MNST – A Blinding Glimpse of the Obvious

Shares of MNST are weak this morning on the news of a new study (presented at a meeting of the American Heart Association) that suggested that energy drinks can raise blood pressure and produce an irregular heartbeat in some people.  In lieu of a study, we suspect the American Heart Association could have simply asked anyone who has ever had a Red Bull, espresso, or a grande latte.


What this morning’s weakness does highlight is the sensitivity of the share price to incremental, non-financial news – a phenomenon that we think will persist until we get some clarification with respect to what role the FDA will have, if any (our view is close to zero) in regulating energy drinks.


Today, we view this incremental news as a non-event, and anxiously await further studies that can reveal that water “is wet” and the sun is “kind of hot”.  Our primary concern with respect to shares of MNST is not based on nonsense such as this headline, but the fact that we

remain below consensus for EPS for 1H 2013.


Finally, we hope the group funding this study saved the receipt and we also hope that it wasn’t our tax dollars doing the funding, because that kind of news is no way to start a weekend.


Have a good weekend,





Robert  Campagnino

Managing Director





Cyprus: Defibrillator Needed

Takeaway: Take a look at this chart of the Cyprus stock market. It doesn't get much uglier than this.

Investors in Cyprus have been wearing hard hats for the last five years as the market there has been throwing up nothing but bricks. In case you haven't pulled up a chart longer than one-year in duration, check out the five-year chart below.


The official observation from Hedgeye's Inflection Inspection Department? Defibrillator needed.


Cyprus: Defibrillator Needed - Cyprus Stock Market Annotated  3

PEP/MDLZ Speculation – Intuitively Compelling, But Not so Fast…

This morning, The Telegraph in the UK reported that Nelson Peltz’s Trian Funds has taken a position in both MDLZ and PEP, with the hope of agitating a merger between the two companies.  We would like to make a couple of quick points on the topic:

  1. The Telegraph is a legitimate source, so this strikes us as more than the normal spivvy hedge fund rumors that bubble up occasionally across the pond, meaning that the positions mentioned have a decent shot at being real
  2. We have to balance that with our innate distrust of Friday rumors toward the end of the quarter
  3. Mr. Peltz has owned PEP as a passive investor previously (November 2011) and the speculation back then was that he would agitate for a separation of the beverage and snack assets (his duration as a shareholder was very short, in that case)
  4. PEP separation speculation makes sense, and may be a matter of if not when, but it has been a matter of speculation for a long time (multi-year duration) but faces several hurdles, not the least significant of which is management reluctance
  5. PEP CEO Indra Nooyi, while a source of frustration for some shareholders, does have the benefit of a reasonable share price performance (+12% YTD) to help keep some potential wolves at bay
  6. MDLZ may be a passive position as well, though we should point out that the legacy Cadbury business is one that Mr. Peltz knows well, so the possibility of more active role in that company is the better possibility, in our view
  7. Mr. Peltz has an intimate knowledge of the beverage business, having bought and sold Snapple, then sold again (sort of) as an activist investor in Cadbury
  8. In this case, PEP takes on the role of the old KFT (business to be broken up) while MDLZ, well, is the old (and new) Cadbury business – circle of life
  9. MDLZ CEO Irene Rosenfeld has been a source of frustration as well for investors in recent quarters, but does deserve credit for the separation of the Kraft assets and the associated valuation creation there – we suspect she has a longer rope with MDLZ shareholders than Nooyi does with PEP shareholders to the extent that she has actually done something in recent years with respect to reshaping her company
  10. The second level of speculation that we have heard regarding PEP is that as part of the separation of snacking and beverage assets, Anheuser-Busch InBev would look to acquire the beverage business, though we are not sure ABI desires either the competitive positioning or the growth profile.
  11. Finally, to wrap all the speculation of the last couple of months into one note, we suspect investors may try to weave POST into this narrative as well, as break up of PEP may be into three parts – snacks, beverages and cereal, with cereal combining with the POST assets
  12. Finally, we think investors have to contextualize all these rumors within the current market valuation of staples post-HNZ, recognizing that being the second company to make an acquisition in a consolidation “wave” makes it much more difficult (or unlikely) to create value for shareholders

Bottom line, the speculation as outlined in the article makes sense to us, but intuitively compelling and likely are often two very different things and we would caution against basing a shorter-term investment thesis based on this type of speculation.  Of the two companies speculated, we prefer MDLZ on a longer-term basis, but think that near-term earnings expectations may be too optimistic.


Also, the current multiples in the staples group makes us loathe to chase anything.


Here is the article:




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Signals from Oil and China

Client Talking Points

Oil and the Dollar

If you want to get freaked out about something, keep a close eye on oil, not at something inconsequential like Cyprus. In fact, Cyprus might even be the biggest pretend crisis in a decade. Right now, according to our models, the price of Brent crude is nearly perfectly inversely correlated to the US dollar. That means if the US dollar moves higher, oil prices move lower. Look at Brent oil’s price since February 1 – it’s been declining.

China Calling

Oil and China are the two most bullish items from a global macro perspective this week, and they’re interconnected. The Shanghai composite index closed higher for the third consecutive day, thanks in part to lower oil -- as money is flowing out of places like Cyprus and back to the US and elsewhere.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. Darden reported earnings today that beat Wall Street expectations, though net income declined 18%.


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.


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.

Three for the Road


“Roll forward and stay current but keep those durations short.” -- @CAMLLCCIO



“Reality is merely an illusion, albeit a very persistent one.” – Albert Einstein


1, the number of games Harvard has now won in its history in the NCAA basketball tournament following last night’s win over New Mexico.

Nike: Three for Three in Q3

Takeaway: Nike delivered on everything we needed to see to keep pounding the table on the stock, and then some.

This note was originally published March 21, 2013 at 21:41 in Retail

There are three things we were looking for in Nike’s quarter; proof that 1) Nike is gaining share/driving consumer demand across its portfolio, 2) Gross Margins are improving at a rate well ahead of consensus expectations, and 3) that it is achieving these things with disproportionately less capital invested in its business (ie driving returns higher).  


Well, Nike showed us every one of these, topped our EPS estimated by a penny, and blew out the Street by $0.06ps. No changes to our above-consensus EPS estimates our thesis. Nike remains a top pick.


Some important points:

North America En Fuego. As it relates to demand, we saw North America sales up 18%, which was on top of a 17% growth rate last year. Importantly, futures were up 11% despite being up at a colossal rate of 22% this quarter last year. Think about it like this -- try to find another company with 45% share in its category that is growing its top line at a mid-teens rate while improving margins and lessening capital intensity along the way. Let us know what you find, we think you’ll come up dry.


China has definitely bottomed. Don’t let management’s caution fool you. They specifically made it a point to keep estimates grounded and said that that they still have a lot of wood to chop. But futures going from -6% and -5% over the past two quarters to +4% in 3Q is proof positive that this business has at least found bottom, and is likely trending higher once again.


Inventories still improving – driving better margins. Though pricing and easing raw materials costs helped gross margins, the spread between inventory and sales growth is getting better and will continue to drive gross margins higher. This is probably best evidenced by our SIGMA chart, where it shows Nike making a big move into the upper right quadrant of this analysis. Over time, triangulating margins with capital efficiency explains away 92% of stock moves in retail. Translation – it matters.


Nike: Three for Three in Q3 - nkeSIGMA


We think that the spread between inventories and margins will continue to diverge well into FY14

Nike: Three for Three in Q3 - nkegm




Here’s our previously-published comments on our expectations for 3Q.


NKE: Ahead of the Print

We think that the Q is in good shape, but if there are any fireworks we’re confident enough in our thesis to support the name.


Conclusion: Our analysis suggests that Nike’s quarter is in good shape. But let’s face it, Nike always manages to light off a firework or two. If that happens to be case on Thursday, we’re confident enough in our underlying thesis that we’d support any weakness.


Will the quarter be a blowout? Not exactly. We’re modeling $0.72 vs the Street at $0.67. Nice upside -- but not huge.  We’re about in line with the Street on the top line at about 11%, but we’re 50bp higher on the gross margin line. We think that’s fair given the easing product costs flowing through the P&L as well as 2Q ending with the most favorable inventory position in nine quarters.


Futures: As it relates to futures, bears are calling me with the expected ‘futures are decelerating’ concerns.  The company is going against a 22% North American futures number in this quarter, and +18% globally. It doesn’t take a genius to figure out that this is a ridiculously tough quarter to comp. On a 2-year run rate, a 7% North American or 5% Global futures number suggests an even underlying trend. We think Nike comes in 2-3 points above those levels. On a go-forward basis, keep in mind that after this quarter, we started to see China drop off precipitously. Beginning next quarter, we expect any slowdown in growth in North America to be offset by a rebound in China and an uptick in Western Europe (NKE is about to anniversary the latest downturn there, and FL recently noted a stabilization in Europe).


Sentiment is Flat-Out Bad: Lastly, we need to acknowledge sentiment and valuation. We agree that the stock isn’t cheap at 17x earnings. But let’s not forget that sentiment on Nike remains quite bad. Our sentiment monitor, which is based on both sell-side recommendations, short interest and insider trading activity, suggests that Nike is more hated today than almost any time over the past 10-years.


Nike: Three for Three in Q3 - NKE sentiment

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.