“He had shown himself to be … a young man who took great pride in his perseverance and steadiness of purpose.”
A month or so ago I referenced researching more about the roots of Jeffersonian thought (an alternative to British Keynesianism). Being a Canadian who is constantly thirsting to be educated in American history, I often lean on my American-born colleagues for reading recommendations.
One of our analysts, Allison Kaptur, pointed me towards Stephen Ambrose’s “Undaunted Courage” – the story of Meriwether Lewis, Thomas Jefferson, and the Opening of the American West. It was easily one of the most gripping and inspirational stories I have ever read.
The way the best storytelling is told is when the author personalizes the experience and reaches in and grabs you. Many of you will be familiar with the late Stephen Ambrose for his work in “Band of Brothers.” Many of you may not be familiar with the passion Ambrose had for backpacking every step of the Lewis & Clark Trail with his family.
“Of courage undaunted” was the opening description of Thomas Jefferson’s praise for Meriwether Lewis. It’s where Ambrose’s wife, Alice, came up with the idea for the title of the book. As Ambrose acknowledges best in answering the question, “what is the secret to being a successful author?” – “Marry an English major.”
Lewis never married. He died, tragically, at the very young age of 35 years old in Hohenwald, Tennessee, shortly after being appointed by Jefferson as the Governor of Louisiana in 1806. While it would be easy to tell stories about how messed up Meriwether’s mind became in his final years, I think it’s best for Americans to celebrate the confidence and courage it took for him to change the world.
“At eighteen years old, he was on his own. He had travelled extensively across the southern part of the Unites States. He had shown himself to be a self-reliant, self contained, self confident teenager…” (Ambrose, “Undaunted Courage”, page 29)
After 6 consecutive down weeks for US stocks, I’m calling attention to this story after being inspired by a great American Olympian who I have the pleasure and privilege of working alongside at Hedgeye – Bob Brooke.
On Wednesday night, Bob, Big Alberta, Darius Dale, Kevin Kaiser, and I were having a few beverages watching Game 4 of the Stanley Cup Playoffs with our summer interns. After proudly attending his son’s graduation at a very patriotic ceremony at Notre Dame, Bob told me it was a good time to think about a way to communicate to our clients how optimistic we are about the future.
You see, Wall Street and Washington like to put people like us in boxes. When you’re always thinking inside of the box – I guess that makes sense. You’re either a Bull or a Bear, a Democrat or a Republican – and it’s easier for these group-thinkers to generalize and not take the time to understand what something new could mean.
Just because I am bearish on US Equities, old Wall Street, and Keynesian Central Planning in Washington, doesn’t mean I don’t have the confidence and courage to put my own capital at risk to build a great team in this great country.
In fact, it’s quite the opposite – everything I am pessimistic about, gives birth to my optimism.
At the Hedgeye Holiday Party this past December, I cited a very popular American country song titled “Bless the Broken Road” (recent rendition by Rascal Flatts) to better explain why it’s our industry itself that gives me reason for optimism:
Every long lost dream led me to where you are
Others who broke my heart they were like Northern stars
Pointing me on my way into your loving arms
This much I know is true
That God blessed the broken road
That led me straight to you
Without giving away Hedgeye’s strategy to continue to be the change we want to see in this profession, that’s all I have to say about that. If Wall Street and Washington don’t realize that the most simple solution to all of this is to stop what they are doing, then the rest of us will just have to keep plugging away until we’ve reached the new open frontier of American Optimism that’s as old as America itself.
My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $98.46-102.91, and 1, respectively.
God Bless America,
Keith R. McCullough
Chief Executive Officer
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UA said all the right things at its analyst meeting – and it wasn’t smoke in mirrors. But growth isn’t linear, and we think that investment capital flows take the stock lower before it takes its next tear upward (as much as we disagree with Wall Street’s rational for doing so).
I’m sitting on an Amtrak from UA’s analyst meeting in Baltimore back up to New Haven, and have a mixed analytical read to say the least. I’m trying to ignore the fact that I am sitting next to Ray Lewis…No joke. The dude is completely decked out in UA from head to toe…and he wears it well. (Note to self…I gotta start working out). We’re sitting here eating our Caesar Salads, and I have the screen brightness on my mac as low as possible so he can’t see what I’m typing. If he sees me write anything negative about the brand he knows and loves, I am mildly concerned that he’ll snap my left arm like a pencil. Heck, maybe I’ll roll the dice let him read this when I’m done.
The punchline out of the UA meeting was very poignant. These guys are going to grow, grow, grow. The reality is that this is not exactly a change from the plan all along. Remember that UA could have been printing an operating margin double its 10-11% over the past 8 years if it desired to do so. But instead, it has reinvested in growth. That’s why it’s growing organically today at 20-30%. It’s also why they’ll keep doing that for the next 5 years at a minimum.
The only new target thrown out today was that the company would double sales in 3 years – that’s a 28% top line CAGR. What I like here is that it is not just coming from US apparel. Consumer direct going from 6% of sales, to 10% (now) to 23% by 2013 and ultimately 2030 is a massively ambitious goal. But that will help UA achieve these consumer-direct ratios that are double that of other brands.
It’s interesting to think about it, actually. Being such a young brand is a double edged sword. On one hand, they still have a lot of money to spend to get the size and scale to compete on a global cross-gender multi-sport basis with its rivals. But on the flip side, it is not hostage to the legacy processes that the traditional brands are married to as it relates to building a business from scratch. They can shake the Etch a Sketch clean, and literally start fresh. This is particularly an opportunity for Gene McCarthy in building the footwear business, which we think already has a turn time that rivals Nike, and will only get better on the margin.
Despite the hyper top line, however, management made it clear that it will not be afraid to spend money to achieve its goals. That’s fine with me. This is a business where you need to spend money to make money. Also, despite what doubters may think, this company has proven to be an ardent steward of capital in recent years.
All that said, capital investment and realization of financial rewards are not simultaneous nor are they linear. Unfortunately, the former needs to come first.
We continue to contend that UA is in an investment period today – in SG&A (Tom Brady, Cam Newton – current charges plus off balance sheet liabilities), cape (building store count to 80 by end of year), and working capital (building a footwear business and filling retail stores with product.)
People focus on sales momentum and EPS growth with this name, but another key stock driver is the cadence of SG&A combined with Capex and Working Capital. When all are headed in the same direction, the stock almost always goes the other way.
Again, to say this brand is killer would be a massive understatement. To say that the management team has grown in breadth, depth and maturity is as well. My confidence level walking out of the meeting into the 100 degree Baltimore sun was quite high that this is one of those unique Consumer companies that will defy growth projections time and time again and will threaten Adidas as the #2 global athletic brand.
But we know that this is a punitive market. As working capital squeezes, our sense is that the stock will trade down on the margin.
The sentiment on the name is close to all time highs (78x), the stock is still peaky, and management stock sales have accelerated. (See our sentiment chart below).
When we put on our TAIL duration hat (3 years or less), we absolutely want to own this name. But holding true to our risk management framework, the TREND and TRADE don’t look compelling. We’ll hold on and look to buy this great company at a better price.
(I’ll leave it up to you to guess if Lewis read this note).
We caught up with CFO Mark Robinow for lunch today. The obvious first issue on the table was the departure the CEO Mark Buehler. Robinow was very straight forward in saying that the Buehler and the board decided that the company need to find a CEO that would reside in Phoenix. Importantly, it had nothing to do with the operations; in fact, according to Robinow, the company is operationally stronger that it was 18 months ago.
A couple of other key takeaways from lunch:
- Business trends remain on track - the Kona recovery story is alive and well.
- The remodel program is probably ahead of plan and we should see a positive impact to 4Q comps. The remodeling of the seven stores should be completed in time for the holiday season.
- Commodity costs remain an issue, as for all restaurant companies, but the overriding message was that costs are manageable.
- From a growth perspective, the company is currently negotiating leases for 2012 and 2012.
- Management is looking to close under-performing stores.
Despite the recent price action in the stock (before today), I continue to see KONA as one of the better-positioned small cap names in the restaurant space.
HEDGEYE MACRO & FINANCIALS: WHAT'S NEXT FOR THE FED?
AND WHAT ARE OUR TOP FINANCIALS LONGS AND SHORTS IN THAT SCENARIO
REPLAY & PODCAST
Earlier today, CEO Keith McCullough, DoR Daryl Jones, and Managing Director Josh Steiner teamed up to host a conference call on Hedgeye's intermediate-term interest rate outlook. Some of the key topics addressed in the presentation included:
- A refresher on our Q2 theme Indefinitely Dovish, which postulates lower interest rates much longer than consensus expects.
- What are the trigger points for QE3? And does inflation matter?
- Why the Fed's Indefinitely Dovish policy is about to go from a tailwind for the Financials to a headwind.
- Not all Financials are positioned equally. We look at which Financials are best (and worst) prepared.
- A look at hidden sources of interest rate exposure that aren't on most investors' maps.
To access the replay podcast, please click on the following link. You may have to copy/paste the link into the URL of your browser for best results: https://www.hedgeye.com/feed_items/13850
Presentation Materials: http://docs.hedgeye.com/Macro%20Financials%202.pdf
The Hedgeye Macro Team
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.