Fly on WallStreet

Nashville is a health care town. Many aspects of the health care business are represented here:

• Vanderbilt has one of the nation's best medical schools
• Hospital chains are present (HCA is headquartered here and was recently taken private)
• The pharmacy business is here with Caremark
  
• Insurance is here, R&D, etc...it's a powerful cluster

Healthways, formerly known as American Healthways, is also based in Nashville. The stock (Ticker:HWAY) has been a real high-flier in recent years. I think the company and the stock are showing signs of weakness. Here's why:

• Healthways hit an earnings snag in the third quarter, when the company announced on July 5th that it had lowered its earnings guidance for the 2007 fiscal year - down to $1.21 to $1.44 per share. That's about 20 cents per share lower than its previous guidance.
  
• Goldman, citing a "market dislocation" downgraded on valuation concerns.
  
• Despite the news, the stock has climbed on decreasing volume. Some I've talked to think this "dislocation" is actually accumulation prior to a take-over attempt. Perhaps. More likely, a result of this contract win and Jefferies price target of $60. Hope springs eternal at Jefferies.
  

If HWAY is not a take-over candidate, I think it is due for fall. A break below the 50 day moving average would be a short for me.

Here's why I think HWAY is running out of steam and will retest/break below the 50 day:

• Employees tell me the company is becoming increasingly frustrated with domestic growth opportunities. As a result they are pushing internationally, hence the company name change.
  
• International opportunities, like the aforementioned contract win, are harder to monetize and operationalize than domestic ones.
• The company is making, at least to my eyes, desperate attempts to keep the growth story alive including buying Axia, a company that...get this:

'With an integrated suite of prevention programs, Axia Health Management is an industry leader in preventive health care by incorporating personalized solutions that help healthy individuals stay healthy and improve the health of those already affected by disease or disability. This is accomplished through a high-touch delivery system of over 10,000 fitness center locations, 3,000 Axia-certified health improvement instructors and over 30,000 health and complementary and alternative medicine providers including personal trainers, massage therapists, nutritionists, acupuncturists and chiropractors. The cornerstone of Axia’s suite of products is the SilverSneakers® Fitness Program, a unique physical activity program offered to nearly three million Medicare-eligible members in 42 states at more than 2,100 fitness centers and class sites."

• Simply stated, Axia is the YMCA staffed by voodoo doctors. Half a billion for that!
• I could go on about the nursing shortage, how they are having problems retaining front line nurses to work "on the phones" with patients...how they are building a massive corporate headquarters, shaped like an H, with some of the most luxurious and decadent furnishings I've ever seen...

My professional mentor is a CEO of an financial services firm. He once told me that if you don't trust management, sell the stock tomorrow. Well, I don't trust HWAY's management. I have first hand experience in this regard: I interviewed extensively at the company, up to just shy of the CEO. I was unimpressed with every single executive I met. They were protecting turf. Afraid of the future. You could smell it. I left with a real sense that they were merely trying to get theirs before the gravy train ended. I withdrew my candidacy for the job.

As I write this I have no interest, long or short, in HWAY. It could be acquired. It could hit that $60 target Jefferies projected. I will wait for either more bad news or a break below the 50 day before I short it. Please, do your own due diligence...or you might get the blues.

Larry Carlton is a guitar legend. He lives in the rolling hills outside Nashville. You know his work from countless sessions including work with Steely Dan, Joni Mitchell, Billy Joel, and Quincy Jones. Now you know the man: