Land Of The QuadrillYen

The Bank of Japan has said it plans on curtailing the strength of the Yen by doing what the United States does best: printing money. As you can see over the last three months, the USD/JPY has appreciated quite a bit as the value of the Yen dropped. Unless the Japan decides to radically change its economic game plan, expect the Yen to devalue further.


Land Of The QuadrillYen - image001

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We believe there is a high likelihood that PNK's 26.50 bid for ASCA will be topped.  As evidenced by the huge increase in PNK's stock, ASCA left a lot on the table.  MGM Resorts International or Penn Resorts could offer a higher bid for ASCA.  ASCA would be hugely accretive for MGM, given MGM's large balance of tax loss carry-forwards. They could pay 8.5x ASCA's trailing 12-month EBITDA, which would equate to a $35 bid and still make it de-leveraging and very accretive from an EPS and cash flow perspective.  PENN could offer even higher since ASCA's integration with its planned REIT structure would instantly create value.  We believe ASCA could be worth up to $40 to PENN.



INTERMEDIATE TERM (the next 3 months or more)

The stock may trade in a tight range for the next month or so. Investors are waiting to see if a higher bid from MGM, PENN, or another operator surfaces. Fundamentally, ASCA remains relatively protected from new competition and, with the top in class assets in virtually all of its jurisdictions, is a defensive play in the space. LONG-TERM (the next 3 years or less) PNK's acquisition of ASCA is expected to close by 3Q 2013. However, we believe ASCA will receive a higher bid before that deadline. A bid of at least $35 (28% premium to current price) seems reasonable and doable given the relatively small breakup fee.


LONG-TERM (the next 3 years or less)

PNK's acquisition of ASCA is expected to close by 3Q 2013. However, we believe ASCA will receive a higher bid before that deadline. A bid of at least $35 (28% premium to current price) seems reasonable and doable given the relatively small breakup fee.



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Out With The Old

Client Talking Points

In With The New

2013 is an exciting year for us at Hedgeye. We’re all about following a process that works for us, owning up to our mistakes and taking on new challenges every day. The #OldWall still doesn’t get it to a degree. They are still attending conferences where everyone plays by the rules and makes sure to discuss year-old topics with a certain vagueness as to not offend anyone. Our analysts are the best of the best and don’t have things like brokerage to get in the way of their decision-making process. When we trade stocks, we use a combination of quantitative and fundamental, bottom-up research that helps us determine a risk and a range for each name. If you stay within that range, you’ll do a lot better than throwing darts blindly into the wind. 

Hammer Time

One of the themes from our Q1 2013 Global Macro Themes call was #HousingHammer and boy, is it Hammer Time. This week has been quite a boon to the housing market with some truly significant data coming out on the mortgage application and housing starts front. Throw in a superb Jobless Claims print of 335,000 and you’ve got something to get excited about. The Street consensus isn’t as bullish as they should be on housing; we suggest they take a closer look at the market.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


ADM has significantly lagged the overall market in 2012 over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist. Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry. Merchandising and handling results were at the mercy of a smaller U.S. corn harvest. Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground. With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


“Phrase "deeply regret" has really lost its way. I'm pretty sure you can't regret something someone else did (or another country)” -@ianrosen


“If a man does his best, what else is there?” -General George S. Patton


China Q4 GDP rises 7.9% vs estimates of 7.8%

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Politicians and Energy Drinks - Making Sure No Windmill goes Untilted

Yesterday, shares of MNST were weak for what seems like the umpteenth time on the same news - concerns over the FDA's involvement in energy drinks.  This time, it was a letter sent from the offices of Sens. Durbin and Blumenthal and Rep. Markey to Living Essentials, the manufacturer of 5 Hour Energy Drink.  The letter is linked below:


The latest flurry of activity is in response to data published by the Drug Abuse Early Warning Network regarding emergency room visits and energy drinks.  The report is linked below:


The gist of the report is that emergency room visits involving energy drinks doubled from 2007 to 2011 - the data prior to 2007 is squirrelley, at best.  Of course, over the same period MNST's volume has grown over 60% and energy shots have seen a substantial increase in popularity.


We are encouraged by the fact that our elected officials have fixed everything else in the country to the point where looking at caffeinated drinks has become an issue.  However, we haven't changed our view that there isn't a role for the FDA here.


Part of us thinks KO should simply buy MNST and use KO's more substantial resources to fight this battle because, and make no mistake about it, they will come for KO's products next (KO's recent efforts to get out in front of the obesity issue tells us there is concern there).  Mayor Bloomberg isn't the only part-time nanny that holds a political office.


Hedgeye is an outstanding resource for historical perspective, and part of that is some very quotable quotes.  I prefer to rely more on pop culture for my quotes, and look to Captain Jean-Luc Picard in his fight against the Borg in Star Trek: First Contact - "The line must be drawn here! This far and no further!"


- Rob


Robert  Campagnino

Managing Director








ICR: A Whole Lot of Complacency

Takeaway: The lack of a major theme out of ICR is itself a theme. We think this is the year where you're paid for the stock call, not the group call.

We think that this is the first ICR conference in at least 5-years where there is the absence of a major theme to carry the group – up or down – for the year. Management teams seemed complacent in their lot of ‘slightly better than average’ business trends, with few companies (FNP and URBN are two) who stand out with an exceptional process to drive their business to the next level.


Our top longs remain FNP, NKE, RH, URBN, and believe it or not – JCP is even gravitating to our bench of ideas.

On the short side, we like department stores – M, KSS, as well as GPS, and GES.



The tone of this week’s ICR conference seemed positive overall to us, with a far more favorable preannouncement cadence than last year, and notable commentary on good inventory positions despite mixed sales results. You could drive a truck through the range in quality of the management teams there, and we were specifically impressed with discussions with both FNP and URBN as it relates to their respective views as to what it will take to more than double the size of their businesses, and the categories and selling methods it will take to get there.


But there was one big trend that hit us hard – and that was the absence of a recognizable trend at all. That might seem like a ridiculous statement, but let’s look at past ICRs and add some context.


  • 2008 and 2009: We were in the depths of the Great Recession. Positive datapoints were few and far between. The sentiment was almost uniformly negative, and the stocks behaved accordingly. Into the 2009 ICR conference alone, the group (as measured by the RTH – cap weighted S&P Retail Index) was off by almost 15%. The MVR (equal-weighted index of 30 retail stocks) was off by over 30% into and around the conference.
  • 2010: This was a big recovery year. Sales accelerated and inventories fell. That sent gross margins up high and earnings revisions higher. This is clear as day in Exhibit 2 below. The stocks started to work in earnest two quarters before the conference, but were still up 5-10% on the event as the recovery continued.
  • 2011: The Raw Material Scare. This is when people thought that cotton, which had just doubled in price over the shortest time period in history, would stay at $2 in perpetuity. The ‘recession earnings recovery’ slowed, at the same time the outlook for Average Unit Costs (AUC) went grossly out of favor. Translation = negative tone at ICR, and decelerating stock price performance.  
  • 2012: This was an interesting one. There were more severe preannouncements than any year yet, but more often than not companies chalked this up to the lingering impact of higher costs – which was the ultimate excuse because the fact of the matter is that it was valid. But at the same time the companies gave positive unofficial outlooks on getting pricing power in 2012 and the gap between AUR and AUC turning positive. The bottom line is that it gave people reason to believe, the tone of the event was upbeat, and the stocks traded up.
  • 2013: This year, as shown in Exhibit 2, Inventory/Sales trends are back to zero-barrier after a strong four-quarter trajectory upward. Gross margins are still down, but are within 100bp of peak and unlike last year, clean inventories won’t likely provide a tailwind. We’re not looking to paint a big negative call here, but just can’t come up with something positive, either. We’re pretty much ‘retail-agnostic’. The market seems to agree, as the stocks are only up 3% on the event – which is less than usual. We may get more GM improvement in 2013, but by and large, we need a strong consumer for the group to work en masse from here. The lack of strong proactive plans by many companies seems to support this.


Exhibit 1: S&P Retail Index vs. Past ICR Conferences

ICR: A Whole Lot of Complacency - icr1


Exhibit 2: Sales/Inventory Spread vs. Gross Margins (60 Company Average) vs. Past ICR Conferences

ICR: A Whole Lot of Complacency - icr2

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