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Growth Is Getting Paid

Takeaway: Beware the Antichrists of Growth.

The Antichrists of Growth (Gold, Treasuries, Utilities, etc) are still underperforming.


Just to give you an idea: Utilities (XLU) are down 0.5% on the month, whereas pro-growth Consumer Discretionary (XLY) is up 3.4%. A not-so-subtle 400-basis point divergence there.


Growth Is Getting Paid - Growths Dichotomy


Pro-growth Financials (XLF) are up 2.67% July-to-date. Gold? Hell on earth, scorched over 25% YTD.


As for Bill Gross, his 10-Year Treasury is down about 6% in the last three months; the S&P 500 is up over 5%.


Last but not least. The Russell 2000 is breaking out to new all-time highs, notching its second consecutive record high in as many days. It’s up 19% YTD. Many would acknowledge that the Russell 2000 breaking out is probably a pro-growth signal.


Here's another way of looking at it.


Growth Is Getting Paid - Risk Managing the Growth Trade


In other words, growth is getting paid. 


(This is an excerpt from Hedgeye Risk Management CEO Keith McCullough's morning call. If you would like more information on our services and how Hedgeye can help you please click here.)

FDX: If Ackman Isn’t Buying FDX, He Should (Market Speaks)

Takeaway: If Ackman is not buying FDX, he should take a look. The move in FDX today indicates that FDX matches his criteria well.



We do not know if Pershing Square is planning to invest in FDX, but many of the characteristics described appear to be a solid fit.  FDX trades at a meaningful discount to UPS, despite having a more impressive franchise in many ways.   In concept, FDX offers a simple service and competes in an industry with very high barriers to entry.  The company’s topline is fairly predictable and FDX could generate substantial free cash flow if it ramped down capital spending (perhaps an issue for activism). The market cap is right, too.   If Ackman is not buying FDX, he should take a look.  The move in FDX shares today may be indicating just that – FDX matches his investment criteria well.


To review the opportunity at FDX, see our black book call here and write-up here.  We have also had expert calls on independent contracting at FedEx Ground and on FedEx’s relationship with an evolving USPS.  After all, if DHL can match competitor margins, FDX certainly can.  In short, we think FDX is one of the best long-term opportunities in the sector.



Timing Matters 


10-K Filing:  FDX is scheduled to release its 10-K around July 15th.  That matches the commitment timing for the Pershing investor commitments  of July 17th.  Reviewing the data released in the 10-K would be important before taking a concentrated, long-term position.


FY 4Q Express Margin:  As we expected and noted, FedEx delivered on its goal to improve the Express division margin in its FY4Q 2013 earnings release.  Gains should continue into FY2014 and FY2015 as the restructuring continues.  It is less risky to commit after the company has already made headway on a critical restructuring.



Upside in Restructuring


Revaluation Potential:  FDX matches peer margins in its Express division, we estimate that there is >50% upside in the shares (best case valuation of ~180, base case of 120-150, and a favorable  sum of the parts approach).  FDX has already started to generate improvements as of FY4Q 2013 results.  There is no point in activism without the potential to unlock value and even following today’s move, FDX has that potential in abundance.


Expectations Low:  FDX seems broadly misunderstood, with some analysts holding funny ideas about networks, leverage and contracts.   Investors have trouble trusting FDX and an activist might help with that.  Intentionally (in our view) weak guidance in the FY4Q earnings release has kept FY14 expectations for FDX very low relative to recent results.  If Ackman could just get management to guide less conservatively, there could be significant upside.



Activism at FDX?


Unwelcome, but Likely Useful:  We are not sure that activism at FDX will be especially welcome, but outside scrutiny of the Express segment restructuring is positive for shareholders.  FedEx can be a bit insular and may not pay enough attention to the wishes of shareholders (e.g. FY3Q earnings were a tough comp because of a previously undisclosed insurance reserve reversal at FedEx Ground in the prior period – that is not helpful). 



If He Isn’t, He Should


Ackman should buy a stake in FDX.  The move in the shares today should make that clear. 




P.S. BGG Could Use Some Activism, Too


In the event Mr. Ackman receives this, Briggs and Stratton should sell its Products segment.  Even declaring it a discontinued operation could make the shares pop, we think.

WWW: 2Q Another Milestone to $100

Takeaway: 2Q spot-on with our call that this is a $100 stock over 2-yrs. But we need some serious context around some overblown near-term factors.

WWW's 2Q print was spot-on with what we needed to see to remain confident in our call that this is a $100 stock over 2-years.  We think that the revenue hammer is cocked to add $1bn in sales over three years. This is accentuated by the margin story that reared its head meaningfully in 2Q and will get return on capital moving in the right direction after a 2-year decline.


One thing that became abundantly clear to us in listening to the conference call is how bifurcated the perception is on this name. We all know that Wall Street is naturally short-sighted, but easily 80% of the time on this marathon 80-minute call was allocated to near-term puts and takes that have no real bearing on what we think is relevant to the appropriate money-making thesis.


There were two factors in particular that were a big focus (and shouldn’t be). 1) The lack of guidance, and 2) Commentary around accretion of the PLG brands.

    1. WWW bowed out of the quarterly earnings game, and simply reaffirmed an annual revenue range while upping annual EPS guidance by a dime after a $0.13 EPS beat Q2. Combined with unidentified/unauditable expenses that were supposedly pushed out, and unquantified revenue that was pulled forward, WWW succeeded in spooking the Street into keeping back half estimates low.  We're at $2.86 vs. a consensus range for the year between $2.60-$2.75.
    2. PLG Accretion. Here's one where we've got to call a spade a spade. Either the company's forecast accuracy as it relates to acquisition accretion is simply horrendous, or they've artfully sandbagged the Street's expectations on a consistent basis. Consider the progression of expected accretion/dilution vs. actual results. Going into the year, WWW guided to Modest Accretion in 1Q, Slight Dilution in 2Q, and $0.35-$0.50 per share in accretion for the year. It ended up earning $0.34ps and $0.24ps in 1Q and 2Q, respectively, from PLG, or $0.58 combined. Now, even though at the beginning of the year it called for accretion in both 3Q and 4Q, it is taking down expectations for zero back half accretion.  Perhaps we'll fall victim to thinking there's a sandbag when one does not exist, but given the momentum of Sperry and Keds, we find it very difficult to get to a loss in 2H.


The near-term factor that mattered most, in our opinion, was the fact that the Performance division went from +8% in 1Q to -4.8% in 2Q. Simply put, Merrell, WWW's largest division, tanked.  We can talk all day about how a product like M-Connect is up double digits, but the reality is that Merrell has a huge division called Outdoor Lifestyle that sells the non-performance product in the portfolio.  We think that it was ignored immediately following the PLG acquisition, which is less than optimal given that it accounts for about 40% of the Merrell portfolio.  The good news is that the company made organizational changes over the past 3-6 months, and the order backlog for the brand in aggregate turned up to the point where management noted that it can grow low single digits for the year. We have no reason to believe that they're lying about order levels, and the channel is lean enough that we don't forsee outsized cancellation levels. In other words, we're going to give them the benefit of the doubt on this one.


Even better is that the full benefit of the Merrell reorganization will be seen at the beginning of 2014, which is also when we start to see a greater impact from the company scaling Sperry and Keds over the existing International infrastructure.  From a timing perspective, this is when we think people will really start to realize that WWW is much growthier than they otherwise think.





The Street is grossly underestimating the revenue growth opportunity as the legacy WWW scales its recently acquired brands over its global infrastructure.  We think WWW can and will add $1bn in sales to its $2.7bn base over 3-years. Under its former owner, Sperry, Keds, Saucony and Stride-Rite only generated 5% of its sales outside of the US, and most of that was in Mexico and Canada. Legacy WWW, on the other hand, is the most global footwear company in the world (yes, even more so than NKE and AdiBok), with 65% of units sold outside the US through an elaborate network of seamlessly-integrated third-party distributors. Given that the infrastructure is already in place, the incremental sales should be brought on close to a 20% incremental margin, versus 8% margin today. Similarly, minimal capital is needed on the balance sheet to grow these brands, making the growth trajectory over the next 3-5 years very ROIC accretive. The stock might look expensive at 20x earnings and 12x cash flow, but the street’s numbers are low by an incremental 10% per year. We're at $5.75 to the Street's $4.25 three years out.  We’d buy aggressively on a pullback, but are not so sure that will happen. We think WWW is a double over 2-3 years.



WWW: 2Q Another Milestone to $100 - 1



WWW: 2Q Another Milestone to $100 - 2






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SHORT BBEP and ROYT, Call Details

SHORT BreitBurn Energy Partners (BBEP)

SHORT Pacific Coast Oil Trust (ROYT)


CALL TODAY AT 1PM EST to discuss our theses on these two names.

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 973882#
  • Materials: CLICK HERE (slides will download prior to the start of the call, email if issue)
  • Send questions to



We believe the high-yield energy equity space to be rich hunting grounds for short/sell ideas. 


The performance of Master Limited Partnerships (MLP) is particularly representative of the 2009 - 1H13 yield chase.


But behind the guise of what are commonly pitched to retail investors as low risk, high yield fixed-income alternatives, we are finding many instances of aggressive and irregular accounting (in most cases, non-GAAP measures and other “management metrics”), poor corporate governance, and grossly overvalued securities.  Many of these companies trade at ~30 - 50x earnings with low organic growth prospects, have low-to-negative FCF yields, and pay dividends/distributions well in excess of earnings or free cash flow. 


Our recent work on the short sides of LINN Energy (LINE, LNCO) and EV Energy Partners (EVEP) has provided a solid base to work from - we know what to look for. 


This report focuses on two high-yield energy short ideas: BreitBurn Energy Partners (BBEP) - an upstream MLP - and Pacific Coast Oil Trust (ROYT) - a BreitBurn-affiliated trust that is trading at 2x our 3P NAV.


Kevin Kaiser

Senior Analyst

Overbought: SP500 Levels, Refreshed

Takeaway: Our immediate-term risk range says there’s a risk spread of -3.5% (1650-1592), so we’ll sell some.



Nice rally (on no volume) after A) holding TREND support (1592) and B) breaking out above our TRADE line (1621) on more US Employment #GrowthAccelerating news (both NSA rolling Jobless Claims and Monthly Payrolls) last week.


Who said #RatesRising is bad? And for who? Where to from here? Our immediate-term risk range says there’s a risk spread of -3.5% (1), so we’ll sell some (taking net exposure from 7 LONGS, 3 SHORTS Friday to 4 by 4 here).


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1650
  2. Immediate-term TRADE support = 1621
  3. Intermediate-term TREND support = 1592


In other words, this risk range is narrow and trade-able, and we’re cool with that. The SP500 is in a Bullish Formation (bullish TRADE, TREND, TAIL) and the VIX is in a Bearish Formation, so we’re trying to thread the needle here within our range – but at least we know that.




Keith R. McCullough
Chief Executive Officer


Overbought: SP500 Levels, Refreshed - SPX

Morning Reads on Our Radar Screen

Takeaway: A quick look at stories on Hedgeye's radar screen.

Keith McCullough – CEO

Japan Says China Using Force to Try to Change Status Quo (via Bloomberg)

Fed Says a Few Dealers Report Deterioration in MBS Market (via Bloomberg)

Groups gather in Turkish protest park after night of clashes (via BBC)


Morning Reads on Our Radar Screen - earth2


Howard Penney – Restaurants

High beef prices 'threaten consumer appetite' (via FARMINGUK)

@DunkinDonuts declared war on @Starbucks with an aggressive t-shirt. (click here to see pic)

101M Get Food Aid from Federal Gov’t; Outnumber Full-Time Private Sector Workers (via CNS News)


Daryl Jones – Macro

German Exports Decline Significantly and "Unexpectedly" (via Mish’s)


Michael Blum – President

CNBC Viewership Collapse Continues; Cramer, Kudlow Audience At Record Lows (via Zero Hedge)


Josh Steiner – Financials

FDIC to Tighten Screws on Banks, Require 5% Leverage (via CNBC)

BAC - #RoundTwo $8.5bn settlement hearing resumes after 3-week hiatus. (via CharlotteObserver)


Jonathan Casteleyn – Financials

NYSE Euronext to Take Over Administration of Libor From BBA (via Bloomberg)


Brian McGough – Retail

Wolverine World Wide (WWW) Keeps Shoe Sector A Step Ahead (via IBD)

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