RL: Good Question

Question from an astute client. "Why short great companies that you love longer term for a trade when there's enough longer term crap out there?"


The question is referring, of course to Keith's move this afternoon in adding RL to the short side of the Hedgeye virtual portfolio.


The answer to the question boils down to our process as a team. Keith actively manages near-term (TRADE) risk across a broad array of names where we have an edge on the fundamentals. But make no mistake -- he is ‘ticker agnostic’. Keith has been known to say “McGough/(or any other Hedgeye analyst) likes XYZ so much that we’re shorting it…” only to buy it back when the price matches the fundamentals. His track record is on the Hedgeye site for all to see.


Yes, I (McGough) am a RL bull over the intermediate to long-term (which we call our TREND and TAIL durations, respectively), as I think that a $9 EPS number is in the cards within 3-years. I think that the 'it's too expensive' arguement is a recipie to get steamrolled for any company that has earnings momentum (the same way many stocks that appear so cheap can still be great shorts).


But stocks do not go up or down in a vacuum. And the reality is that as an analyst, my expertise in gauging what the stock will do 3-weeks out is average at best. I know where I'm good, and I know where I am simply not.


That’s why I spend 90% of my time on the fatter-tailed fundamental research, which is where I’ll pit my teams’s work against anyone’s. It’s also why I leave the near-term part of the equation to Keith, who is our full time risk manager. His models show that the stock probably has near $5 in downside from here based on current factors.


Does this mean I don’t like the company? No. Does it mean that if I am an investor that has the luxury of looking out many quarters and/or years, I would not own RL?  No. In fact, I think estimates are too low this year by about $0.50 ($6.80 vs. the Street at $.6.29). For that matter, an investor who can look out 1-2 years should have a better price to buy it than where it is today.


RL: Good Question - 6 29 2011 2 33 27 PM



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