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Swapping out BKW (short) for DRI (long) in Best Ideas List

We are removing short BKW from our Best Ideas as increasingly positive macro data and a strong quantitative setup are overshadowing the bearish aspects of Burger King’s outlook.  In BKW’s place, we are adding DRI on the long side.

 

 

Quantitative Setup


BKW has been moving against us recently as continuing gains in employment growth, particularly among younger age cohorts, overshadow the company-specific negatives. 

 

Swapping out BKW (short) for DRI (long) in Best Ideas List - BKW levels

 

 

Fundamental Setup


DRI: Pursuant to our Black Book, we now see an attractive risk-reward setup on the long-side of DRI.  We believe the downside in the stock is limited, even with continuing mismanagement, as the dividend yield continues to attract investors.  Despite this, we believe the board and broader investment community will agitate for change in the company’s C-Suite, either in terms of personnel or strategy or both.  We believe the stock price is currently trading at a discount to the value of the sum of the parts and expect that PE is likely sizing up the company presently.

 

BKW: Robust macro data continues to support stocks within the XLY and BKW is not an exception.  The issues we see in the business model, and the cash flow pressure on franchisees, are very real but positive macro data are taking center stage.  Given the importance of timing on the short-side, and our lack of visibility as to when the market will begin to discount the issues we know are at play in BKW, we do not see the stock as an attractive short.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


TCB: CHICAGO TAILWIND

Takeaway: $TCB remains one of our favorite longs. It looks like Chicago is poised to make significant gains and TCB should benefit.

Thesis Continuing to Play Out

One of our primary bullish thesis points on TCB has been the recovery in housing, reflating its distressed collateral. The company has approximately 30% of its residential loan book in Illinois. To date, Chicago has been a laggard among major markets on a home price basis. We think that is likely to change in the coming 12 months. Consider the chart below.

 

We're showing inventory (x-axis) and volume (y-axis) changes on a YoY basis by market as of either January or February, depending on the market. Our work has shown that prices lag both demand (sales volume) and supply (inventory) in housing by 11-18 months. Currently, Chicago is one of, if not the strongest looking market on a prospective basis. The change in inventory over the past year is -41.6%, while the change in demand is +32.3%. Putting those two factors together creates a very powerful tailwind for the coming year. Given how much exposure TCB has to this market, we think they will be a primary beneficiary of Chicago's coming property recovery. For reference, the bubble size corresponds to the LTM change in home prices for that market. The best long plays are small bubbles in the top left quadrant, and vice versa.

 

Interestingly, we also ran across this article (hat tip bankstocks) that profiles the nascent Chicago recovery: Chicago Tribune

 

TCB: CHICAGO TAILWIND - bubble chart

 

TCB: CHICAGO TAILWIND - OLD TABLE

 

Joshua Steiner, CFA

 



Eye-Catching Industrial Data

Takeaway: Here's how industrial production compares between the United States, Europe and Japan right now.

Industrials sector head Jay Van Sciver released a number of charts to his institutional clients earlier this week. Here's one we found very interesting. It compares industrial production in three regions: the United States, Europe and Japan. Van Sciver writes:

 

"The mid-month lull in data is a good chance to step back and look at global industrial activity.  Europe and Japan (note Japan is on the right axis) continue to show year-on-year declines in industrial activity.  Industrial activity in Europe and Japan has continued to contract, although Europe seems to have rebounded from year-end weakness.  Industrial activity in the US has remained positive but continued to slow as of January.  Given stronger US transport data so far in 2013, February and March data may improve."

 

Eye-Catching Industrial Data - Industrials

 


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Consumer Staples Snapshot

Takeaway: Here's a fascinating chart of earnings and revenues of companies in the Consumer Staples sector.

Below is a very interesting chart, courtesy of our Consumer Staples sector head, Rob Campagnino. As you'll see, many companies in this space have beaten both revenue and earnings expectations.

 

Consumer Staples  Snapshot - Consumer Staples


Labor Market Strength

Takeaway: Here's one reason today's initial jobless claims report points to a strengthening labor market.

This past week's non-seasonally adjusted initial jobless claims were lower year-on-year by -7.3%, which is roughly consistent with the rate of improvement over the previous two weeks (-8.9% and -8.0%).

 

This brought the four-week rolling average year-on-year change in non-seasonally adjusted claims to -5.8% as compared with -4.2% in the previous week. What this signals is that the real labor market is experiencing accelerating improvement, and this has been the case for the last five weeks.

 

Here's a chart that shows rolling non-seasonally adjusted claims for the past five years. Note the the decline so far in 2013.

 

Labor Market Strength - Jobless claims


The US Dollar, S&P 500 and Brent Oil

Takeaway: As we say here at Hedgeye, if you get the US dollar right, you get a lot of other things right.

Let's take a look at these two charts below. Our models saw these correlations before they happened.

 

In the first chart, note the performance of the US dollar versus the S&P 500 in the last few months. You'll notice that as the US dollar moves higher, so does the S&P 500.  In fact,did you know the US dollar index is up for the sixth consecutive week? But as with any correlation risk, change can happen fast, so we'll be prepared if and when this correlation changes.

 

The US Dollar, S&P 500 and Brent Oil - usd spx  2

 

In our second chart, we show the relationship between the US dollar and Brent oil. That relationship is negatively correlated, meaning that as the US dollar moves higher, the price of Brent moves lower. Lower oil prices drive consumption growth, which effectively acts as a tax break for consumers. In other words, a strong dollar equals a strong America.

 

The US Dollar, S&P 500 and Brent Oil - usd brent  2


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