prudently are:

Key issues not addressed in the original bill need to be clarified to allow corporate planners and individuals to formulate strategies that will make the bill a document that solves the healthcare issues, which the original bill has failed to do, i.e., wider coverage at affordable rates, tort reform, streamlining data input/and not increasing the currently enormous debt.

The need to computerize legacy data and manage billing systems and hospital procedures will create significant opportunities for the existing vendors in that space along with entrepreneurs that will launch ancillary services. Outsourcing of physicians, nurses and other specialized skills will create vast opportunities. Many high quality technology companies could benefit from the greater need of storing information, transferring and processing of the data. Select medical instrumentation companies could benefit from more screening tests. Home healthcare and hospices, more user friendly packaging and dispensing of drugs could be major beneficiaries as they realign their businesses.

Examples of companies that could benefit are:

Arcadia Resources (KAD)* – A $100 million sales company, that provides home care, medical staffing, and pharmacy services and has 70 facilities in 18 states. Perhaps, the most interesting aspect of this $92 million capitalization stock is its Daily Med pharmacy division. This entity distributes medications to patients that take multiple drugs on a daily basis in a user friendly pack that enables the patient to get the proper dosage at the right time. Daily Med has a very strong relationship with WellPoint that has excellent long-term potential. They are currently servicing WellPoint insured patients in California and Virginia, and South Carolina and will soon be in New York, and Kansas. The initial feedback from its current patients has been favorable. WellPoint is better able to track its patients and thereby help control costs and pricing of their policies. A key point in the current healthcare bill is Medical Therapy Management (MTM), which is exactly the area that Daily Med is in and may be the only independent company in this area. Arcadia Resources is in the “sweet spot,” driving down total cost by improving patient compliance of drug therapy. They just had their contract with WellPoint extended for three more years.

PRGX Global Inc. (PRGX)* – With estimated sales of $180 million in 2010, and a market capitalization of about $120 million, PRGX provides audit recovery services, principally to business and government agencies having numerous payment transactions and complex purchasing environments. They serve many different types of customers that include pharmaceutical firms, healthcare payers, both private sector and health insurance companies along with State and Federal government agencies such as the Center for Medical Services (CMS). The U.S. Government recently decided to audit Medicare payments and asked PRGX Global to run a demonstration model on $89 billion of Medicare payments (A&B) to determine what overpayments may have been made. PRGX indicated that $330 million could have been saved. The U.S. Government has officially hired PRGX to analyze $30 billion of Medicare payments. Assuming similar type results in the previous analysis at PRGX’s 9% fee of the savings would generate about $10 million to the company at high margins. This contract is scheduled to start in the Q3 of 2010. A substantial part of the costs were absorbed in the earlier demonstration project. It is easy to see how PRGX could benefit from the healthcare bill. This combined with its existing business augurs well for the future.

Cerner Corporation (CERN) is a supplier of healthcare information technology solutions, healthcare devices and related services and is instrumental in transforming IT functions for its enormous customer base of 3,400 physician practices that covers 30,000, 2,300 hospitals, 1,500 retail pharmacies, 600 ambulatory facilities, and 700 home care facilities. Cerner’s strong position could receive a significant boost of the healthcare bill. Cerner with a $6.3 billion market capitalization is selling at 26.6 times management’s $2.85 per share projected for 2010, a debt/equity of 0.07, and a $3.6 billion backlog, the stock may be attractive, particularly on pullbacks to the $70 level.

Disclaimer
Aaron Lehmann is an independent private investor and is not affiliated with any investment firm, broker dealer, or advisory firm. Information is obtained from public documents, management and industry checks and relies heavily on Mr. Lehmann’s extensive investment experience. No warranties are made for the reliability of the data. Mr. Lehmann’s personal account, IRA or family partnership may own positions in stocks mentioned in this report (noted with an *). Any position may be bought or sold at anytime during the present or future circulation of this report. No updates should be expected. Mr. Lehmann, although not currently engaged as a consultant, may from time to time act in a consulting capacity.

Opinions expressed herein are based upon presentations by participants at Roulston Research, LLC. sponsored Roundtables. The associated notes of such presentations summarized herein have not been independently verified for accuracy, truthfulness, or completeness. The report is in no way intended to be a recommendation by Roulston Research, LLC. to purchase or sell any security.

>No Change in CSCO Thesis

August 16, 2010

>A New York presenter maintains his bullish view on Cisco (NASDAQ: CSCO, $21.91).
The guidance last week was a little underwhelming, but the business remains solid. At the current price, the stock is trading at less than 11X non GAAP trailing EPS if the net cash of about $4 per share is subtracted. The presenter believes the difference between share buyback and option issuance should just be added as an ongoing expense.

>A New York presenter argues that Maudore Minerals could be worth $10 right now based on the new resource estimate released today. The Quebec-based gold mining company reported results that indicate a more than 100% increase in high concentrate deposits in its Comtois project. The presenter believes that the next estimate expected in 6 months or so will show another very significant jump, based on the drill data reported since the February cutoff date for the last report.

>Craig Johnson, the chair of our Consumer group, has shared his perspective on the current trends in the retail space:

Flight to value resuming; post-post frugal fatigue: WMT, TGT both up only modestly, as F&C predominate, and as discretionary still lags. Winners: Dollar stores, TJX, ROST, ARO, F-21; COST/BJ’s; but now with first reappearance of barbell growth in 2 years.

Dollar stores emerging as C-stores without the gas pumps, rapidly expanding SF, units

High heat driving AC/Fan sales for WMT/TGT, COST, LOW/HD, BBY/HGG; best in several years, but not a make/break.

Unless Exclusive/Unique/New, Full price merch left on racks (ex URBN/Anthro, JCG-F, TIF).

Winners focus on Value, Speed, Productivity, Newness: VSPN

Needs/Wants/Desires: Necessities vs. Discretionary: e.g. COST Food/Cons’ YOY 61% to 65%; WMT 49% to 53%; BJ’s 68% to 71%. Discretionary categories were recovering most strongly, off of pent-up demand, but now taking a breather.

Women’s Wear rebounding from 2-3 year drought: TLB (going younger, ANN esp Loft, CWTR all up from deep ditch, but far below sales highs; JCG, CHS, Anthro/URBN, all much better, better comps with smaller fleets.

Deflation still strong in sectors: CE (Notebooks, Netbooks, GPS)—but FPT new generation of LED, 3D and IPTV Net-Connectivity will bring TV AUR’s up; Apparel deflation easing/reversing by 1-2% 1Q2011, with hikes tempered by sourcing into Bangladesh, Cambodia, VNam; and Food has bottomed, with dairy up and beef/corn going up; some product inflation

Private Label substitution, higher quality, but lower prices and thus Av. Tkt down.

More frequent trips continuing, with small AT’s

Home sector in major turnaround, 1Q best Q since 4Q2006, but 2Q softening again. WMS, BBBY, TJX/HomeGoods, and Home depts of broadlines strong (TGT, KSS, M, even WMT). HIP bottomed in Jan/Feb, all much stronger in March/April/May, best Spring since 3+ years, and still accelerating. Key has been the great outdoors: nursery, lawn & garden, and OPE

WSM strongest in several years, esp PB, PB/T-K sides. W Elm still work in progress, being tweaked by Mgt.

BTS shoppers delaying purchases till later in season; more looking vs. buying July MTD; waiting closer to need, and for sale prices/next mark

>Craig Johnson, President of Customer Growth Partners, and Roulston Research’s Consumer Community Chairman predicts this year will be a better back-to-school season than last year. “It will be pretty good, but only because last year was the worst since World War II,” he says. His firm forecasts sales gain will average 5.2% for July, August, and September, compared with last year’s 3.3% decline.

>A San Francisco presenter remains positive on Schweitzer-Mauduit’S (NYSE: SWM, $46.22) long-term prospects. The company lowered its 2010 guidance on today’s earnings call, but the story is still intact. The thesis may take a bit longer to play out than originally envisioned, but SWM does have the dominant technology in the growing market.