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September 30, 2003

Hedgies for the Pros

By Kathryn M.Welling

Another we like is Shimachu. It is Japan's leading furniture chain, enormously liquid. Its enterprise value to sales is 0.3, and that is adjusted for cash. It had fantastic sales growth last year in a difficult environment, and its sales are growing this year, producing double-digit earnings per share growth. These guys have double-digit operating margins, so it's not as if it's a troubled company. It has a double-digit return on capital, all the metrics are there. But it has been overlooked. In part, because it's not an enormous cap. It's a mid cap. But mostly because when people don't like things in Japan, they really don't like them. Conversely, when they love them, they can't get enough.

So tell me about another.

Just one. Aoyama Trading. They sell discounted men's suits. Kind of like Men's Warehouse. They've been doing very well at moving up the pricing chain. I think their average suit price has gone up from roughly the equivalent of $185 to $225 over the last two years. In other words, they've managed to increase their price point amid probably one of the worst economic environments in post-war history in Japan. So they've increased their margins. Yet this stock trades at 0.6 EVA to sales. It is at 21 times earnings, but that is cheap versus its history.

Okay, but does nothing appeal to you on these shores?

Well, HMOs in North America - like Aetna (AET), Mid Atlantic Medical Services (MME), Coventry Healthcare (CVH). There are fantastic margin dynamics at play in that business now. Premiums, as we all know, go up every year. But their costs have actually been going down. And they're continuing to go down as big drugs go generic, as more people with insurance have to accept higher deductibles or pay larger portions of their premiums because companies are cutting back. There are all sorts of reasons HMO costs have been heading down for at least the last 24 months now.

This trend hasn't exactly gone unnoticed in the market.

The stocks have been fantastic. But we think there is a lot more upside. And the stocks just had a really nice dip. AET, for instance, is down to around 57 after topping 70. MME is about 10 points off its peak of 60 or so, and CVH has roughly followed that same track. So if you think there's another leg coming, now is definitely the time to buy.

Thanks, John.

Kathryn M.Welling is the editor and publisher of welling@weeden, an independent research service of Weeden & Co., L.P. Greenwich, Conn.