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BWLD: TRADE UPDATE

Buffalo Wild Wings was shorted moments ago in the Hedgeye Virtual Portfolio.  From a fundamental perspective, this is one of our favorite names on the short side.

 

Buffalo Wild Wings’ share price has popped up 14% over the last week after trading below $60.  A sell-side upgrade generated some attention for the stock last week and since then BWLD has strongly outperformed the market.  The stock is currently being awarded an EV/EBITDA NTM multiple of 8.3x by the Street.  Only BJRI and DIN trade with higher multiples in the casual dining space.  The Hedgeye Macro Team’s current theme, “King Dollar”, has played out nicely and a corollary of that has been a strengthening of U.S. consumption.  While our longs have worked nicely under this macro theme, BWLD has worked less effectively over the past week than it had been.  From a quantitative and fundamental perspective, however, we are still bearish on the stock – at these prices, only more so.

 

We have discussed our short thesis at length: wing prices are heading higher in a hurry and this will greatly dilute the effectiveness of any promotional approach the company might take to driving comps, a strategy that worked well in 3Q.  Margins are likely to take a leg down and, while King Dollar is likely helpful for comps, we are pessimistic about the prospects of the company taking further price in the hyper-competitive discounting environment that exists in casual dining today.  At the same time, dropping price in 4Q and (especially) 1Q12 is a completely different proposition than doing so in 3Q11 when wing prices were down year-over-year.  1Q12 is the litmus test of this fundamental thesis; we expect wing prices to be up 50-60% year-over-year. 

 

This company has growth and that is part of the reason why it is being awarded a (relatively) rich multiple but we believe it is worth noting the G&A associated with that growth since much of it is focused in new markets.  On the 2Q11 earnings call, management had this to say:

 

“We underestimated in two areas for the second quarter: the one is the amount of money that we were putting into recruiting training managers, staffing, regional managers in these new markets on both coasts, where we don't have an infrastructure to do any of the training locally. So, a lot of travel expenses related to that that we – I just could not have fully captured in my estimate for the second quarter.”

 

From a quantitative perspective, the TRADE line of resistance is at $69.19, as illustrated by the chart below.

 

BWLD: TRADE UPDATE - bwld levels

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


Trade Update: Shorting France (EWQ)

Positions in Europe: Short France (EWQ)


Keith shorted France via the etf EWQ in the Hedgeye Virtual Portfolio today getting a better re-entry price. The CAC40 is in a bearish formation, broken across its immediate term TRADE, intermediate term TREND, and long term TAIL lines (see chart below). 

 

Trade Update: Shorting France (EWQ) - 1. CAC Heut

 

We remain bearish on France over the intermediate term due to:

  • Pending downgrade of France’s AAA Sovereign Credit rating
  • Public debt rising through the 90% (as a % of GDP) next year
  • Slowing growth (below the government’s 1% 2012 projection) and sticky inflation alongside Austerity’s Bite  = Stagflation
  • Banking risk, including any difficulties for its major banks (BNP, Credit Agricole, SocGen) to raise capital to the 9% Core Tier 1 ratio, and sovereign risk as France is the largest holder of Italian public debt and private debt, according to BIS
  • EFSF and IMF are undercapitalized to materially aid any potential sovereign and banking bailout needs of France
  • High unemployment rate of 9.8% (versus 7% in Germany); 22.8% among the French youth
  • Smaller export profile (versus Germany), so there’s less benefit to grow via exports 

This morning Josh Steiner of our Financials teamed passed along a very interesting chart that shows the correlation between Citi (C) and EWQ.  The correlation is 0.88! In a note yesterday, Josh said: “Fundamentally, we continue to dislike Citi. We expect Citi to have significant margin pressure in the coming quarters.  Moreover, as European investors are still largely unable to short European financials, they continue to flock to Citi on the short side as their go-to substitute.  We see little changing in this regard.”

 

We’ll continue to monitor this rather notable correlation.

 

Trade Update: Shorting France (EWQ) - 1. Steiner Chart

 

Matthew Hedrick

Senior Analyst


JOBLESS CLAIMS HAVE 1-2 MORE WEEKS OF GOOD PRINTS

Initial Claims Continue Their Winning Ways

The headline initial claims number fell 2k WoW to 364k (down 4k after a 2k upward revision to last week’s data).  Rolling claims fell 8k to 380k. On a non-seasonally-adjusted basis, reported claims fell 17k WoW to 418k. Claims are currently at a level that is consistent with a reduction in the unemployment level: generally anything in the 375-400k level has been consistent with falling unemployment.

 

It strikes us that claims have exhibited similar tendencies for the past few years. Starting around week 36 of the year, rolling claims begin improving and continue that improvement through year-end. While we don't have a great explanation for why that is, considering the data is seasonally adjusted, it does seem to be a recurring trend. Also important is the fact that in the first 1-2 months of the new year, claims seem to go the wrong way, or least have done so in the past few years.

 

We'd also highlight the sizeable divergence that has emerged between claims and the S&P. Historically these divergences have not lasted. Right now the divergence is suggesting that either claims back up to ~445k or the S&P 500 puts on a move to ~1375. Last time a comparable divergence emerged it was in the Fall. The mean reversion instrument at that time was the market, as claims showed resilience, and, ultimately, improvement.   

 

JOBLESS CLAIMS HAVE 1-2 MORE WEEKS OF GOOD PRINTS  - Rolling

 

JOBLESS CLAIMS HAVE 1-2 MORE WEEKS OF GOOD PRINTS  - Raw

 

JOBLESS CLAIMS HAVE 1-2 MORE WEEKS OF GOOD PRINTS  - NSA chart

 

JOBLESS CLAIMS HAVE 1-2 MORE WEEKS OF GOOD PRINTS  - s p 07 10

 

JOBLESS CLAIMS HAVE 1-2 MORE WEEKS OF GOOD PRINTS  - Fed and Claims

 

2-10 Spread

The 2-10 spread widened 3 bps versus last week to 170 bps as of yesterday.  The ten-year bond yield increased 6 bps to 197 bps.

 

JOBLESS CLAIMS HAVE 1-2 MORE WEEKS OF GOOD PRINTS  - 2 10

 

JOBLESS CLAIMS HAVE 1-2 MORE WEEKS OF GOOD PRINTS  - 2 10 qoq

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

JOBLESS CLAIMS HAVE 1-2 MORE WEEKS OF GOOD PRINTS  - subsector perf

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

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HOTELS: GREAT NOV AND IT COULD GET BETTER

The math suggests that January and February could actually accelerate from a strong November, and that’s without a macro recovery.

 

 

The early 2012 set up looks favorable for hotel stocks.  We are very encouraged by November’s strong growth and while December won’t quite look as good, January and February are likely to accelerate.  When the hotel companies report in late January/early February, not only should Q4 earnings look solid, but the outlooks could be favorable with about a month of 2012 already in the bank.

 

November US REVPAR for Upper Upscale properties came in at 8.2% growth, in-line with our sequential model projection of 8.0%.  November generated the highest YoY growth rate since May 2011, overcoming the relatively weak 4.8% rise in October.  We track REVPAR on a sequential dollar basis, seasonally adjusted.  Our model successfully predicted the summer swoon and the fall resurgence, both coinciding with the performance of hotel stocks.

 

With two more weeks left, December Upper Upscale REVPAR is tracking +6%, also above our projection, which means Q4 REVPAR may expand 6-7% YoY.  That’s pretty solid growth in the face of a difficult macro environment.  In addition, there are surveys of a strong holiday season to close out 2011 which could increase hotel bookings.

 

And the YoY trend may get even better.  According to our seasonality model, REVPAR may reach double-digit growth in January and February.  If that happens, the bears will be severely disappointed.  There are expectations out there for flat REVPAR growth for 2012.  We’re only predicting 2-3% growth in REVPAR for CY 2012 and we are bullish on the sector.

 

Healthy US REVPAR performance would restore investor confidence in the lodging sector.  We think lodging outperforms consumer discretionary in any environment.  Counter intuitively, MAR could be the biggest winner.  Obviously, MAR doesn’t have the same leverage to increasing RevPAR as the hotel owners but the sentiment is much worse surrounding the name.  With the completion of its timeshare spin-off, MAR is almost a hotel pure play with a business model that generates 95% of its revenues through fees.  This business model should command a huge premium valuation multiple in our opinion and an environment of improving investor sentiment could get us there.  At only 9x EV/EBITDA, we’re left with plenty of upside.

 

HOTELS: GREAT NOV AND IT COULD GET BETTER - uup


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 22, 2011

 

Storytelling may very well make the US stock market world go round, but the globally interconnected facts embedded in last price remain.  As we look at today’s set up for the S&P 500, the range is 31 points or -1.26% downside to 1228 and 1.23% upside to 1259. 

 

 

SECTOR AND GLOBAL PERFORMANCE

 

 

THE HEDGEYE DAILY OUTLOOK - levels

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE:  695 (-1620) 
  • VOLUME: NYSE 824.30 (-12.96%)
  • VIX:  21.43 -7.71% YTD PERFORMANCE: +20.73%
  • SPX PUT/CALL RATIO: 2.53 from 1.25 (+102.78%)

 

CREDIT/ECONOMIC MARKET LOOK:

 

TREASURIES – not getting the memo from Ed Hyman on GDP being 4%? in Q4 either; we all know that the Keynesian sell-side GDP models failed Old Wall St in both 2008 and 2011, so I don’t get why someone would use them right here when the long-end of the Treasury market has front-run every Growth Slowdown from Dupont to Oracle this year. 10yr trading 1.96%, only up 11bps on the wk and well below all lines of resistance.

  • TED SPREAD: 57.12
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 1.98 from 1.94   
  • YIELD CURVE: 1.70 from 1.68

 

GLOBAL MACRO DATA POINTS (Bloomberg Estimates):

  • Japan Gov forecasts FY11-12 real GDP (0.1%), FY12-13 real GDP +2.2%.
  • UK final Q3 GDP +0.5% y/y vs consensus +0.5% and prior +0.5%
  • UK final Q3 GDP +0.6% q/q vs consensus +0.5% and prior revised to +0.00% from +0.5%
  • 8:30am: Chicago Fed, Nov., est. -0.17 (prior -0.13)
  • 8:30am: GDP QoQ (Annualized)    3Q, est. 2.0% (prior 2.0%)
  • 8:30am: Initial Jobless Claims, Dec. 17, est. 380k (prior 366k)
  • 9:45am: Bloomberg Consumer Comfort, Dec. 18, (prior -49.9)
  • 9:55am: UMich Confidence, Dec. F, est. 68.0, (prior 67.7)
  • 10am: Leading Indicators, Nov., 0.3% (prior 0.9%)
  • 10am: House Price Index, Oct. est. 0.2% (prior 0.9%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas storage 

 

WHAT TO WATCH:

  • Yahoo! said to consider cutting its 40% stake in Alibaba to ~15%
  • Greece creditors said to resist IMF pressure to accept bigger losses on Greek govt bond holdings
  • U.K. GDP climbed 0.6% in 3Q, more than estimated
  • 10:25am: NRC meets to discuss Toshiba design, permits for what would be first nuclear reactors built in U.S. in 30 years

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

  • Herpes Virus Makes Oysters Rare Treat in French Holiday Season
  • ‘Medieval’ Economy Is Kim Jong Il’s Legacy as Minerals Untapped
  • Hong Kong Solstice Banquets Threatened by Bird Cull, Sales Ban
  • Hamburg Loses to Trieste as Southern Ports Exploit Rail: Freight
  • Nothing Predicted Happened as Men Conspired With Nature in 2011
  • Oil to Set Record in 2012 as U.S. Dodges Slump: Energy Markets
  • More Bankers Predict Policy Easing as Economy Cools, PBOC Says
  • Gold May Decline in London as ETF Holdings Drop to 1-Month Low
  • Oil Rises for Fourth Day as U.S. Supplies Drop Most in a Decade
  • Komatsu Sees Record Year for Mining Equipment Sales on China
  • Corn Crop Heading for Record to Feed 1 Billion Cows: Commodities
  • U.S. Stocks Rise for 2nd Day as Oil Climbs, Treasuries Retreat
  • Gloucester Coal Suspends Share Trading Pending Merger Proposal
  • Copper Gains for Third Day on Stockpiles, U.S. Data Speculation
  • Uralkali Cuts Output Target for Next Year to Buoy Prices
  • Ex-Dow Scientist Who Stole Secrets Gets 7 Years, 3 Months Prison
  • India Should Allow Banks, Funds Trade in Commodities, Panel Says
  • Palm Oil Climbs to Two-Week High as Rains Threaten Production

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

 

ITALY – you’d think the Italian stock and bond markets could at least recover my 1st lines of support (immediate-term TRADE lines) and hold them for more than 48 hours – after 24hrs, and 489B euros of life support, nope – MIB’s first TRADE line of resistance = 15,391; watching that like a hawk alongside Euro 1.31 as I have no European short exposure and need to put it back on once resistance is confirmed.

 

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

 

ASIA – still not getting the memo that the LTRO gets the world free and clear of the #1 factor that’s pummeling Global Equity valuations in 2011 – Growth Slowing. Yesterday’s export print in Japan (down -4.5%) knocked the Nikkei down another -0.8% overnight (down -18% YTD) and Chinese stocks have been down every day this week. Emerging Markets MSCI Index down -23% YTD – EM outflows $41.2B YTD are = 2nd worst ever.

 

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST (HEADLINES FROM BLOOMBERG)

  • Baghdad Bombings Kill 57 as Political Tensions Escalate
  • Oil to Set Record in 2012 as U.S. Dodges Slump: Energy Markets
  • Putin Must Beat Own Economic Record as ‘Golden Decade’ Ends
  • EU Banks’ Retreat Creates Gap for Gulf Borrowers: Arab Credit
  • Malaysia, Emirates Consider Sukuk for Aircraft: Islamic Finance
  • Dana Gas Slumps to Lowest on Record on Egypt Delay Report
  • Egypt May Delay $148 Million Payment to Dana Gas, Al Bayan Says
  • U.S. Joins EU Push to Embargo Iran Oil Over Nuclear Effort
  • Rosneft Overtakes Exxon Mobil in Crude Output, Vedomosti Reports
  • BankMuscat Plans Stock Sale at 20% Discount; Shares Advance
  • MIDEAST DAYBOOK: Egypt Bond Rating Cut at Moody’s; Barwa Sale
  • Dubai’s Nakheel Says It Made 10% Profit Payment on Sukuk
  • Qatar’s Barwa Sells Financial District for $3 Billion
  • Aldar Won’t Delist Shares From Abu Dhabi, Deputy CEO Says
  • Iran to Hold Navy Exercises East of Strait of Hormuz, Fars Says
  • U.A.E. Shares Retreat on Aldar Delisting Concern, Margin Calls
  • Iraq Halts Oil Exports Via Turkey on ‘Operational Requirements’
  • Goldman Sachs Sukuk Row May Dent Industry Lure: Islamic Finance

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

The Hedgeye Macro Team

Howard Penney

Managing Director


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%
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