Cardiac Science (CSCX) is a long-term dud, to say the least, falling from a peak of $235 in 1993 by 98% over the past 16 years and by 96% since peaking at $98 in 2000. Based in Bothell, Washington, CSCX (3.22, $75mm market cap), this manufacturer of automated external defibrillators and cardiac monitoring equipment somehow managed to snag what appears to be a good CEO, and that is why I am interested.

I first learned of the company when a client asked me about it in August. The company had just resumed shipping its AEDs after a quality issue had led to a short-term halt in shipments. Management suggested that it might have to take a large charge to cover the expense to fix the problem. Two days ago, it did so, announcing an $18.5mm cash charge to cover a software upgrade for a problem that impacted 2 out of 300k installed units.

I first wrote about EZCORP (EZPW) (14.28, $704mm market cap) in early 2008 and have followed it closely every since. In fact, it is one of only two names I have held since inception over the past 18 months in my Top 20 Model Portfolio (Catalyst Health (CHSI) is the other). It has been quite the ride, as it ended 2008 up about 35% but was cut almost in half from its Q4 peak at the March lows. This year has seen some sharp moves up and down, but it is still down 6% y-t-d after surging post-earnings on Friday. I expect the stock could move to an all-time high price over the next year, potentially appreciating 60% to 23.

EZPW is primarily a pawnshop operator with a secondary business in payday lending. In the big picture, the company provides credit to those without access (a large and growing population!). The company is classified as a Financial, but it is really a hybrid. Unlike most financial companies, it isn't leveraged (pro forma net debt to cap is <10%). It derives a significant portion of its earnings from the sale of used goods, so it is a retailer as well.

The long-awaited correction appears to have finally arrived. Like a yo-yo that has climbed up sharply and is now heading back down, this fall will probably not be as sharp or as deep as many pundits would suggest. I am going with a SPY target of 87.50 to 92 as the most likely bottom for this move. For those that follow my work, you may recall that this happens to be the area that I initially thought would contain the rally from March. Clearly I was too conservative. I get to my zone using several different metrics, including Fibonacci retracements as well as charting and volume-at-a-price. To be very successful in the last few months, one had to set aside one's fundamental views in my opinion and roll with the liquidity. As long as interest rates aren't rising, I do believe the pullback will be orderly and contained, but the bear is back on if we can't finance our federal debt at a low cost.

Even though my expectations are that stocks in general have about 15% downside from here (two weeks or two months - who knows), I believe that many stocks have considerably more risk. In the past few months, companies with leveraged balance sheets have roared back as the capital markets have reopened. Many companies have addressed liquidity issues by extending their debt or issuing stock, but several others have not taken advantage of what I view as a good opportunity. I am cautious on companies in general that have high levels of debt relative to their potential to generate free cash flow, especially in an environment of economic weakness or stagnation at best. With that in mind, I want to share three ideas, all of which have lots of debt relative to FCF and short-interest that has come down significantly over the past several months. None of these companies had moved to address their weak capital structures.

I continue to think that the economy will be challenged for quite some time and that the earnings estimates out there are too optimistic. But what if I am wrong? If rates stay low and earnings recover, what is the upside? What follows is a simple excercise. I took the largest 20 stocks in the S&P 500. Here they are ranked in descending market cap (click to enlarge):

The recent pick-up in mergers and acquisitions has spilled over into MedTech companies too, with Covidien (COV) announcing the purchase of Aspect Medical (ASPM) in late September and Kimberly-Clark (KMB) announcing the purchase of I-Flow Corp (IFLO) last week. I didn't even know that KMB had a Healthcare division (6% of sales in 2008)!

While I am somewhat disappointed that my keen interest in the space hasn't yet yielded me any buyouts of companies I have purchased or recommended, I do believe that the buyouts signal that some big companies are on the prowl in the sector. Covidien, the former Tyco Healthcare, also bought Vnus Medical earlier this year as well as some private companies. One thing that I have noticed about the acquisitions has been that the targets have had very high gross margins and strong balance sheets. Further, the companies have had high recurring revenue due to the sale of consumables rather than capital equipment. With that in mind, I screened my 70-stock universe of medical consumables companies for the following:

Today, I applied several of those parameters to the broad market and tried to hone in on companies that not only have strong balance sheets but that appear to have weathered the storm. While the 8 names I am about to share are up a lot this year, they were down a lot last year and appear to be cheap yet. Lots of people like to buy value stocks when they are beaten down, but prices 50% higher aren't necessarily bad prices. In the case of this group, they fell pretty much with the market last year, about 47% on average. While they have rallied 57% on average in 2009, they are still down over the past 21 months. While I know only one of these companies very closely, the group certainly appears to be worth investigating.

Is this what you are looking for?

Playing "Catch-up"? My article from last weekend, "15 Stocks Having a Tough Quarter, But Worth a Look" drove the most traffic to my websites in over a year. It tells me that the crowd is looking for beta, not alpha. There's probably a whole other story here, but rather than talk about why I think everyone is downright silly chasing stocks, I will offer more ideas to investigate.

• 50dma > 200dma (maximum 10%)
• PE F12M <120% of 5yr Median
• Net Debt to Capital < 60%

The first constraint is to assure that the trend is up but it isn't overextended. The second constraint makes sure the PE isn't super-inflated. The final factor kicks out balance-sheet disasters. Here are the 15 stocks:

In my normal weekend activities of running through several screens, I noticed that Callaway (ELY) (7.50, $484mm) is one of the few companies in Consumer Discretionary that still trade below tangible book value (though it really doesn't - see below). I am not a golfer, and I have never looked that closely at this company until today. I intend to add it to my secondary watchlist and to try to get a better understanding of the "drivers". Kidding aside, while this one appears to be very cheap, it has gone nowhere for the past 15 years. Take a look at what hitting the wall looks like (click to enlarge):

The price of Natural Gas is hovering just below $3, which is about the median price over the past two decades. Or is it? While the spot price has garnered lots of headlines recently for its collapse, the future price has declined much much less so. The quoted price for a year from now is above $5. Here is the history since 1990 (oclick to enlarge):

I have been blogging about stocks and the economy since early 2007. During these past 2 1/2 years, the markets haven't been exactly conducive to marketing services to retail investors. Lately, though, after the rally of a life-time, I have been inundated with all sorts of offers to help me become a better stock picker. These claims are almost always shallow and baseless, but sometimes they border on criminal. I hereby vow to expose marketing claims that are disingenuous at best. If any readers feel like emailing me solicitations they receive, I am happy to share my thoughts publicly.

Today, I received one from TheStreet.com (TSCM) for the second or third time. Here is a link to what I received. I am not sure about copyright laws, so I won't post directly. Here, though, is my summary of the solicitation.

This is the 9th in a series of ideas where I contrast a cheap security with an expensive one that otherwise shares some characteristics. So far, I am 6 for 8:

For reference:

When Synovis Life Technologies (SYNO) (15.72, $181mm market cap) reported in late May, I thought I had let a great opportunity slip away. I had recently added this pure-play in biological materials used in surgery to my watchlist, as it is a member of an elite group of companies in the Med-Tech space with gross margins above 60% and little or no exposure to capital spending. I have written about a couple of others, including Somanetics (SMTS) last week and Volcano (VOLC) earlier this summer. SYNO reported a great quarter, yet again, but it announced that it was going to be hiring salespeople. I mistakenly took this long-term bullish but short-term costly action as a possible catalyst for the stock to pullback even further than it already had. Instead, it ran from its close of 14.24 to a high of almost 20 in the next few days and a peak of almost 22 five weeks later. As you can see in the chart below (click to enlarge), it looked like I had let a great one get away:

Somanetics (SMTS) (14.02, $169mm), the tiny manufacturer of a non-invasive patient monitoring system that measures oxygen levels in the brain and other vital organs, made news this week when it filed suit against an even tinier want-to-be competitor, CAS Medical (CASM). I have been amazed at how cheaply SMTS has been trading. Could this patent infringement suit serve as a potential catalyst?

SMTS, which I own in a portfolio I manage as well as in my Top 20 Model Portfolio, is a neat little company. It sells the INVOS system (In Vivo Optical Spectroscopy), which consists of a monitor (razor) and sensors (blades). The primary markets are for cardiac surgery as well as neonatal and pediatric surgeries, none of which are elective. It fits a theme that I have been pursuing (MedTech companies with high recurring revenue), and I first got involved with after they reported in June. The stock has fallen about 15% since then despite an overall strong market, so I have been checking my assumptions.

This is the 8th in a series of ideas where I contrast a cheap security with an expensive one that otherwise shares some characteristics. So far, I am 5 for 7:

For reference:

A year ago, I highlighted the fast casual restaurant segment favorably, suggesting these chains would benefit from falling input costs and a slowdown in expansion. Most of the stocks mentioned are higher today despite the overall market being down. I followed that article up a few days later with a explanation of why I bought BJ's Restaurants (BJRI), which turned out to be a real winner.

While most of the stocks mentioned are up, the path wasn't so straight, as all of these stocks were hammered in the October massacre. I had alluded to the too-high debt levels of many of these companies, and those were the ones that fared the worst. Several, in fact, suffered losses over the ensuing months of 80-90%.

Another reason I was slow to embrace the story is that it operates an airline. While I have had a long-term respect and appreciation for Southwest Airlines (LUV), I view the airline industry as perhaps even worse than the auto industry. For me to buy into an airline story, it has to be unique. Having read public filings and other company information, listened to conference calls and crunched a few numbers, I find that this is not your typical airline.