Today we bought Brinker International (EAT) at $32.78 a share at 3:13 PM EDT in our Real-Time Alerts. Hedgeye Restaurants Sector Head Howard Penney got on our Morning Call this morning and was excited about Chilis' new initiatives. Buying consumption on red - we'll sell it on green when the time is right.


TRADE OF THE DAY: EAT - image001


The Economic Data calendar for the week of the 14th of January through the 18th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



When In Drought

The drought that has plagued Midwestern America and the rest of the country is far from over. New reports show that corn, wheat and other commodities are low in supply, which accounted for today’s pop in the futures market. Simply put: the Midwest needs snow and lots of it. Several feet will be necessary to equate to the amount of rainwater that will make a material difference. Average snow depth across the Midwest for the first 11 days of January was 0.3 inches and that was covering only about 10.4% of the area. Ouch.


When In Drought - Drought 1.8.13


When In Drought - image001

Early Look

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GES: Sentiment Should Be Weaker

Takeaway: $GES is an admittedly unloved stock, but it should be loved less. Some argue it's cheap, but the real EPS power makes it look expensive.

Guess? Is one of the more interesting names to us heading into ICR.  It will undoubtedly be one of those companies where 50 analysts will be crowded around the CEO at the break-out session fighting to glean every last bit of information. But we have no reason to believe that the information will be positive relative to expectations.


To put this into perspective, the stock is up 14% since the trough before the latest quarter and is sitting just 4% (or $1) away from its TAIL line of resistance). On that last print, which was very sloppy to say the least, it was clear that management really has no clue as to why its business is weak. While placing blame on a weak consumer might be accurate, we can point to a host of other companies that are still growing even with a weak consumer.


Also, one notable difference at ICR this year is that GES is without a COO and a CFO – the first time in its history of attending this conference where that will be the case. So let me get this straight…the company just lost two of its best players (with the simultaneous and still mysterious resignation of Prince and Secor), and the remaining bench is left trying to bridge the gap between macro and a micro problems.


In looking at sentiment, one might think that these concerns are already baked into the stock. After all, sentiment (as measured by our Sentiment Monitor) is sitting near a historical low of 20 on a scale of 100. (i.e. this says that sentiment is bearish, which when exaggerated is a contrarian indicator for the stock).

GES: Sentiment Should Be Weaker - ges sentiment


But we don’t think so, and we think it comes down to earnings.

1)      We need to assume that every business unit accelerates in order to hit the company’s 4Q guidance – which they issued at a time when they admittedly did not know what was driving their business down.

2)      We’re at $1.65 next year versus the consensus at $2.32. Yes, it looks cheap at 10.8x consensus estimates. But it’s at 15.2x our number.

3)      Keep the current multiple steady on our estimate, and you get a $17.75 stock – that’s 30% downside from where it is today.  


Keep in mind that GES was one of the companies that came out an announced a special dividend for the 2012 calendar year -- $1.20 per share, or $110mm. This was one of the more self-serving moves we’ve seen, as the co-founders own 30% of the stock and drew better than $55mm in dividends for the year. That’d be fine as it pays other shareholders as well, but the reality is that this company is likely to generate free cash flow this year of only $125mm.


Even though the company is not levered, it hardly seems prudent to pay up for a special dividend when you’re looking at an economically cyclical business that depends on hitting fashion trends and the company just lost leadership by way of departures in the COO and CFO ranks. Shareholders probably liked the dividend, but we can’t quite stomach it from a risk management perspective heading into an uncertain 2013.


Of course, the disconnect would be that management does not view 2013 as a year where there is risk to earnings, while we do. Therein lies our comfort level with our short case.


The near term risk to the upside is that the company is one press release away from announcing an external management hire that gets people all excited. We don’t think that one person can immediately make a big difference here – especially given that whomever is brought on will need to prove (as Carlos Alberini did) that he or she can manage both the shareholder and family agendas simultaneously, which is tough to do. But we need to at least acknowledge the risk.




Note: As it relates to earnings, GES is currently sitting in a very bearish part of its SIGMA chart, with inventories and margins both working against the company.

GES: Sentiment Should Be Weaker - gessigma

Corn Supplies Get Tighter

Not a lot of corn out there right now

Today’s WASDE (World Agricultural Supply and Demand Estimates) didn’t tell us anything that we didn’t already know – yields ticked up a bit from December (123.4 versus 122.3 bushel per acre) and ending stocks were down at 602 MMT versus 647 MMT in the prior report and expectations of 652 MMT.  The 602 MMT is a historically tight number as we head into the planting season.  I wouldn't read too much into the yield increases, as that number tends to get fudged a bit.


In a bit of a surprise, both Argentinean and Brazilian corn production estimates were raised – we only saw half of that coming and expected a move in the other direction in Argentina.

The bottom line is that there is not a heck of a lot of corn out there versus historically levels, and the snow situation in the Midwest remains unhelpful – average snow depth across the Midwest for the first 11 days of January was 0.3 inches and that was covering only about 10.4% of the area.  We need to start getting some snow.


Corn Supplies Get Tighter - Drought 1.8.13


Have a good weekend,




Robert  Campagnino

Managing Director




Overbought: SP500 Levels, Refreshed

Takeaway: This is the first day in the last 7 trading days that my intraday SPY signal gave me a lower-high.



Today, both the fundamental research and quantitative risk management signals said the same thing – time for a breather. This is the first day in the last 7 trading days that my intraday SPY signal gave me a lower-high.


Lower-high versus the 1494 I registered on the close last night, that is. We are obviously seeing higher-lows and higher-highs across longer-term durations, and that’s bullish, until it isn’t.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1485
  2. Immediate-term TRADE support = 1459
  3. Intermediate-term TREND support = 1419


In other words, overbought is as overbought does. If all the Financials act the way WFC just did on the “news”, I’ll be surprised; especially if we go into the prints from a lower price. But then again, everyone else would probably be surprised too.


Keep moving out there,



Keith R. McCullough
Chief Executive Officer


Overbought: SP500 Levels, Refreshed - SPX

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