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FTSE: Bullish On The Margin

This week's PMI reports for the UK and Germany weren't as bad as people thought they'd be and in turn, the market was pleased enough to continue buying up UK equities. The FTSE 100 index is in bullish formation now across all three durations: TRADE, TREND and TAIL. Even if it's just a story of funds shifting capital into UK equities, it's impressive enough to garner our attention nonetheless. 

 

FTSE: Bullish On The Margin - FTSE100


Holler At The Dollar

We've said it before and we'll say it again: get the dollar right and you get a lot of other things right. With the US Dollar being up seven of the last eight weeks, two things happen that correlate decently with the currency: stocks are heading higher and commodities are getting crushed. On a 60-day basis the correlation between the US Dollar Index and the SP500 is now +0.81; bullish is as bullish does.

 

Holler At The Dollar - dollarholler


SPY: Watch Your Levels

The S&P 500 (SPY) hit a new all-time high intraday today of 1572 after yesterday's attempt, which saw the index testing our TRADE line of support at 1556 by the close on light volume. Chasing the broader macro market and buying high and selling low just doesn't work. We'll keep an eye on the S&P 500 as well as the US dollar; a strong dollar drives down commodity inflation and boosts the S&P 500. All the more reason to stay the course and remain bullish on the market.

 

SPY: Watch Your Levels - SPXRUSSEL

 

We also bought the Russell 2000 (IWM) yesterday when the index and S&P 500 both held their TRADE lines of support. Sticking to our process is a must.


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BUY BJRI AHEAD OF EPS?

With only one sell-side analyst, according to Bloomberg, advising clients to sell BJ’s Restaurants’ stock at this price, and the eye-catching underperformance versus the S&P 500, it is tempting to get on board with BJRI.  At this point, we intend on waiting until after the 1Q13 print on 4/26, at the earliest.

 

Reasonable Expectations

 

One of the major reasons why BJRI is tempting on the long side is that expectations seem reasonable.  In fact, at $1.25, we are ahead of the Street’s FY13 EPS estimate of $1.22.  That said, our confidence in our estimate is not as firm as we would like and we are not overly confident that the market will take “beats” versus consensus as a reason to bid up the stock significantly.  We are waiting on the 1Q print and any sign that returns are sequentially accelerating.  We expect returns to improve throughout the year, but not soon enough that we would rush to buy the stock.

 

 

Returns, Returns, Returns

 

Return on Incremental Invested Capital has been key to the share price of this, and many other restaurant companies.  Empirically, this has proven to be especially true of growth stocks.  Until we become confident that management is seeing stable returns on incremental invested capital, we’ll be advising our clients to be patient.   

 

BUY BJRI AHEAD OF EPS? - bjri roiic stock price

 

 

Traffic

 

Same-restaurant sales growth has been erratic over the past year, missing expectations in two quarters during 2012.  The company’s Gap-to-Knapp has come in drastically over the last few years and this has pressured returns.  In 1Q, we will be waiting to see a strong recovery in traffic trends, sequentially, on a two-year average basis, to gain the necessary confidence to get behind this name.  If traffic trends don’t recover, it will be difficult for the investment community to consider this a growth stock and we expect the multiple will remain in the 8-10x EV/EBITDA range.

 

BUY BJRI AHEAD OF EPS? - bjri srs compo

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 


Pinnacle Foods – What Do Pickles and Pancakes Tell Us About Consumer Staples?

Pinnacle Foods has traded from an IPO price of $20 per share to over $24 in under a week.  What does that tell us?

 

Priced Right

 

The deal was priced “right” – at a discount to the group in terms of EV/EBITDA – that gap has now narrowed, with PF trading at 10.6x EV/EBITDA (our estimate of EBITDA of $450 million).  The packaged food average is 11.4x and the large cap packaged food average is 10.7x.  Based on the company’s growth profile (or lack thereof) we think it should trade closer to the large cap number, but we also recognize that reasoned views of valuation are largely meaningless in staples these days.

 

Scarcity Value

 

Though we mentioned it in our prior note, we apparently underestimated the scarcity value of a relatively high yielding asset in the small–mid cap space.  We have spoken with more than a couple of people that have capital that needs to be deployed and are faced with limited alternatives in the sector.  This probably also serves as at least a partial explanation for MKC’s performance in the wake of, at best, a mediocre quarter and guide.



Yield is a Driver

 

With today’s move above $24 per share, the yield with the proposed dividend is now below 3.00% (2.96%) versus the yield at the IPO price of 3.60%.  For reference, SJM (2.10%), MKC (1.86%), CHD (1.73%), ENR (1.61%) and HRL (1.65%) are the relevant peer group in terms of yield, suggesting further upside to the extent that the performance of PF is related to a paucity of yield in that cap segment of staples.

 

High Debt/EBITDA Has Outperformed

 

Companies with higher debt/EBITDA ratios have outperformed in the staples sector since the beginning of February, and PF is at the higher end of the staples range with a debt/EBITDA ratio of 4.2x.  The market seems to have embraced deleveraging stories (or lower “quality” assets).

 

Pinnacle Foods – What Do Pickles and Pancakes Tell Us About Consumer Staples? - Debt to EBITDA

 

What Have We Learned?

  1. Don’t fight money flows
  2. Yield still matters
  3. Valuation matters, but only when there is a discount (warranted or otherwise) to be exploited
  4. Crap is still beating quality

To be honest, we kind of knew all those things, but we appreciate the proof of concept.

 

Call with questions,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst


NORTH KOREAN SABER-RATTLING "ON"

Takeaway: The latest saber-rattling out of North Korea is likely little more than a desperate plea for incremental international aid.

SUMMARY BULLETS:

 

  • Our analysis and interpretation of history suggests the most appropriate risk management exercise at the current juncture is to broadly fade any fears associated geopolitical risk emanating from the Korean Peninsula.
  • Specifically, it is our view that this latest saber-rattling is merely just North Korea throwing a glorified temper tantrum in order to bring international organization such as the UN back to the negotiating table. Securing incremental humanitarian aid is likely their ultimate goal and promoting geopolitical conflict has historically been their primary tool for accomplishing that goal.
  • We could obviously be wrong here, but anyone not named Kim Jong-un that proclaims they know exactly what the North’s intentions are now is probably unaware of his/her own ignorance with respect to the situation. That is paraphrased directly from Yale Professor Charles Hill (arguably the world’s foremost source on Korean Peninsula geopolitical risk), with whom we hosted a conference call with back in late MAY of 2010 on this very same topic. In the note below, we list a handful of his key takeaways from the call. 

Less than 18 months on the job (specifically in his role as Supreme Commander of the Korean People’s Army), Kim Jong-un has taken after his late father by selling what old-timers like to call “wolf tickets” in the international community.

 

North Korea’s latest attempts to promote beef include “reentering” a “state of war” with South Korea over the weekend; it should be noted that this act is impossible, as, technically speaking, both sides have remained at war since their 1950-53 conflict ended in an armistice rather than a treaty.

 

Overlooking this misstep, it should be noted that North Korea’s state-run Korean Central News Agency expressed that "every issue raised between the North and South will be dealt with in a wartime manner".

 

Naturally, South Korean President Park Geun-hye (the country’s first female president) said that South Korea would respond to any North Korean attacks on its territory. Not bad for her first 45 days on the job.

 

In addition to the aforementioned wartime proclamation, North Korea announced today that it would restart its only nuclear reactor – a decision that was immediately condemned by regional counterparties, such as China, Japan and, of course, South Korea.

 

It’s actually worth noting that Kim Jong-un’s first real bout of outward aggression is actually rather tame relative to his father’s tactics. Recall that back in 2010, the int’l community came to the conclusion that a North Korean torpedo was responsible for the sinking of the ROKS Cheonan, killing 46 South Korean sailors in the process. This was in addition to an artillery attack that killed four South Koreans and the country’s hosting of a tour by foreign experts to their uranium enrichment facility.

 

Our analysis and interpretation of history suggests the most appropriate risk management exercise at the current juncture is to broadly fade any fears associated geopolitical risk emanating from the Korean Peninsula.

 

Specifically, it is our view that this latest saber-rattling is merely just North Korea throwing a glorified temper tantrum in order to bring international organization such as the UN back to the negotiating table. Securing incremental humanitarian aid is likely their ultimate goal and promoting geopolitical conflict has historically been their primary tool for accomplishing that goal.

 

We could obviously be wrong here, but anyone not named Kim Jong-un that proclaims they know exactly what the North’s intentions are now is probably unaware of his/her own ignorance with respect to the situation. That is paraphrased directly from Yale Professor Charles Hill (arguably the world’s foremost source on Korean Peninsula geopolitical risk), with whom we hosted a conference call with back in late MAY of 2010 on this very same topic. Below, we list a handful of his key takeaways from the call:

 

  • “The problem with the Korean Peninsula is really unique. There’s nothing comparable to it anywhere in international relations, so it’s really hard to know how to deal with this because the problems created by North Korea do not fit any of the mechanisms [or] the expectations that are built into the international system. And we don’t much about North Korea because it is such a closed society. So any kind of prediction is really difficult to come to.”
  • “North Korea is a criminal state – and there’s no [other] state like that… It uses those state powers to run a criminal operation, which no other state formally does. In a sense, it has a monopoly on criminal activity (counterfeiting, drug production and proliferation, abductions, money laundering and illegal arms dealings)… That’s been a major problem for the outside world for 25-30 years.”
  • Not unconnected to that is the nuclear question. In a sense, what North Korea has done is turn a nuclear program into a criminal activity. They’ve figured out that if they violate international norms or international law in the production of nuclear weapons and if they issue threats periodically or actually take action such as tests of missiles that could carry nuclear weapons, then they could get the outside world to pay them off in return for promises to change their ways. And this has happened again, and again, and again. It’s a cycle that repeats itself and it’s really extortion: ‘we threaten you and you give us money or food aid or fuel and we’ll promise to subside for a while and then we’ll come back and do the whole thing all over again.’”

 

To listen to the KOREAN RISK AND GLOBAL MARKETS, WITH PROFESSOR HILL call held May 28, 2010 please CLICK HERE (Professor Hill’s commentary begins at the 9:50 mark).

 

To view the accompanying presentation “RISK ON THE KOREAN PENINSULA: IMPLICATIONS FOR GLOBAL MARKETS” please CLICK HERE.

 

ABOUT PROFESSOR CHARLES HILL

Charles Hill is a diplomat in residence and lecturer in International Studies at Yale University. He is a career minister in the U.S. Foreign Service, serving in a variety of roles such as Deputy Assistant Secretary for the Middle East at the State Department, Chief of Staff of the same, and executive aid to former U.S. Secretary of State George P. Shultz. Dr. Hill has been a fellow at the Harvard University East Asia Research Center, a Clark fellow at Cornell University, and is currently a research fellow at the Hoover Institution. He served as special consultant on policy to the secretary-general of the United Nations from 1992 to 1996. He received an A.B. degree from Brown University in 1957, a J.D. degree from the University of Pennsylvania in 1960, and an M.A. degree in American studies from the University of Pennsylvania in 1961.

 

Darius Dale

Senior Analyst

 

NORTH KOREAN SABER-RATTLING "ON" - 1


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%
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