Hedgeye In The News

Hedgeye In The News for the week ending February 1, 2013:


The latest gaming revenue figures from Macau seem to indicate that the feared ban on smoking... (via Seeking Alpha)


First 3 tasks for Mary Jo White at the SEC (via Fortune)


Hedgeye report questions if Herbalife (HLF) is a pyramid scheme (via Ransquawk)


Beef price spike makes $1 McDouble harder to stomach (via Chicago Tribune)

ILMN: Time To Like This Stock?

Takeaway: Illumina (ILMN) stands to benefit as changes in funding and successful treatments revolutionize cancer research.

Illumina (ILMN) is a leading maker of sophisticated genetic screening equipment.  After reaching nearly $80 a share in 2011, the stock fell to a low of $37.77 this year.  We have been negative on the stock for some time, but a new environment may provide a lift as ILMN’s diagnostic systems emerge as possible leaders in key areas of cancer research.  


Today our Health Care sector head, Tom Tobin, hosted a conference call for our institutional clients with Dr. Gary Palmer of Foundation Medicine , a private company at the forefront of transforming cancer care using genomic screening to analyze how cancers develop.  Cancer specialists say the use of genomics screening is fast becoming the diagnostic approach of choice and Foundation Medicine is the go-to lab to perform the analysis.  This is important for doctors wishing to get their patients enrolled in clinical trials, and for practitioners testing off-label uses for approved treatments.  Of particular interest for our ILMN thesis, Foundation uses ILMN diagnostic equipment for its genomic screening.


Foundation Medicine and Cancer Treatment

Dr. Palmer walked us through Foundation’s genomic testing process.  Genomic testing is revolutionizing cancer treatment, because researchers have found that gene mutations correspond to broad varieties of cancers that were previously believed to be unrelated.  By approaching the disease from the genomics level, Foundation has helped doctors achieve startling results – Dr. Palmer cited breast cancer patients who were described as going from “hospice care to objective remission.”  While these treatments are still in early stages, it is clear that the genomic screening is a revolutionary diagnostic tool with the potential to dramatically advance cure rates.


The American Cancer Society reports over 12 million Americans have some history of cancer, and over 1.6 million new cases will be reported annually.  With over 1,500 Americans projected to die of cancer every day, the disease is the number 2 killer of Americans – but most Americans fear “the C-Word” more than any other health threat.


Foundation Medicine believes that genomics screening can dramatically accelerate the process of identifying effective treatments.  Dr. Palmer went so far as to say the targeted treatments arising from Foundation’s screening results are forcing a Paradigm Shift in the way cancer is treated.  Genomics screening has been able to identify up to 70% or more treatable cancers than are found with existing testing procedures.  Their ultimate goal, says Dr. Palmer, is to turn cancer from a life-threatening critical illness, into a chronic condition that can be managed using targeted therapies, similar to the model of long-term HIV treatment.  


Foundation is in conversation with a number of insurance providers and third-party payers.  Insurers have not yet embraced genomics testing as the diagnostic of choice, but Dr. Palmer says they are aware of the dramatically higher effectiveness and reduced cost of this approach.  It is not clear how many case studies will have to be presented before the insurers accept genomic screening as a diagnostic of choice, but Dr. Palmer believes this is inevitable.  


What does this mean for ILMN?

In our conversations with cancer researchers we have heard a distinct shift in tone.  Researchers used to speak of dramatic advances in cancer therapy that they could see “in the next five years.”  Now they are saying these advances are happening “now.”  This is critical to our thesis on the stock.  In 2010-2011, the academic community was in the grip of doom and gloom, as funding for genomic research from the National Institutes of Health, and demand for ILMN equipment, had gone into a steep decline but there was little offset from clinical applications such as Foundation’s.  Health Care sector head Tobin says his team’s analysis of current trends in NIH funding shows Illumina is getting a second wind as volume and dollars geared to ILMN’s products appears to be reaccelerating.  Foundation Medicine appears to indicate growth from clinical applications will be additive to ILMN’s growth among academics.


NIH awards appear not to be affected by the talk over sequestration and the Fiscal Cliff in recent months, although the risk of Sequestration remains.  Says Tobin, “This is in contrast to the 2011 debate that caused a substantial slowdown in awards.”  Sequestration may be a risk, but NIH appears to be largely ignoring the risk.


ILMN stock

ILMN is a mid-cap stock, with a market capitalization of over $ 6 billion, and average daily trading volume of about 1.6 million shares (source: Yahoo! Finance.)  Recently it has built up a short position of about 25% of the outstanding shares, creating the possibility of a Short Squeeze.  While the stock has a relatively low Beta of 0.77 (meaning that 77% of the action of the stock price is attributable to tracking the broad market averages – 23% of the price action is attributable to other factors, such as news coming out about grant funding, successful clinical trials emerging from diagnostics using ILMN equipment and the like) the high level of short interest means there could be a sharp upward reaction if a solid piece of good news comes out.  At the same time, we can not rule out continued volatility in the shares until meaningful news emerges.



Tobin considers ILMN an attractive stock with potential for a sound recovery over the intermediate to longer term.    

Dr. Palmer was very upbeat on the outlook for genomics testing as the new wave of cancer research.  The idea of moving from a long process of uncoordinated and expensive tests, to a single screen that identifies a broad range of threats and potential treatments, is a very exciting prospect.  The term “Paradigm Shift” is certainly appropriate.  We see the possibility of important news from a number of potential sources: greater adoption of ILMN equipment as new companies enter the genomics testing space; greater acceptance of genomics testing as the preferred diagnostic, leading to successful treatments; and acceptance by third-party payers, which would establish genomics testing as a preferred approach.  In all these scenarios ILMN has the potential to be a sought-after provider as the space grows.  Finally, the projected stability of government research funding brings all these outcomes closer to possible realization, as it provides ongoing resources carry through to the next breakthrough.

DOW 14,000: WHAT NEXT?

The Dow Jones Industrial Average hitting 14,000 has a lot of amateur and retail investors excited. However, the Dow hitting 14k is largely a symbolic event and nothing more. Stocks are still in a bullish formation as fund flows continue to shift into equities and our overbought signals are beginning to heat up a little with the S&P 500 above 1500. Many wonder how much higher can we go before a pullback or correction? We'll find out soon enough.


DOW 14,000: WHAT NEXT? - 5yearSTOCKS

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VIDEO: Housing Takes Hold

The housing market has undergone a remarkable recovery over the last year as home prices increase, inventory falls and mortgage applications rise. The second theme of our Q1 2013 Global Macro Themes call is long housing (aka #HousingsHammer) and we're confident that recovery in the market will not be short-lived.

As a result of the positive recovery in housing, regional banks like TCF Financial (TCB) also stand to benefit from the improving nature of the market.


Employment data released this morning by the Bureau of Labor Statistics is positive for the quick service restaurant industry. While near-term data out of the group may be underwhelming, from a comparable sales headline perspective, as we lap difficult weather compares, the pace of hiring in the QSR sector should not be ignored.


Per our note ahead of EPS next week, we like YUM, EAT (although Brinker already reported so not featured in note), and JACK (longer-term) and have a negative view on BWLD and CMG.  



Leisure & Hospitality Still Rolling Over


Hiring within the leisure and hospitality sphere is sequentially decelerating, which likely a negative sign for restaurant industry sales, on aggregate.  Full service employment growth tends to follow leisure and hospitality hiring more closely than quick service.  The chart below illustrates trailing-twelve month growth in full service, quick service, and leisure and hospitality. 


RESTAURANT EMPLOYMENT BIFURCATION CONTINUES - leisure   hospitality vs restaurant employment



The chart below shows monthly employment growth and we can see that the divergence between employment growth in quick service and employment growth in full service is becoming more pronounced.  While price points across the industry, among all subgroups, have been converging as the discounting war rages on in casual dining, an upgraded experience is helping QSR take share from casual dining, which is populated with often over-supplied and tired concepts.





Employment by Age Data Mixed Start to Year


Employment growth by age cohort implies that quick service restaurants have been benefitting from strong employment growth among core consumers while casual dining’s difficulties have been  exacerbated by some deceleration among some of the sector’s most vital consumer groups (by age). 


However, the chart below highlights a mixed start to 2013 for employment growth among the younger age cohorts.  Job growth in the 20-24 years of age cohort remained sequentially decelerated to +1%, year-over-year, versus 2.9% in December.  The 25-34 years of age cohort saw employment grow by 2.5% in January, versus 1.2% the month prior. 


The 35-44 and 45-54 years of age cohorts both saw negative year-over-year employment growth.  We interpret this as negative for casual dining, a highly discretionary sector that derives much of its revenue from families and middle-aged consumers.  As the chart below highlights, the 45-54 years of age cohort saw its third consecutive month of negative job growth.  The 55-64 years of age cohort, also significant for casual dining, saw employment growth decelerate to 3.5% in January versus 5.6% in December.






Howard Penney

Managing Director


Rory Green

Senior Analyst




Labor Market: Growing Pains

With the unemployment rate ticking up to 7.9% today, many are questioning if the recovery in the labor market has begun to fizzle out. The principal driver of the increase in Unemployment this month was the delta between the change in the employed and the change in the unemployed. Total employed increased 17,000 sequentially while the total unemployed increased 126k sequentially. 


Labor Market: Growing Pains - EMPLOYMENT1


The hallmark of both the downturn & the recovery was the contrast between the extreme job loss among younger cohorts and the relative employment stability among older workers (employment for 55-64 yr. olds never went negative through the great recession). Interestingly enough, the 20-45 age group has begun to improve recently and the 25-34 year old group is continuing to accelerate. 


Labor Market: Growing Pains - EMPLOYMENT2


Part-time employment (household survey) decreased for a third straight month and posted its first negative growth month since December 11th. Temp employment growth (establishment survey) followed the same trajectory, decelerating 1.6% sequentially. 


Labor Market: Growing Pains - EMPLOYMEN32


Lastly, it’s important to note that after a four year run of negative growth, state & local employment is now approaching the zero line and likely to go positive in 2013.

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