Value Trap Trades


Hedgeye CEO Keith McCullough appeared on CNBC's Fast Money this evening to discuss everything from Bernanke's view of the Fiscal Cliff to market performance to the Autonomy scandal at Hewlett-Packard (HP). 


One topic the Fast Money traders discussed were  stocks that were value traps. Keith honed in on Caterpillar (CAT), noting that valuation is NOT a catalyst and that investors need to realize that earnings are slowing.


Watch the above video for Keith's appearance on CNBC.



While much of the EBITDA share movements is due to hold fluctuation, we believe LVS will continue to gain revenue and EBITDA share


  • LVS maintained its industry leading position thanks to a strong performance from the Venetian.  3Q EBITDA share improved 2.8% QoQ to 27.9%.
  • Due to stellar results at Galaxy Macau, Galaxy has surged into 2nd place, a significant rise over the last year.  Galaxy Macau’s EBITDA rose 12% QoQ.
  • MGM continues to hold the rear.  3Q EBITDA was negatively impact by low hold on direct play and rolling chip play.



Following Bernanke's Lead

Since the Federal Reserve first initiated quantitative easing back in November of 2008, the US stock market has shot upward in tandem with each subsequent announcement. However, the law of diminishing returns seems to kick in with each new round of easing as the gains following an announcement quickly become short-lived. Keep in mind that the S&P 500 is down -6% since the September 14 high (aka the Bernanke Top).


Following the Keynesian route of printing money over and over again is clearly unsustainable. Moreover, GDP growth is no longer keeping pace with the equity market as growth and earnings continue to slow. A fix is needed and one thing remains certain: another round of easing is not the solution. Some traders may be set on thanking the Fed for quick pops in the market, but over time, all good things come to an end.


Following Bernanke's Lead - fedgdp

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Solid Growth In Macau

Macau average daily table revenue (ADTR) grew 17% year-over-year last week, in line with our expectations and a solid week nonetheless. For the month, we’re predicting year-over-year growth of gross gaming revenue (GGR) of around 5-10%, well above October’s 4% growth. We think that December will improve to the point where it exceeds November; the only reservations we have at the moment are smoking restrictions that may go into effect in early-to-mid January. 


Solid Growth In Macau - image016


Takeaway: No need to panic now but the small players need to be watched

The little slot guys trying to play with the big boys


We've been waiting years for this but could the small guys finally be making their move?  Ok, we're not ready to call the end of the big boy dominance of the slot market.  Outside the top 5, the small guys will still only comprise 7% of North American ship share (excluding Canadian replacements).  However, that's more than double what it was in 2008.  The product is much better coming out of MGAM, Aruze, et al.  So while there is no need to begin cutting estimates on IGT, BYI, WMS, Aristocrat, and Konami, this is a trend that needs to be monitored.  We continue to believe that IGT, at least over the near and intermediate term, is the least likely to bear a material (to them) share impact from the new competition because of their product depth.

  • In 2008, we estimate that the top 5 suppliers had North American ship share of 97%
  • In 2012, we estimate that the top 5 suppliers will only have 87% ship share in North America
    • 6% of the decline is due to Spielo’s large share of the currently ongoing replacement cycle in Canada
    • However, even without the Canadian replacement cycle, we estimate that the top 5 share would still decline to 93%
  • Some of the small players that are slowly but surely gaining traction in the for-sale market include:
    • MGAM
      • 2009:  entered the market with 132 units
      • 2012:  on track to ship over 2,000 units to NA
      • Continuing to get licensed in many state jurisdictions, including Nevada in 2013, which should almost guarantee MGAM above market growth
    • Aruze
      • We estimate that Aruze had approximately 300 units “sold” in 2010 and are currently on track to sell about 750 units this year.
      • They are still predominantly focused on participation / leases
    • Spielo - They are a player in VLT/VGT markets and are beginning to develop better content for Class III.  Through Wells-Gardner, they have already secured over 1,800 IL VGT contracts.
    • Ainsworth
      • In 2010, Ainsworth sold approximately 475 machines into NA. 
      • In 2012, they are on track to sell around 1,700 units



IGT: Simply The Best


Last week, we held our bi-annual Best Ideas call for institutional clients. The call focuses on our best actionable ideas from each sector head and today, we’re pleased to bring you Gaming, Leisure and Lodging Sector Head Todd Jordan’s idea: International Game Technology (IGT). After being negative on IGT for years, Jordan is now bullish on the stock due to improving EPS growth, a low P/E ratio of 11x and the company’s ability to grow market share through quality content. 


Another positive for IGT is that it has accelerating cash flow; returning cash to shareholders is now a priority and increases the possibility for stock buybacks. Jordan is long on the immediate-term TRADE (3 days) duration and the intermediate-term TREND duration (3 months).


Watch the video we’ve posted for Jordan’s full rundown on IGT. You’ll easily see why it’s one of our best ideas.

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