Fall 2010

U.S. Physical Therapy is well-positioned in the healthcare sector, benefiting from the increasing demand for physical therapy services as the population ages and seeks rehabilitation services.

CoreLogic provides essential data and analytics for the real estate and mortgage industries, which positions it well to capitalize on the recovery of the housing market and increased demand for its services.

Aon is an insurance brokerage firm with about 65% of its revenue coming from outside the US. The company is expected to benefit from increased premiums in an inflationary environment, and even without inflation, the stock should perform well if pricing stabilizes. Aon's strong management and balance sheet further support its potential for growth.

AGCO is a farm equipment manufacturer that has been generating significant free cash flow. The company is viewed positively due to its operational improvements and potential benefits from inflation, making it a solid investment choice.

Republic Airlines is a low-cost operator trading at 86% of tangible book value, with an estimated earnings power of $1.60, implying a valuation of 5.4x potential earnings. The company is expected to benefit from industry consolidation and has significant tax loss carryforwards, enhancing its earnings potential.

Yamana Gold is trading at a 25% premium to book value but still presents an attractive investment opportunity due to its significant organic growth potential and strong balance sheet, with earnings power estimated at $1.00 per share.

Dillard's has tremendous hidden real estate value, with a breakup value estimated at $52 per share compared to its current price of around $27. The company is undergoing a fundamental turnaround, which, combined with its asset value, makes it an attractive investment.

U.S. Physical Therapy is poised to benefit from secular demand growth for physical therapy services, with attractive unit economics and solid cash flow. The company has opportunities for market share growth through targeted advertising, partnerships, and acquisitions in a fragmented market. At 12.6x LTM adjusted free cash flow, it is attractively valued, with a target price of $24.00 per share, representing a 33% upside.

U.S. Physical Therapy is positioned to drive operational efficiencies and capture market share through strategic acquisitions of small operators in a fragmented market. The company is expected to grow its adjusted free cash flow at a high single-digit growth rate over the next three years, with a target price of $24.00 based on a 15.0x multiple of 2012E adjusted free cash flow.

CoreLogic is a high ROIC business services and data analytics company with leading niche market share that is poised to benefit from long-term secular trends in the mortgage and financial industry. The company has a strong competitive edge due to its market share, barriers to entry, and the increasing demand for transparency and regulatory compliance. Applying a 13x free cash flow multiple to a normalized levered FCF of ~$250MM, I arrive at a target price of $27/share.

We bought AAP's shares when we started the fund and sold recently, with a good realized return.

Paychex is a very interesting business with very high barriers to entry, customer captivity, and high return over invested capital; however, we wouldn’t feel comfortable knowing when to short a business like that.

In May 2008, we were short CSX because the market was implying that the ROIC would be 15% in perpetuity, which we believed was unrealistic given the economic conditions and competition from trucking.

When USG was trading at $90 in 2006, it was implied that there would be a soft landing in the housing market and the return over invested capital for USG would remain around 30%, which we considered a mathematical impossibility.