[Bonus] Led Tasso

Editor's Note: Below is a special bonus edition of the "Early Look" written by Retail analyst Jeremy McLean. This note explains a critical component of Hedgeye's team-based approach to risk management: The Retail team measures and maps their high conviction long and short ideas across bottom-up fundamentals and sentiment data, while calibrating those ideas against the Macro team's top-down risk management process. Enjoy this bonus "Early Look" and have a great weekend.

"The enemy of my enemy is my friend”
– Ancient Proverb

Watching Season 2 of Apple’s Ted Lasso, we are introduced to a new character: Led Tasso.  Led is simply Ted Lasso transformed into a bizarro version of himself.  Upon his intro, he hurriedly stomps onto the soccer pitch and flips over the water cup table.  He’s mean, angry, impatient, impolite; all the things Ted Lasso isn’t.

It was perhaps and improv moment for Jason Sudeikis to channel an inner charged-up Bobby Knight. After screaming for a while and telling the team to run a thousand laps, he cancels practice. The players walk off upset and confused.

We then find out that it was all an attempt to unite the team against a common enemy (Bizarro Coach Led Tasso) as the players were having some internal struggles.

A common enemy is a powerful force.  It creates simplicity in terms of motivation, state of mind, purpose.  I’ve always liked watching WWII movies/documentaries and I think it’s because it’s modern history’s clearest moment of a common enemy, a pure example of good vs evil. 

A country, and perhaps all free societies, united against a distinct common enemy.  From afar, decision making and objectives in this period seem simpler. Certainly, simpler than today as a nearly even split, highly polarized country has two sides screaming at each other over facial coverings. 

If only today’s challenges were a simple as wake up, fight the common enemy, and savor life.

Back to the Retail Macro Grind…

So, who/what is the common enemy in investing and risk management?  The other side of the trade? Old wall? The “suits”? The Fed? Reddit Traders?... I’d argue none of the above.

As I think about it, the only common enemy I can identify is ourselves.  We must overcome our fear, our biases, our hubris to make the best decisions to consistently create alpha.  How do we combat this common enemy? Enter the process.

The process at Hedgeye is multi-dimensional.  As I view potential ideas or review our positioning on the Hedgeye Retail team, I look at stocks through multiple lenses, 4 main ones to be exact.  

There’s the rate of change in the fundamentals (the “Pods” of revenue, margins and cashflow), then the long-term earnings power in the context of current valuation and street/market sentiment, also the macro setup from a quad perspective relative to the stock at hand, and finally perhaps most importantly for risk management the market signal and style factors vs where the stock fits. 

We of course lean heavily on Keith and our Macro Team for reads on the latter two, while Brian, Bradley, and I on Team Retail focus heavily on the first two, but it’s important to be aware of all of them, especially if running a portfolio (also a good reason to tap into multiple Hedgeye products to risk manage the multiple factors).

We’ll often consider other details like company management, business quality, strategic positioning, etc in identifying what we think the opportunity is for stocks, but those can be dangerous in establishing biases.  They may matter in the long run, but the market generally doesn’t care about those on any given day/month/quarter. The process for me really goes back to those 4 lenses.

When all of these align on the same side of an idea, we can get some serious alpha. That’s what we saw for much of the period from last fall to this spring. Our retail longs worked great, with at least a half dozen or so names doubling or better in 6 months or less.  Our Retail Pro subs likely did quite well.

The last few months have been tougher sledding in Retail investing, the small cap style factor has turned bearish, the macro setup has clearly pivoted out of the prior raging Quad2, and in post stimulus Retail land the rate of change in revs and margins for retail subcategories is painting a very different picture.

At least some shorts are working again (W, LOVE, SFIX, SNBR, BGFV hitting lows in last month) vs that recent Quad2 period when a great Retail short was one that just didn’t really go up.

Some short-term stock moves make less sense.  For example, a growth company like W guiding down upcoming Q revenues by 20% and the stock rallies. Maybe the risk was previously “over signaled” by other ecommerce names, or maybe the market preferred big cap ecommerce name as it tends to do in Quad3.

Regardless, I go back to reviewing what’s changed through those lenses if anything. The chart of the day shows the sudden divergence of the W sales multiple vs the revenue growth rate.  The only similar divergence came in Feb 2019, which turned out to be a great W short opportunity.  As a note, historically Wayfair does well in Quad3, underperforms in Quad2, and basically crashes in Quad4.

I guess my point is that the volatility and uncertainty is not new and not unexpected, when we reach moments of macro and market pivots things get a bit more cloudy, confusing, and hard. The pivots are processes, not points.

With the macro market signal dancing between Quad 3, Quad 2 and Quad 4, there’s no more critical moment to combat the common enemy. If we put our fears aside and execute the process, further alpha awaits.

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Keep your eye on the ball, and finish balanced.

Jeremy McLean
Retail analyst