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Keith's Top-5 Tweets Today

Takeaway: Here's a look at Keith's top tweets heading into Memorial Day weekend.

Our best week ever in terms of new clients - thanking all of you for helping us be the change we all want to see

@KeithMcCullough 4:01PM

 

Long weekend trading days usually some of my favorite - volume makes it easier to pick people off

@KeithMcCullough 2:22PM

 

When we say sell, clients sell - when the Old Wall says sell, I usually cover/buy

@KeithMcCullough 12:28PM

 

The combination of market morons and economic ideologues is something we love competing with

@KeithMcCullough 8:09AM

 

Krugman's Op-Ed "Japan the Model" could have been written in 1924, championing the Weimar Republic @NYTimeskrugman

@KeithMcCullough 7:50AM

 


Heard on the AM Call: Sippin' Sapporo

Takeaway: Paul Krugman and Ben Bernanke need to go back to whatever dorm they were sippin’ the Sapporo in and rethink everything.

(Excerpt from this morning's Hedgeye conference call)

 

Every Sector ETF in our S&P Sector Model (with the exception of Utilities) is in what we call a Bullish Formation (bullish on all 3 of our core risk management durations – TRADE, TREND, and TAIL). The Utilities Sector ETF (XLU) is getting crushed, already -6.4% in May.

 

What is people giving up on Utilities (Yield Chasing) saying? It‘s saying shame on you Ben Bernanke. He’s forcing retired people to chase yield and rethink the whole historic notion of savings going back to Benjamin Franklin.

 

Another shame shout-out goes to New York Times “economist” Paul Krugman. If you can stomach it, take a moment to read his latest op-ed championing “Abenomics” and Japan’s insane efforts to turn its economy around. Holy smokes. Krugman may as well be writing about the Weimar Republic in 1924-25.

 

Bottom line: Krugman and Bernanke need to go back to whatever dorm they were sippin’ the Sapporo in and rethink everything.


Oversold: SP500 Levels, Refreshed

POSITIONS: 9 LONGS, 4 SHORTS @Hedgeye

 

I was a busy little beaver this morning. I came into the 10AM swoon running net short (only the 3rd day I have had more shorts than longs since November 29th), so covering on my oversold signal was a relatively easy decision. Buying aggressively here is less easy (maybe that’s why I should).

 

Here’s how I think about that in terms of key levels:

  1. Inside of 1637, the SP500 is immediate-term oversold
  2. But immediate-term TRADE resistance (1657) is the 1st signal for lower-highs I’ve had all month
  3. The broader TREND of support is down at 1558

This week’s 50 point SPY selloff (in 48 hours from Wednesday morning’s highs to Friday morning’s lows) came on central planning risks in the US and Japan; not economic fundamentals. #BernankeRisk is real – the market has already reminded you of as much. The risk is his forecast is too bearish.

 

It’s perverse really. Bernanke vs The People. And the bond market (long-term Treasuries) is betting that real (inflation adjusted) growth wins.

 

This week’s jobless claims surprised again on the downside, New Home Sales of 454,000 were fantastic, and this morning’s Durable Good print showed #GrowthAccelerating too.

 

Now all we need is a bigger #StrongDollar Tax Cut at the pump. Oil down hard on the week will help.

 

Enjoy your long weekend,

KM

 

Oversold: SP500 Levels, Refreshed  - SPX


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PG – Don’t Get Fooled Again

Takeaway: We think AG Lafley is a clear improvement over Bob McDonald, but we aren’t entirely convinced that Lafley is all that good.

This note was originally published May 24, 2013 at 10:25 in Consumer Staples

“Meet the new boss, same as the old boss.” – The Who



Last night, Procter & Gamble CEO Bob McDonald announced his “retirement” and former Chairman and CEO AG Lafley was named as President and CEO.  McDonald was facing a fair bit of external and internal criticism, and his retirement shouldn’t come as a complete surprise to the market.  We have a couple of thoughts on the situation.

  • We think Lafley is a clear improvement over McDonald, but we aren’t entirely convinced that Lafley is all that good – for example, the Gillette acquisition took place on his watch and we think it’s a horse race between PG/Gillette and GIS/Pillsbury for worst staples acquisition of the last 20 years
  • This doesn’t strike us as a permanent solution – AG Lafley is 65 and note that any likely successor to Lafley almost certainly lives and works in Cincinnati as I type this, so don’t expect a sea change in terms of philosophy or style going forward (this is part of the reason we questioned Pershing Square’s thesis on the name).
  • While PG stock was a strong performer during Lafley’s tenure, he had several notable tailwinds, including a period of strong global growth and a company in Unilever that was a fairly consistent share donor (the current Unilever is much, much more capable global competitor) – this goes back to our prior thought that while Lafley is better, better doesn’t necessarily equal good
  • It’s unclear to us what Lafley’s strategy will be, but there are only so many levers to pull – advertise, innovate and invest in price – none of those seem to be all that positive for the broader HPC space and likely not positive for PG’s earnings base.  2014 as a reset/investment year is a real possibility
  • At $82, PG is a do nothing for us and represents more than a little bit of the triumph of hope over experience, which we see as particularly fitting given that this is Lafley’s second “marriage” to PG (Samuel Johnson - “A second marriage is the triumph of hope over experience”)
  • We are happy to sit on the sidelines until we hear a clearly defined strategy and then perhaps wait a bit more until we see some positive impact from the implementation of that strategy – PG is a big ship to get moving
  • PG’s upgrade this morning by a large sell side firm strikes us as a “true-up” after being on the wrong side of the name for a good bit of time

 

Call with questions,

 

 

Rob

 

 

Robert  Campagnino

 

Managing Director

 

HEDGEYE RISK MANAGEMENT, LLC

 

E: rcampo@hedgeye.com

 

P: 203.562.6500

 

 

 

Matt Hedrick

 

Senior Analyst



WWW – We Really Like This Stock

Takeaway: The short takeaway here is that Hedgeye Retail sector head Brian McGough really likes Wolverine World Wide (WWW). A lot.

Hedgeye Retail sector head Brian McGough presents his Best Idea, footwear maker Wolverine World Wide (WWW).  The short takeaway is that Brian really likes this stock.  He likes it for short-term traders.  He likes it for long-term investors.  He likes it for cautious buyers waiting for the right entry time.  He flat-out likes it.

Over the next 2-3 years, Brian looks for this stock to be at least a double.  Unless, of course, lots of things go right, in which case WWW, which currently trades in the low $50s, could soar well above the $100 mark.

 

Here’s the breakdown.

 

A Look Under the Hood at WWW:

WWW has complex set of footwear brands, including lots of household names like Stride Rite, Hush Puppies, Merrell and Patagonia.  But if you remember the famous “80/20 Rule,” it will not surprise you to learn that, out of about 15 brands, the top seven brands account for over 80% of WWW’s revenues – the top three brands make up half the company’s sales.  (OK, we recognize it’s not exactly 80/20, but the concept is solid.  Would you rather we called it “a log-normal distribution”?)

 

This well-managed company offers products under three headings: Heritage (with such brands as Wolverine and Harley Davidson), Lifestyle (Sperry, Keds, Stride Rite), and Performance (Saucony and Merrell).  In clear distinction to another well-known retailer, Payless – from which WWW acquired both the Sperry and Keds brands – WWW’s sales network operates on a uniform platform globally, providing maximum efficiency in all markets.

 

Modeling Assumptions:

 

Brian’s projections for WWW’s earnings are meaningfully above the consensus.  So much so, says McGough, that he believes the stock could be accorded a higher multiple today.  McGough estimates 2013 EPS at $2.73, versus Street consensus of $2.63.  By 2016, McGough is modeling $5.64, well above the consensus of $4.24.

 

WWW is a top-line story.  So much of the cost of their business is built into their efficient distribution network that nearly all of every incremental dollar of sales revenues turns into earnings.  (We told you it’s a well-run company!)

 

The big story here, says McGough, is a convergence of a trend in improving operating margins, together with an improvement in operating asset turns.  Calling this “a rare, rare instance where both are improving together,” McGough sees a further catalyst in the general trend as peak revenues start to roll over and fade in the retail group as a whole.  Thus, WWW stands out both on a comparative and on an absolute basis.

 

Where We Are Different

 

McGough says WWW is the most global footwear company of all.  Fully 65% of its unit sales are outside the US, far above such visible global brands as Nike and Adidas.  So it may seem counterintuitive that they recently purchased two of the least global names: Keds and Sperry.  Sperry are the folks who make Topsiders.  Right, the boat shoes.  But wait, there’s more…

 

In contrast to WWW’s global reach, Sperry sells 95% of its products in the US.  McGough says this is a well managed brand with a talented management team, but without the capital or the network from expansion.  McGough expects WWW’s global platform to quickly add Sperry sales overseas, with a boost to the top line. 

 

Together, “without making heroic assumptions,” McGough expects the Keds / Sperry combo to easily add 4%-5% top line growth.  McGough points out that WWW has done this before.  They took the Cushe brand from $10 million in revenues in 20 countries when WWW acquired them in 2009, to $50 million in 100 countries today.

 

In 1997 WWW bought Merrell, a brand doing $27 million in sales.  After the acquisition Merrell grew between 20%-25% annually for 15 years and is closing in on $600 million in sales today.  Now that’s management!

 

Pushback Points:

 

OK, so why isn’t WWW already at over $100?

 

For one thing, people think it’s pricey.  “It’s expensive, and I missed it already” we hear.

 

McGough agrees.  WWW is expensive.  It’s built to be expensive, and McGough thinks it will only get more expensive.

 

Some folks criticize the Keds acquisition as being way too costly.  McGough recalls the same criticism when Nike bought Converse.  “It was expensive and everybody thought it was stupid.”  Oh, and it turned out to be Nike’s best deal, more than ten times over the profitability of anything else they acquired.

 

WWW’s strategy with Keds includes a fashion deal with Kate Spade and a tie-in with Taylor Swift, moves that have already boosted Keds’ revenues by around $25 million.

 

And Sperry?

 

Let’s just say these aren’t your grandfather’s boat shoes.  The category known as “boat shoes” has undergone not just a transformation, but a radicalization.  McGough disagrees with those who think this “boat shoe cycle” will blow over.  He says the category has been permanently redefined, with broad new fashion offerings that speak to a wide range of ages and lifestyles. 

 

 

[PUT IN HERE SLIDE 25, OR MAYBE 27, TO SHOW WHAT NEW “BOAT SHOES” LOOK LIKE]

 

So, what if we’re wrong?  McGough says if the Sperry brand fizzles, it’s less than a 2% hit to revenues, providing a good risk / reward scenario.

 

Stock Strategy

 

McGough says the technical picture for the stock is “extremely bullish.”

 

The stock is in an odd position.  Everyone says “it’s too expensive and I already missed it.”  And no one seems to like it, which means there aren’t too many folks waiting to sell their positions – they don’t own it.  (McGough notes that WWW has historically performed well regardless of sentiment, so maybe it’s a sort of Ultimate Contrarian play.)

 

Conclusion

 

McGough likes this “expensive” stock right here, right now.  His model indicates WWW could produce 25% EPS growth over the coming 3 years, while at the same time taking down debt levels, a combination that he believes should have the stock trading at more than a double over the next 2-3 years.

 

The risks are the stock’s already high price and implied P/E of over 30.  But McGough thinks for the downside to be realized, WWW needs to suffer a combination of bad European sales, a horribly bad winter both here and overseas, and a complete failure of the “new boat shoes” model.

 

It isn’t often that an analyst likes a stock for short-term Traders and for long-term Investors.  McGough likes WWW for both – and even for intermediate-term Undecideds.  Expensive today.  Lots more expensive over the next couple of years.

 

 

 

Moshe Silver, Managing Director

msilver@hedgeye.com

Copyright © 2013 by Hedgeye Risk Management LLC

 

Read the Hedgeye e-book Fixing A Broken Wall Street at http://tinyurl.com/cqgter9


PG – Don’t Get Fooled Again

“Meet the new boss, same as the old boss.” – The Who



Last night, Procter & Gamble CEO Bob McDonald announced his “retirement” and former Chairman and CEO AG Lafley was named as President and CEO.  McDonald was facing a fair bit of external and internal criticism, and his retirement shouldn’t come as a complete surprise to the market.  We have a couple of thoughts on the situation.

  • We think Lafley is a clear improvement over McDonald, but we aren’t entirely convinced that Lafley is all that good – for example, the Gillette acquisition took place on his watch and we think it’s a horse race between PG/Gillette and GIS/Pillsbury for worst staples acquisition of the last 20 years
  • This doesn’t strike us as a permanent solution – AG Lafley is 65 and note that any likely successor to Lafley almost certainly lives and works in Cincinnati as I type this, so don’t expect a sea change in terms of philosophy or style going forward (this is part of the reason we questioned Pershing Square’s thesis on the name).
  • While PG stock was a strong performer during Lafley’s tenure, he had several notable tailwinds, including a period of strong global growth and a company in Unilever that was a fairly consistent share donor (the current Unilever is much, much more capable global competitor) – this goes back to our prior thought that while Lafley is better, better doesn’t necessarily equal good
  • It’s unclear to us what Lafley’s strategy will be, but there are only so many levers to pull – advertise, innovate and invest in price – none of those seem to be all that positive for the broader HPC space and likely not positive for PG’s earnings base.  2014 as a reset/investment year is a real possibility
  • At $82, PG is a do nothing for us and represents more than a little bit of the triumph of hope over experience, which we see as particularly fitting given that this is Lafley’s second “marriage” to PG (Samuel Johnson - “A second marriage is the triumph of hope over experience”)
  • We are happy to sit on the sidelines until we hear a clearly defined strategy and then perhaps wait a bit more until we see some positive impact from the implementation of that strategy – PG is a big ship to get moving
  • PG’s upgrade this morning by a large sell side firm strikes us as a “true-up” after being on the wrong side of the name for a good bit of time

 

Call with questions,

 

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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