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Destroy The Currency, Boost The Market

Japan and Venezuela have enjoyed massive gains in their respective stock markets over the last year. Venezuela's IBVC Index is up over 30% year-to-date while Japan's Nikkei 225 is up almost 20%. Comparatively, the S&P 500 is up a little over 9.0%. These two countries have seen their the value of the Japanese Yen and Venezuelan Bolívar drop considerably since last year. Debauched currency = rising stock market. 

 

Destroy The Currency, Boost The Market - image001


Stock Report: Darden Restaurants (DRI)

Stock Report: Darden Restaurants (DRI) - HE II DRI 3 30 13

THE HEDGEYE EDGE

We have been writing for several quarters of our belief that Darden’s multi-brand portfolio is inefficient and, far from achieving the economies of scale that management touts, has led to subpar cash return on investment.  

 

Following our call to short the stock in July of 2012, we saw a depreciation in the stock price and a general consensus emerge among the investment community that fully bakes in our negative views of the company’s fundamentals.  

 

At this point, we believe that the potential for improvement at Darden is too great, and the mismanagement so egregious, that it is difficult to imagine either activism in the shareholder base or management offering a mea culpa and following a more prudent strategy with respect to capital allocation.  In either scenario, the stock should appreciate and $1 billion in EBITDA makes the dividend yield safe and, we believe, supports the stock in the mid-to-high $40’s valuation range. 

TIMESPAN

INTERMEDIATE TERM (the next 3 months or more)

Over the intermediate-term, we believe that sequentially improving restaurant trends within the casual dining industry should provide support to Darden’s same-restaurant sales results.  Darden’s blended “Big Three” (Olive Garden, Red Lobster, LongHorn) sales will almost certainly continue to lag the industry, but until management, willingly or otherwise, attacks the middle of the P&L, we believe a true turnaround will take some time.

 

LONG-TERM (the next 3 years or less)

The long-term is where there is real upside in Darden.  This kind of opportunity does not arise in this space on a regular basis.  Darden’s operating margins are in line with Brinker’s while its restaurant-level operating margins are 400-500 bps wider; we see this as indicative of a corpulent cost structure at Darden.  

 

By our estimation, $293 million could and should be cut from SG&A, adding roughly $1.40 per share in EPS or $20 of share price upside.  Combining this with the difference between our sum-of-the-parts valuation ($67) and the share price, we see roughly $33 of upside in the stock. 

ONE-YEAR TRAILING CHART

Stock Report: Darden Restaurants (DRI) - HE II DRI chart 3 30 13


Tired? SP500 Levels, Refreshed

Takeaway: In other words, the all-time highs remain in play, but so does some very short-term mean reversion (to 1532). We want to be flexible here.

POSITIONS: 11 LONGS, 9 SHORTS @Hedgeye

 

I sold the open this morning (sold 2 LONGS, added 2 SHORTS) because the bottom up signals in each security told me too. The SPY didn’t register a sell signal (it usually doesn’t until after stocks do). The market has been up for 9 of the last 10 weeks; certain stocks are getting exhausted.

 

Exhaustion can last (think the 1995 US stock market), particularly if the research fundamentals support it (they do). So don’t expect me to get too cute here. This remains a market we want to be risk managing with a bullish bias, until something (signal or research) changes.

 

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

 

  1. Immediate-term TRADE overbought = 1565
  2. Immediate-term TRADE support = 1532
  3. Intermediate-term TREND support = 1477

 

In other words, the all-time highs remain in play, but so does some very short-term mean reversion (to 1532). So we want to be flexible here. Keep moving and don’t get plugged buying on overbought signals.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Tired? SP500 Levels, Refreshed - SPX


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

MACAU: BLOWOUT START TO MARCH

March is off to a bang with average daily table revenues (ADTR) up 34% YoY for the first 10 days.  The numbers are skewed higher a little because the period contains 2 weekends of data.  We are upping our full month forecast from 10-15% growth to +12-17%.  Our initial growth projection was based on historical sequential seasonal patterns and an easy hold comp over last year.

 

MACAU: BLOWOUT START TO MARCH - maa2

 

The word around town is that hold percentage is likely running higher than normal.  We had received reports last week that traffic on the Mass floors was a little light.  ADTR is likely to moderate the rest of the month.

 

SJM outperformed to start the month mostly at the expense of Wynn.  The other operators are tracking fairly close to recent trend. 

 

MACAU: BLOWOUT START TO MARCH - maa


Morning Reads From Our Sector Heads

Todd Jordan (GLL):

 

-Hotel chains boost loyalty point requirements to book a free room (via LA Times)

 

Rob Campagnino (Consumer Staples):

 

-Vietnam Coffee Harvest May Drop 30% on Drought, Vicofa Says (via Bloomberg)

 

Kevin Kaiser (Energy):

 

-Oil sands firms move on cutting costs (via Globe and Mail)

 

Howard Penney (Restaurants):

 

-$DRI is back with its 2 for $25 Italian Dinner 3 Courses/2 People/Just $25 - and this is going to help traffic? (via Olive Garden)


Strong Dollar

Client Talking Points

Just Pump It Up

Having a strong US dollar is one of the most important things for our country right now. Why? Because having a strong dollar will ultimately help stocks. Now while that may seem to be the opposite agenda, a strong dollar helps drive down commodity prices like crude oil. Low oil prices and lower commodity prices help increase consumption among consumers when they visit places like the gas station and the grocery store. An increase in consumption is an increase in growth and growth helps everyone in the long run.

Asset Allocation

CASH 22% US EQUITIES 24%
INTL EQUITIES 24% COMMODITIES 6%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
ASCA

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

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

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

TWEET OF THE DAY

"New week!! Go get 'em!!!" -@TheKillir

QUOTE OF THE DAY

"In politics, absurdity is not a handicap." -Napoleon Bonaparte

STAT OF THE DAY

10-year Treasury hits a six-month high this morning of 2.05%.


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