Investing Ideas Updates:
CAG: Consumer Staples sector head Rob Campagnino is less concerned about ConAgra’s earnings report and continues to like this name, in large part because of its sensitivity to declines in commodity prices. With the CRB commodity index well off its October 2012 and trending towards the lows of last June, Hedgeye continues bearish on the outlook for commodities. This resonates in the private label food business, which CAG has just expanded through a substantial acquisition. The private label business is primarily exposed to the costs of its inputs – by definition, consumers don’t buy no-name products out of brand loyalty. Campagnino notes that continued declines in commodity prices contribute to substantial expansion of CAG’s profit margins. (Please click here to see the latest Stock Report on CAG.)
HOLX: Health Care is not immunized to earnings any more than other sectors. Sector head Tom Tobin notes weak results so far this earnings season. Poor admissions results from Health Management Associates (HMA), HCA Holdings (HCA, formerly Hospitals Corporation of America) and weak lab volumes from Quest Diagnostics (DGX) indicate Hologic may report weak diagnostics revenues. Based on the way health care stocks have reacted to earnings reports so far this earnings season, this may be a non-event. Certainly for investors holding HOLX for longer-term profits, Tobin remains bullish. His fundamental case remains strong: a replacement cycle in mammography equipment, acceleration in doctor visits, and especially Tobin’s unique analysis pointing to a rise in birth rates, reversing a 40-year decline. (Please click here to see the latest Stock Report on HOLX.)
DRI: Restaurants sector head Howard Penney says the “win-win set up” remains intact at Darden Restaurants. Penney remains critical of DRI management which “continues to fall short of the standards we believe the investment community is demanding.” But, he says, “equity holders shouldn’t panic.” Penney says sequential improvement in industry trends should bail out the company’s business through the rest of this year, giving holders breathing room while we wait for a likely group of activists to emerge. Finally, at these prices the dividend yield is around 4% - much more than Treasury Secretary Jack Lew is paying these days! (Please click here to see the latest Stock Report on DRI.)
FDX: Industrials sector head Jay Van Sciver is skeptical on this week’s downgrades by analysts followingFederal Express. Says Van Sciver, “FedEx Ground is using its structural advantages to take market share from UPS,” but other Wall Street analysts prefer FDX’s “Big Brown” competitor. Van Sciver believes this could be because UPS is simpler to understand – not a compelling case for investment. This is like the joke about the man looking for his lost car keys under a streetlamp. “Did you lose them here?” asks his friend. “No,” replies the man. “I lost them across the street, but there’s a lot more light here.” Analysts are downgrading FDX now that it’s down almost 20% off its highs. Van Sciver tweeted “Looking at impact of mix shift is looking at yesterday’s news – actually, last year’s news. #oldnews.” And he points to concerns about the impact of the new Teamsters’ contract on FDX. Note to other analysts: FDX is non-union, giving them a huge labor cost advantage over UPS on ground. Van Sciver’s long-term bullish case for FDX remains in place. (Please click here to see the latest Stock Report on FDX.)
MPEL: Melco Crown Entertainment remains Gaming, Lodging & Leisure sector head Todd Jordan’s favorite name “with the catalyst of a terrific first quarter earnings release looming.” Jordan shared his projections this week, looking for net revenue that’s 3% above Wall Street consensus projections – and $267 million of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, a widely-used measure of basic operational profitability of a company) – 5% ahead of consensus. Jordan says “another strong quarter should bring the company closer to gaining the respect that it deserves from the investment community.” Jordan looks forMPEL to “transition from a trading vehicle to a core long-term holding” for large institutional holders, adding a further boost to multiple expansion. (Please click here to see the latest Stock Report on MPEL.)
Macro Theme of the Week – Buggin’ On Gold
All that glisters is not gold: In “Merchant of Venice,” the winner of Shakespeare’s challenge gets to marry the wealthy and alluring Portia, while the losers must foreswear marriage and remain celibate forever. That’s a big wager – but no bigger than those recommending you dive into the (increasingly less-) precious metal today.
Hedgeye CEO Keith McCullough tweets, “Hedgeye is putting together a list of un-accountable pundits who had you buy Gold $1755 and $AAPL $702 in SEP2012.” (Follow Keith @KeithMcCullough.) Keith is more than justified as the Hedgeye Macro team has been consistently bearish on gold for over a year. Meanwhile the price of gold has seen a 26% peak-to-trough decline going back to 2011 highs. That’s a Crash in anyone’s book.
Factors driving the decline in gold:
- Strong US Dollar – Gold is a haven, as in “any port in a storm.” But the dollar is recovering from a decade of decline and starting to turn up. Recent central bank moves to flood their markets with local currency only help make the dollar look better. The Bank of Japan (BoJ) just announced a plan to inject 500 trillion Yen into the economy – that’s about US$ 1.4 trillion today, but you’d better look quick, because the week the BoJ made the announcement, the Dollar rose more than 4% against the Japanese currency and looks poised to keep going higher.
- Economies are weak – In a world full scrambling for a crust of bread, there’s precious little demand for non-economic assets. Right now Warren Buffett’s observations about gold make all the sense in the world: you can’t eat it, you can’t wear it, you can’t live in it. Its only utility is to exercise the Greater Fool Theory: find a greater fool than yourself and sell it to him.
- Value compared to what? – “Haven Assets” are considered safe because they do not behave like other assets. In Wall Street jargon, they are “uncorrelated.” Investors afraid of the stock and bond markets traditionally fled to the shelter of gold and silver. In the past decade, so many investors bought so much gold – and so much more was sucked directly into the stock market in the form of various gold ETFs – that the “haven asset” now trades more like a stock. Its market behavior has changed and may enter an extended period of adjustment. Not only is gold no longer a Haven Asset, it’s not clear what it is. There are very few Absolute Rules of investing, but one that has stood us in good stead is: When uncertainty rules, prices go down.
- Price, price, and price – Markets move on Momentum. Rising prices beget more rising prices, while declines snowball into avalanches. The downward move in the price of gold has taken center stage. Price itself has become a negative catalyst, giving truth to the adage “the lower it goes, the lower it can go.” OK, that wasn’t an adage before. But it is now. Gold spot prices remain in a bearish formation, based on Hedgeye’s quantitative models, and don’t look like they will recover any time soon.
All That Is Gold Does Not Glitter: In his fantasy trilogy Lord of the Rings, J.R.R. Tolkein turns Shakespeare inside out to teach that some things are more precious than they appear. Our Macro team has identified what looks like the solid underpinnings of a return to stability in the US economy. From an investment point of view, Stability is often more desirable than Growth. (Remember: when uncertainty reigns, prices go down.)
This is at odds with what you will hear from most of Wall Street, where no one else seems to be embracing the notion of growth and stability coming back into the US economy. Here are a few of Hedgeye’s main points:
- Housing recovery – For the first time since before the financial crisis, the value of your home and the value of your stock portfolio are rising together. This happened when you weren’t looking.
- Submerging markets – The BRICS are BROCEN. Hedgeye’s Macro team says emerging markets are likely on the brink (“BRINC”…?) of the next crisis. Brazil just raised interest rates after admitting they can’t control inflation. Russia has no economy with oil prices in decline. And Hedgeye’s analysis pegs India as having tremendous exposure to risks from its corrupt political process and conflicted regulatory regime.
- Classical gas – Global oil and gas trades in both the spot and futures markets settle in dollars, so a strengthening dollar drives energy prices lower. A single consumer saving $5 a week at the pump is fairly insignificant. But multiplied and annualized across 240 registered vehicles in the US… You do the math – all these big numbers make our head hurt.
As a public service, we remind you that being bullish on economic growth doesn’t mean buy indiscriminately stock market at any price. These Macro correlations are not eternal truths, they’re just what’s going on right now. As Keith constantly reminds us, the Rule is, that the Rule is going to change. Don’t touch that dial.
Sector Spotlight – Gaming, Lodging & Leisure
Sector head Todd Jordan saw average daily revenue at the Macau gaming tables rise in the most recent week, bolstering his outlook for a double-digit increase this month. The gaming floors remain busy, apparently discounting the new Bird Flu scare and reports of harsh new border controls – the China Daily writes that junket operators will be criminally prosecuted if they organize a trip into Macau with more than 10 mainland citizens.
MGM China head Pansy Ho says Macau has cleaned up its act. “We don’t see any of that now” she said, referring to the days of money laundering and violence when shady characters surrounded the gaming venues. Adding to the cleanup, local operators are committing to improving air quality in gaming areas, after 28% of Macau venues failed an initial Health Ministry screen under the new smoking ban.
Not to be outdone by their neighbor across the straits, Taiwan is drafting legislation to permit gaming. A cabinet minister says the proposal includes a stipulation that there will be no tax imposed on gaming winnings for 20 years following the establishment of casinos in Taiwan. As they say in China, “Watch This Space.”
Investment Term: Support and Resistance
Perhaps the most widely discussed tools of the technical analyst, Support and Resistance represent price levels where stocks tend to run out of momentum. As their names suggest, they are levels it is difficult to break through – nearly immovable objects that stand in the way of the sometimes irresistible force of stock prices.
“Resistance” represents a pattern of high prices in a trend over a discreet time frame. Standard analytical approaches use segments such as 30 days, 50 days, 200 days, and one year. There are problems associated with all these approaches, notably the self-delusional phenomenon known as Confirmation Bias, when we see patterns that may not exist, and which confirm our pre-existing irrational and deeply held beliefs. If none of this makes sense to you, you may have suffered at one time from Repetitive Trading Loss Syndrome. Don’t worry, it afflicts nine out of every ten investors.
In the simplest of terms, chartists draw a line connecting the peaks in price. When the line forms a solid ceiling that prices keep hitting, but not breaking through, that price level comes to be called “Resistance.” It is the upper price that a stock resists breaking above.
“Support” is the same process, only with low prices. The support level of a stock is the price below which we should not expect the stock to trade. Taken together, Resistance and Support levels form the Trading Range of a stock. Like all other predictive measures of the investment markets, this works until it doesn’t.
Sometimes momentum builds up and stock prices shoot through the upper bound of the trading range. This is known as an Upside Breakout, or simply a Breakout. A Downside Breakout does the same thing, only to lower stock prices. Breakouts can signal that the stock is setting up to establish a new trading range. But upside breakouts can also be the sign of topping out, if they do not sustain the higher prices. And downside breakouts can turn into capitulations, when the last sellers dump their positions. When a stock trades through resistance it may be the signal that the very last buyer has finally bought – the stock will then have nowhere to go but down. And a breakdown through support can signal capitulation, with the last holdouts finally selling their shares, thus enabling the stock to trend higher.
Breakouts can result from irrational mass behavior as investors go into a frenzy of buying or selling. When fear becomes contagious on a trading floor, a stock can go into Meltdown – all bets are temporarily off as any semblance of rational decision making is cast aside and the markets go into panic mode.
A similar dynamic can take hold on the upside, as investors go into a feeding frenzy. When a stock gets hit with a wave of panic selling, it goes into a Meltdown. When the panic is a wave of buying, that’s sometimes known as a… Did you say “Meltup”? Hey, you’re getting good at this!