One of our top short ideas has been trading well over the past couple of days. The reasons for this pop, if we are identifying them correctly, should not be afforded too much weight in terms of the viability our short thesis.
We currently have the following ideas on the Hedgeye Restaurants Alpha List:
LONG: MCD, YUM, EAT
SHORT: DNKN, BWLD
Over the last two trading days our short position in Buffalo Wild Wings is under attack; the stock was upgraded on Friday and the WSJ published a bullish article on the stock today. BWLD traded up 3.4% on Friday (still down on the week) and is trading up another 5% today. Friday’s upgrade included a reduction in estimates but also an increase in the price target.
Our short call for BWLD is predicated on our conviction that wing price inflation in 4Q11 and 1Q12 will cause the company to perform below current expectations. We believe that the risk that the company fails to meet its 20% EPS growth goal in 2012 is underappreciated.
Looking at EPS revision trends for 2012, BWLD has recently joined a group of companies that been underperforming on an earnings basis: DRI, CAKE and PFCB. I think this is just the beginning and we will see more estimate cuts and possibly some downgrades as we get closer to the reporting of 4Q11 EPS and clarity on where 2012 guidance is going to shake out.
With respect to EAT, our lone casual dining long idea on the Hedgeye Restaurants Alpha list, we are of the opinion that the Street is overly conservative in its outlook for 2012.
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Dunkin’ Brands was shorted moments ago in the Hedgeye Virtual Portfolio. The stock is trading higher today. Our fundamental view on the stock remains bearish despite positive sell-side research on the name being published last week.
Dunkin’ bounced off its 12/14 low, buoyed by positive sell-side research reports and an investor presentation released by the company. In our view, the main issue with the company's strategy remains the same: a franchised business like Dunkin’ Donuts needs to accelerate unit growth dramatically in order to meet long term EPS targets. Neither the sell-side research nor the company release of last week provided any incremental disclosure around the company’s backlog of new unit openings. Comps present headline risk to our short thesis but we see this metric as being significantly less relevant than new unit openings for Dunkin’ going forward. As we wrote on 11/29, “WHAT DOES DNKN RUN ON?”, the investor relations section of the Dunkin’ Brands website provides scant evidence of the backlog that we believe will be required to ramp up unit growth sufficiently (to 500 annually from 220-240 guidance for FY2011).
Per Keith’s quantitative model, DNKN’s TRADE line of resistance is currently at $25.43 and the TREND line of resistance is $26.97.
POSITION: Long Consumer Discretionary (XLY)
If you need proof that US Employment and US Consumption enjoy a Strong Dollar, ask an American.
If you need proof that the US stock market is making lower-highs, just pull up a chart. The SP500 is making lower-highs on 2 of 3 risk management durations (TAIL and TRADE).
The question from this time and price is whether we break-out back above TRADE resistance (1231) or break-down below TREND (1207) support?
Across all 3 risk management durations (TRADE, TREND, and TAIL) here are the lines that matter most:
- TAIL resistance = 1269
- TRADE resistance = 1231
- TREND support = 1207
On any rally toward 1231 that fails, I’ll be considering re-shorting the SPY because being long Consumption here can only take this market to another lower-high as long as the Financials and Basic Materials/Energy stocks continue lower.
Keith R. McCullough
Chief Executive Officer
Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".
Of the charts below, in particular we want to highlight the ECB’s SMP bond purchasing program that bought 3.361 Billion EUR last week in European sovereign issuance! This is notable due to the paltry spend two weeks prior of 635MM EUR, and is supportive of both the strong demand seen in European issuance last week, and the notable decline in peripheral yields late last week. As a reminder, Draghi continues to warn that the SMP is a temporary facility with limited firepower. While the SMP along with the extension of the LTROs should be additive to capital market gains, we don’t see the programs carrying sustained gains over the intermediate term for European capital markets.
Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 2 bps to 94 bps versus last week’s print of 96 bps.
ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. The ECB pays lower rates than the market, so an increase in this metric demonstrates increased perceived counterparty risk and liquidity hoarding. Last week the facility hit its periodic low, but this level was higher than the previous cycle, indicating growing risk.
European Financials CDS Monitor – Bank swaps were wider in Europe last week for 28 of the 40 reference entities. The average widening was 2.7% and the median widening was 0.3%.
Security Market Program – The ECB's secondary sovereign bond purchasing program bought 3.361 Billion EUR in the week ended 12/16 (versus 635 Million EUR in the previous week) to take the total program to 211.0 Billion EUR.
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