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IDEA ALERT: SHORTING DRI

Takeaway: DRI is one of our least favorite names in casual dining as industry- and company-specific factors dampen our view of the stock

Keith shorted DRI this year as his quantitative analysis lined up with one of the most important calls we made in 2012.

 

Fundamental View

 

Darden remains one of our top ideas on the short side.  Company- and industry-specific issues that we highlighted in our July black book, “DRI: THE UNTHINKABLE SHORT CASE”, are coming to the fore. 

  • Industry trends are slowing (see Knapp Track chart, below)
  • Darden likely needs a recovery in industry trends to achieve its targets of 1-2% SRS growth at Olive Garden, Red Lobster and LongHorn (again, see Knapp Track chart, below)
  • Darden’s two most important chains, Olive Garden and Red Lobstser, continue to underperform versus the industry
  • With jobless claims and difficult comparisons versus a year ago (weather) over the next few months, we are not expecting much good news on Darden’s top-line
  • The company’s CMO leaving is a negative, particularly seen as the management team did not announce a replacement.  Marketing is a key factor in driving traffic in casual dining and this news only adds to our bearish view of Darden’s sales outlook
  • While earnings expectations continue to decline, we believe the Street’s expectations remain too bullish on this name
  • The company's growth, dividend payments, and share repurchases are becoming more and more difficult to sustain under the company's current path.

IDEA ALERT: SHORTING DRI - olive garden knapp track ttm

 

 

Quantitative Setup


IDEA ALERT: SHORTING DRI - DRI levels

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


Buy The Flush

This note was originally published at 8am on November 09, 2012 for Hedgeye subscribers.

“Buying is a profound pleasure.”

-Simone de Beauvoir

 

You want to buy when people are forced to sell.

 

If you proactively prepare for these manic market moments: A) you have cash and B) your buy list is locked and loaded. While your shopping list may not be as long as it was 2 months ago, that’s ok. I’m picky about what I buy too.

 

Back to the Global Macro Grind

 

In New Haven, CT, rain, wind, or snow, this is what we call The Flush. That’s when you “break” a couple of the moving monkey lines (50 and 200 day simple moving averages) and you get to capitalize on your competition’s emotional selling mistakes.

 

I’m not saying “buy everything.” Neither am I saying everything is fixed. I am simply saying that everything in markets has a time and price. From a purely quantitative perspective, this morning’s Macro Grind is signaling the best time to sell bonds and buy stocks in 2 months.

 

Why?

  1. BONDS – US Treasuries (10yr immediate-term TRADE oversold at 1.60% yield) and German Bunds are overbought
  2. CURRENCIES – The Euro (EUR/USD) is immediate-term TRADE oversold at $1.27 (still bearish TREND)
  3. STOCKS – The SP500 is holding my long-term TAIL risk line of 1364 support

*Note: I don’t use the moving monkey other than for entertainment purposes.

 

Also note that the main reason for the word “buy” being in the title of my note is not “China has bottomed.” As we have said, multiple times, China’s bottom will be a process, not a point. The Shanghai Composite was just down for the 5th day in a row (down -16% since growth slowing began, globally, in March). Peculiar looking bottom to me.

 

As a Chaos Theorist who uses Bayesian conditional probability theory in my decision making process, it’s also critical to note that if we snap my 1364 TAIL risk line today (and close there), I reserve my Canadian and US Constitutional right to change my mind.

 

But, for now – let’s not stress out about that. We don’t have to. We didn’t buy the Bernanke Top (September 14th). Neither do we have to be up +32% (from here) to get back to break-even buying AAPL at its all-time high.

 

We’ve earned the opportunity to be patient (picky) here, and take our time.

 

Top 3 Long Ideas?

 

1.   International Game Tech (IGT) – Always start with what’s working. In a growth and #EarningsSlowing market like this, you should pay more for the growth that you can find. Visibility matters. Todd Jordan said IGT delivered the bacon last night, beating handily on both the top and bottom line, so buy more (email Sales@Hedgeye.com for Jordan’s note)

 

2.   Starbucks (SBUX) – Back to the old well works for me, big time – especially now that one of America’s top capitalist innovators (CEO Howard Schultz) looks forward to selling you his Verisimo machine domestically for holiday, and continues to have one of the most visible expansion plans, globally, of a legal drug. Coffee price deflation is a big margin kicker too.

 

3.   Federal Express (FDX) -  As the world bakes a potential recession into the expectations cake, you want to be buying high-quality (non-mining capex bubble) cyclicals that have already guided down. Especially with our short Oil call working, the margin of safety buying FDX improves (email Sales@Hedgeye.com for Van Sciver’s slide deck presentation)

 

You’ll also note that my Top 3 Long Ideas are US Equities. That could change if German, Dutch, or Taiwanese Equities flash my immediate-term TRADE oversold signal. They have not yet. The Post Election Flush, is very American.

 

Whoever bought US stocks at the YTD top needs to be up, a minimum +7.5% (from here), to get back to that September 14th break-even. With the Russell2000 down -8.3% over the same 2 months, you’d have to be up +9% to get back to break-even there. With real money, timing matters. Return of your money is geometric.

 

This is why we are so focused on earning your respect as the top risk management source you have in your inbox every morning. Buying is a pleasure. We get it. But someone also needs to tell you when to sell. Put another way, as one of my best investors reminded me in NYC yesterday, “Keith, your job isn’t to make me rich – it’s to keep me rich.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, IGT, SBUX, FDX, and the SP500 are now $1708-1740, $105.22-108.44, $80.41-81.12, $1.27-1.29, 1.60-1.72%, $12.69-13.73, $49.27-54.21, $89.21-91.98, and 1364-1410, respectively.

 

Enjoy the weekend and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Buy The Flush - Chart of the Day

 

Buy The Flush - Virtual Portfolio


YUM! BRANDS BLACK BOOK

We will be releasing a black book on YUM! Brands and hosting a Conference Call at 1:30pm EST on Thursday, November 29th.  

 

YUM! BRANDS BLACK BOOK - YUM BB

 

 

Hedgeye Black Books are deep dive research projects which expose all details of a company, examining past, present, and future; they are valuable tools to be saved. This presentation will discuss how the current macro environment and company specific data points are setting up positively for YUM investors into the new year.

 

Topics Will Include 

  • As sluggish growth causes anxiety among investors, we believe that YUM's growth plan offers attractive returns for investors
  • Yum! Brands is a leading global restaurant company offering, in our view, best-poised to deliver on - and exceed - its targets over the next 12-24 months
  • Yum! Brands' stock is viewed as a China play by investors but there are other significant drivers of the stock that we expect to come into play in the intermediate term
  • Shares in the company have appreciated 22% YTD but we believe a case can be made for continued gains in 2013

 

If you would like to receive the dial-in information and the materials for this call or more information about our research please email .

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst



the macro show

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Not Good: SP500 Levels, Refreshed

Takeaway: It’s tough to call the SP500 safe and clear.

POSITIONS: Long Bonds and the Dollar (TLT and UUP), Long Utilities (XLU), Short Industrials (XLI) and The Euro (FXE)

 

Climbing back above my long-term TAIL line (1364) on no-volume is less bearish than it is bullish, until it isn’t. If I broaden the risk management survey to the Dow, Nasdaq, and Russell2000, their TAIL lines are all broken. So it’s tough to call the SP500 safe and clear.

 

This is not good. The average up day volume this week has been 23% below the average down day volume for the last 2 months of the correction. And, US Equity Volatility (VIX) while an imperfect index, tested 14 today – and that’s been a clean cut sell signal for stocks and commodities for 5 years.

 

Across our core risk management durations:

 

  1. Intermediate-term TREND resistance remains overhead at 1419
  2. Immediate-term TRADE resistance is baking in lower-highs at 1398
  3. Long-term TAIL support = 1364

 

In other words, you have maybe +0.7% of immediate-term upside left in this mean reversion bounce and at least -1.7% downside. But (and this is an important but), if we snap 1364 again, there’s no longer-term support to 1258.

 

The high probability pitch to swing at here is buy what’s been working for 2 months – Bonds and The Dollar.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Not Good: SP500 Levels, Refreshed - SPX


MACAU: IF YOU BUILD IT, THEY WILL COME

Takeaway: Infrastructure is a key driver of long term demand in Macau

Update on upcoming infrastructure projects in Macau

 

 

2013 will be the start of a transformational three years for Macau and Cotai.  We should see several important infrastructure projects in Macau come online which could bring thousands of additional mass players.  This would particularly benefit the mass-centric operators LVS, SJM, and Galaxy. Year-to-date, mass revenue has grown 33%; this is on top of the 37% growth seen in 2011.  Another 30% growth year in mass may sound far-fetched but several new pieces of infrastructure as described below can help realize that.  While VIP chugs along, Mass should continue to lead the Macau gaming market to new heights.

 

  • High-speed Rail Beijing-Guangzhou (end of 2012)
  • Phase 1 North Gongbei Gate expansion (early 2013)
    • Will have a daily passenger capacity up to 350,000 (from 300,000 currently).  When the entire project is completed later in 2013, the clearance capacity can be raised to 500,000 people daily.
  • Guangzhou Zhuhai intercity mass rapid transit (early 2013)
    • The high speed intercity railway links between New Guangzhou Station in Panyu, Guangzhou, and Zhuhai Airport in Zhuhai, via Shunde, Zhongshan and Jiangmen, in Guangdong, China.
    • The last four stations of the transit between Zhuhai North and Macau is scheduled to be completed in early 2013
  • Guangzhou-Zhuhai Super Highway- Phase III Western Delta Route (Chinese New Year 2013)
    • Connects Phase II West in Zhongshan at the northern end and extends southwards to Zhuhai. 
  • Taipa Ferry Terminal (currently temporary facility, mid-2013)
    • Full construction is expected to be done by mid-2013.  The Terminal should be open by early 2014.  The terminal will have a capacity of up to 15 million passengers a year and become the main maritime border crossing of Macau.
  • Macau International Airport (early 2013-2017)
    • Planning to add new routes to India, mainland China and other regions.
    • A new hangar for business aircraft will be built by early 2013 to cope with the development of this high-potential sector due to the continuous emergence of new casino-resorts and luxury hotels in Macau. 
    • With the expansion project, the first phase of expansion can meet a volume of 5.6 million passengers in 2015, the second phase will be 7 million in 2020, upgrading to 11 million in 2030 and finally 15 million in 2039.
  • Bridge connecting Hengqin Island and Mainland (February 2014)
    • Hengqin's second bridge is expected to be completed by February 2014.  The bridge will be 6.8 kilometers which incorporates six lanes, becoming the second link between the Hengqin New Area and mainland China which aims to help alleviate the bottleneck congestion.
  • Light Rail Transit (May 2015)
    • The 3.4km Cotai Section consists of four stations covering the major resorts in the Cotai Strip as well as the centre of Taipa village, while the 3.1km Lotus Border Crossing Section has three stations linking the Macau University of Science and Technology, the airport and the Pac On Ferry Terminal.  The 1.9km section with five stations linking Taipa village and the Sai Van Bridge started its construction in February 2012.
  • HK-Zhuhai-Macau bridge (2016)
    • On schedule for 2016.  The bridge will shorten the distance from Hong Kong to Macau and Zhuhai from 60 km to 30 km, and reduce the journey time to within half an hour, for an estimated charge of RMB 100-150 each way.
  • New border checkpoint (TBD)
    • A new border crossing checkpoint connecting Zhuhai and Macau located on a land plot currently hosting the South Guangdong (Nam Yuet) Wholesale Market is currently being considered by the central government in Beijing.  Macau's CEO Chui recently said preparation works for the checkpoint are going as scheduled.  The new checkpoint is expected to run all day. 

JOSHUA STEINER: INITIAL CLAIMS: UPDATE ON SANDY'S MEAN REVERSION

Takeaway: New York, New Jersey and Pennsylvania account for 13% of the U.S. population, but accounted for 70% of the rise in initial claims 2 wks ago.

Quantifying NY, NJ and PA

Last week we urged investors to remain calm in anticipation of what we thought would be mean reversion over the coming two months. This morning's 41k decline in initial claims is a good down payment on that mean reversion. We got the state level data on a one week lag, so now we can evaluate where the surge in claims last week came from. In short, they came from NY, NJ and PA. To put some numbers around it, total non-seasonally adjusted initial jobless claims rose by 116,743 two weeks ago. New York accounted for 43,956 of that, or 37.7%, but New York represents just 6.2% of the U.S. population. New Jersey accounted for 31,094 of the increase, or 26.6%, but represents just 2.8% of the population. Pennsylvania, meanwhile had an increase of 7,037 initial claims, which was 6.0% of the total, despite being just 4.0% of the U.S. population. Taken together, these three states, NY, NJ and PA, accounted for 70.3% of the total increase in jobless claims two weeks ago following Hurricane Sandy, while those same three states represent 13.0% of the U.S. population. We think it's fair to say that Hurricane Sandy was clearly responsible for surge in claims. 

 

In the first chart below we update our plot of seasonally-adjusted claims comparing the effects of Hurricanes Katrina and Sandy. We expect the path of Hurricane Katrina will be a reasonable proxy for what to expect over the coming six weeks from Hurricane Sandy. 

 

The Data

Initial claims fell 29k last week to 410k (but fell 41k after the 10k upward revision to last week's data). Rolling claims rose 9.5k WoW to 396k. Non-seasonally-adjusted claims were lower by 81k WoW.

 

JOSHUA STEINER: INITIAL CLAIMS: UPDATE ON SANDY'S MEAN REVERSION - 1

 

JOSHUA STEINER: INITIAL CLAIMS: UPDATE ON SANDY'S MEAN REVERSION - 2

 

JOSHUA STEINER: INITIAL CLAIMS: UPDATE ON SANDY'S MEAN REVERSION - 3

 

JOSHUA STEINER: INITIAL CLAIMS: UPDATE ON SANDY'S MEAN REVERSION - 4

 

JOSHUA STEINER: INITIAL CLAIMS: UPDATE ON SANDY'S MEAN REVERSION - 5

 

JOSHUA STEINER: INITIAL CLAIMS: UPDATE ON SANDY'S MEAN REVERSION - 6

 

JOSHUA STEINER: INITIAL CLAIMS: UPDATE ON SANDY'S MEAN REVERSION - 7

 

JOSHUA STEINER: INITIAL CLAIMS: UPDATE ON SANDY'S MEAN REVERSION - 8
 

JOSHUA STEINER: INITIAL CLAIMS: UPDATE ON SANDY'S MEAN REVERSION - 9

 

JOSHUA STEINER: INITIAL CLAIMS: UPDATE ON SANDY'S MEAN REVERSION - 10

 

JOSHUA STEINER: INITIAL CLAIMS: UPDATE ON SANDY'S MEAN REVERSION - 11

 

JOSHUA STEINER: INITIAL CLAIMS: UPDATE ON SANDY'S MEAN REVERSION - 12 

 

JOSHUA STEINER: INITIAL CLAIMS: UPDATE ON SANDY'S MEAN REVERSION - 13

 

Joshua Steiner, CFA

 

Robert Belsky


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