A Favorite Technology Stock: Rackspace Hosting

Featuring Lutts’ Logic:

Fixing Health Care: “The First Thing We Do, Let’s Kill All The Lawyers”

The “Debut” of Pet Airways

A Favorite Technology Stock

Today we start with healthcare, a subject that you’ve shown you care about deeply.  The reason for revisiting the topic:  our “public servants” in Washington are still wrestling to achieve consensus on the issue, while new data has come to light from the Massachusetts experiment.

(And I’m not really advocating killing lawyers, but Shakespeare’s words do suggest some sentiments that stem from their involvement in the health care industry.)

It was three years ago that our Massachusetts governor, Mitt Romney, signed a bill aimed at achieving universal coverage for healthcare.

Since then the percentage of uninsured Bay Staters has dropped from roughly 7% to about 2.6%, the lowest number in the country.  Bravo.

Trouble is, we’re paying through the nose for it.

Twenty-three percent of the patient population in Massachusetts still relies on emergency room (ER) care for basic medical treatments.  That’s unchanged from 2006, even though hospital officials have calculated that half of patients visiting the ER would be well served by visiting a regular primary care doctor.

And the people who receive state-subsidized insurance use ER care 14% more than the average resident.  Sure, with their new state-sponsored insurance, they could see a primary care physician.  But it costs too much, and many doctors aren’t taking new patients.

Which should come as no surprise to those knowledgeable about markets.  When you increase demand for a service without increasing supply, you get either higher prices or frustrated customers.

Here in Massachusetts, we have both.

In fact, state budget spending on healthcare has grown from a base of $1.04 billion in fiscal 2006 to a projected $1.75 billion in fiscal 2010, up 14% per year.

Massachusetts healthcare now costs 33% more per person than the U.S. average.

So now, in an attempt to fix this “unforeseen problem,” a state board is recommending a new reimbursement structure, designed to reduce the use of pay-per-procedure medicine, which has led to unneeded tests and procedures.

In the new system, doctors and hospitals would receive a yearly fee for each patient, thus eliminating financial incentives to over-treat … but perhaps introducing incentives to under-treat.  The annual fee would be set by age, gender, and health status.

Whether health outcomes would improve or not under such a system is unknown.  Anything is possible.  Properly managed, it could certainly lower costs.  But when hospitals suddenly cut back on the use of expensive MRIs, and the state reduces payments to long-standing customers, the lawyers are likely to get involved!

Consider this:

Boston Medical Center (BMC), a hospital that boasts a “long history of serving the low-income population,” is suing the state of Massachusetts!

To make a long story short, numerous Massachusetts laws mandate that the hospital treat citizens who need its services.  But its costs are higher than average, in part because it employs 75 translators-30% of its patients do not speak English– and it treats nearly 70% of the city’s trauma cases.

Nevertheless, the hospital, which received $1.5 billion in state funding last year, has only been compensated at an average rate.  And now the state is reducing the amount it pays BMC for treating a Medicaid patient from $12,476 per admission to $9,323.

This rate was calculated by considering the average cost of caring for Medicaid patients at Massachusetts hospitals, and paying 75% of that amount “to encourage efficiency.”  (I can see folks in Washington thinking the exact same way.)

BMC argues in the lawsuit that because of these cuts (and others) it will lose $175 million in the fiscal year starting October 1, an 18% operating loss.   Finally, it argues that Massachusetts is financing its universal health insurance law on the backs of poor residents by cutting money to the hospital that cares for so many of them.

So now, instead of my tax dollars going to pay for care for poor people, which is not necessarily a bad thing, they’re going to pay for lawyers arguing about where my tax dollars should go … and that’s a horrible thing.

And the pity is, I don’t think those “public servants” in Washington–many of whom are lawyers–are giving one minute’s thought to the idea that cutting the LEGAL costs of the healthcare leviathan might be a good idea.

But before they follow Massachusetts into the universal healthcare “business” they should take a good look at the unintended consequences.

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Moving on to a lighter topic, last week marked the start of business for Pet Airways, a privately-funded company that will fly your pet in the main cabin of their aircraft–not in the baggage hold–between New York City, Washington, D.C., Chicago, Denver and Los Angeles.

Founded by Dan Wiesel and Alysa Binder and funded by private investors, the service is initially using one Beech 1900 19-passenger turboprop, which has had its seats in the main cabin removed to make room for the pet carriers, which are provided by the airline.  The plane is relatively noisy and relatively slow; it hopscotches across the country-from NY to Washington to Chicago (with an overnight layover) to Denver to Los Angeles–and then back.

The actual carrier is Suburban Airlines, a contract carrier based in Omaha, Nebraska, that flies mainly for the U.S. Department of the Interior, Alaska Fire Service, U.S. Postal Service, DHL, UPS and Airborne.

And the carrier rarely uses the major airports at these cities: Airports used are Republic Airport in Farmingdale, New York; Baltimore/Washington International Airport in Glen Burnie, Maryland; Midway Airport in Chicago; Rocky Mountain Airport in Broomfield, Colorado and Hawthorne Municipal Airport (Los Angeles Executive Airport) in Hawthorne, California.

Pet Airways promises to care for your pet from drop-off to pick-up.  Drop-off can be as much as 72 hours before the flight; Pet Airways will board pets at their PAWS Lodge until the flight.  Similarly, they’ll board your pet overnight after landing … for a fee.

The company eventually plans to extend its services to other major cities and expand its fleet to 20 planes (including Falcon 20, Convair 580 and Boeing 727) by the end of this year.

Cabot Market Lettter - Cabot Trumps the IndexesI was intrigued by this new venture, not least because of the timing.  In this recession, with people at all income levels spending less than last year, the launch of this service is a voice of optimism, saying, “We think people are ready to pay for something new, because they care about their pets.”

At the start, Pet Airways is accepting only cats and dogs, though eventually it will accept reptiles, birds, pigs and more.

I went online several times in the past week to try booking a flight for Layla, my 67-pound Weimaraner, and had a hard time initially.  The Web site needs work.  Though it never told me a flight was full, it sometimes told me there was no more room for carriers of the size my dog needed.

So I invented a small cat named Mikey … and sometimes got the same message.

Eventually I did succeed in finding passage for both Layla and Mikey … though I didn’t go so far as to actually provide a credit card.  And here’s where it gets interesting.

To fly Layla costs more than to fly Mikey.  A round-trip from New York to Chicago, for example, costs $299 for my large dog but only $199 for my imaginary small cat.  Now, if you consider these passengers freight, that difference is perfectly normal.  That’s how the freight industry works … and it works very well.

But are pets more than freight, and if so is it discrimination to charge extra for larger and heavier pets?

And if not, then are people different than pets?  And if not, why can’t a bold airline like Ryanair start charging its passengers according to their weight?

I think it’s an interesting question, and that some lawyers with a bent for litigation might be thinking the same thing.  I also think it will be interesting to watch the airline’s progress.  I sincerely hope they succeed.  But I worry about that ambitious expansion plan.  For a cautionary tale about a former high-flier that fell prey to the effects of too-rapid expansion, see tomorrow’s Cabot Wealth Advisory by Michael Cintolo.

There are no airline stocks on my radar screen today, though I do like the bold, penny-pinching management of Ryanair (RYAAY), which last month announced it was working to eliminate airport check-in and baggage check-in, accomplishing both right at the aircraft.  But a quick look through the charts of the 31 public companies in the industry reveals that this industry is sick.  The “least sick” are AirTran (AAI), Gol Intelligent Airlines (GOL) of Brazil, China East Airlines (CEA) and China Southern Airlines (ZNH).  But I don’t recommend them when there are so many strong industries and strong stocks in this bull market.

One of my favorite stocks is in the technology industry, where we often find great growth stories in bull markets.  Its name is Rackspace Hosting (RAX), and its business is simple; it delivers enterprise-level hosting services to businesses of all sizes all around the world. 

The company first came to my attention when our IT director selected it as the site for our Cabot server about two years ago, a choice that has proven wise.  Rackspace differentiates itself from the competition–in an industry that risks commoditization–by promising “Fanatical Support” to its customers … and delivering.

More recently, on June 29 the stock earned a spot in Cabot Top Ten Report.  Here’s some of what editor Michael Cintolo wrote:

“Started in San Antonio, Texas in 1998, the company now serves more than 62,000 corporate customers, including over 43,000 cloud computing customers. (Cloud computing involves hosting a customer’s applications over the Internet, thus freeing the customer from investing in, and caring for, applications. In this area, the company is positioned between low-rent Google and high-rent Microsoft.)  …  Looking at the numbers, we see excellent historical growth of revenues, as well as rosy projections by analysts. … RAX came public in August, 2008 [and] broke out to new price highs last week so now has no ceiling. Try to get on board on any normal pullback.”

When that was written, RAX was trading at 14, and Mike’s recommended buy range was 12 1/5 to 15.  The stock did pull back calmly, on decreasing volume, touched 12 on three days, and has now returned to 14, setting up for an eventual breakout.  I like it.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory

Editor’s Note: Cabot Top Ten Report is the #1 source of new stock ideas, like past winners Crocs, First Solar and Apple, just to name a few. Editor Michael Cintolo always has his eye on the market, looking to discover which stocks are going to be the leaders of the new bull market. Every Monday, Mike provides subscribers the market’s 10 hottest stocks, including a detailed fundamental and technical analysis. If you’re ready to discover the strongest stocks in the market today, Cabot Top Ten Report is right for you. Click here to get started today!



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