The Economic Data calendar for the week of the 22nd of July through the 26th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



Stock Report: Mednax Inc. (MD)

Stock Report: Mednax Inc. (MD) - HE II MD boxes 7 19 13



We have done a deep dive on birth trends in the United States coming to the conclusion that the trend is turning positive after the worst decline in 40 years following the Great Recession.   In addition our medical consumption forecast models suggest a similar turn in medical utilization which continues to be impacted by post recessionary headwinds.  For MD, who’s doctors care for pre-term babies in their Pediatrix division, and those of MD’s American Anesthesiology division, birth trends and medical utilization  will be a key positive drivers going forward.



INTERMEDIATE TERM (TREND) (the next 3 months or more)

In the short term, utilization and births remain below potential, but have improved from the lows from 2009-2011.  In the first half of 2013, it appears the US Medical Economy hit a very soft patch in Q113, driving earnings misses at several companies related to MD.   While trends have improved sequentially, we have yet to see a major inflection point in growth.  While we are cautious on the slow pace of improvement to utilization and birth trends in the short term, our intermediate term analysis continues to point to recovery.   In addition, the short interest at MD remains elevated, but has been on the decline since Q412. Following the past 3 spikes in short interest, the most recent being the largest, MD shares tend to perform well as short interest declines.


LONG-TERM (TAIL) (the next 3 years or less)

MD has a highly defensible business model where growth is highly dependent on acquisition growth.  There are several structural changes taking place in the US Medical Economy which will continue to present an opportunity for MD to acquire growth for an extended period.  These structural changes favor large practices over sole practicioner offices.  Managed Care negotiations, medical liability insurance, and information technology, are all conspiring to raise the cost of operating a successful practice.  As a result MD continues to comment on a robust pipeline of acquisition candidates.  Consolidation in the US Medical Economy will reward those who have a successful strategy with stronger pricing power and operating efficiency, and punish those who don’t. 



Stock Report: Mednax Inc. (MD) - HE II MD chart 7 19 13


We continue to believe that Chipotle is one of the best positioned growth companies in the restaurant industry.  The company reported a very strong 2Q13 and we continue to believe that it is well positioned for the balance of 2H13.  Below are some of our thoughts on CMG’s 2Q13 results:




  • 2Q13 same-store sales of 5.5% beat consensus of 3.7% (as extra day adds 1%) and the two-year trend remains steady at 6.8% vs. 6.9% in 1Q13.
  • Management raised its guidance for 2013 same-store sales from “flat-to-low single-digits” to “low-to-mid single-digits.”
  • We expect 2Q13 traffic of 4.5% to continue into 3Q13.
  • $2.82 EPS was in line as a higher tax rate held back EPS by $0.04-$0.05.
  • Increased marketing appears to be driving incremental traffic.  Marketing costs increased to 1.5% of sales in 2Q13 compared to about 0.7% in 2Q12.
  • The company ended 2Q13 with $775 million in cash and cash equivalent along with no debt.
  • New restaurants are opening at (or above the high end) of the $1.5 million to $1.6 million sales target.
  • The company is expected to delay raising prices in 2H13, as management remains focused on continuing to drive traffic and take market share. 
  • Chipotle opened 44 new restaurants in 2Q13, putting year-to-date openings at 92.  It is clear to us that CMG is likely to exceed the high end of management’s targeted opening range (165-180 restaurants) for FY13.



  • The majority of our concerns stem from margin pressure.
  • Restaurant level margin contracted -160bps in 2Q, primarily due to higher food costs.
  • The company reported food costs to be around 33% of sales in 2Q13 as salsa, chicken and cheese added the most pressure to margins.  We suspect that 33% may be the peak in food costs during the current cycle.
  • We continue to monitor new unit performance very closely.
  • Valuation is rich, but we believe the business model is built to stay this way. 








Howard Penney

Managing Director


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Get Out of the Way, Ben

Takeaway: Imagine what would happen to the USD and US interest rates if he took a vacation for a couple of months?

Get Out of the Way, Ben - big gov


We’ve said this 10,000 times before, but we’ll take this opportunity to repeat one of our favorite catch-phrases: “Big Government Intervention does two things: 1) shortens economic cycles and 2) amplifies market volatility”.  


Both the sell-side and buy-side are explicitly bullish on the US Dollar – for many of the right reasons. But it’s also clear that a broad swath of Foreign Exchange market participants – including banks and corporations – have yet to go all in on #StrongDollar. This is likely largely due to the mixed and convoluted messages they continue to receive from Ben Bernanke.


Imagine what would happen to the USD and US interest rates if he took a vacation for a couple of months?


For the record, our #StrongDollar, #ShortGold, stay away from Treasuries, get the Federal Reserve out of the way, strategy has been the non-consensus bull case for growth all year.


Get Bernanke out of the way once and for all and we will witness a rip for the ages.


Get Out of the Way, Ben - moo2

KO Takes It on the Chin

Takeaway: Coke takes it on the chin, but there may be room for optimism.

This note was originally published July 16, 2013 at 14:17 in Consumer Staples

KO is trading down today as volume results for Q2 2013 came in below expectations (globally +1% vs +4% last quarter) with the company citing a challenged macro environment (U.S., Europe, Asia, and Latin America), social unrest, and poor weather conditions (wet and cold across multiple regions) that impacted consumer spending and demand. North America, which is ~ 44% of sales, saw volume down a disappointing -1% in the quarter.  


Performance was hit by tough Q2 comps given the especially good weather in 1H last year: Pacific volumes were +2% vs +10% last year; Brazil’s volume was even cycling +6% a year ago; and India’s volume grew +1% versus a +20% comp.


The company cited optimism around a turnaround in 2H for its key international markets (China, Brazil, Russia, Mexico, and India) on improvement in the macro environment, continued marketing support of its brands, weather improvements (India performs historically stronger in the back half), and its systems execution.


While we expect many of the forces dragging on confidence and demand to remain in the back half of the year,  including  high unemployment (especially in southern Europe), social unrest, and inflation, we like that the back half quarters of 2013 are lapping much easier comparisons year-over-year.  On the top line, the Q3 2012 comp is +0.8% versus this quarter’s +2.8%. Gross margin was pretty consistent throughout last year, however the operating margin gets easier in the final two quarters of last year (+23.6% and +21.7%, respectively) versus +26.1% this quarter.


The stock is currently trading above its intraday lows at around $40.45. Our quantitative levels suggest that KO has an intermediate term price TREND line of support at $40.14.


KO Takes It on the Chin - hed


What we liked:

  • EPS inline with consensus at $0.63
  • Outperformance of still beverages, volume +6%  vs sparkling 0%
  • Packaged water volume up +6% and energy drinks +5%
  • Russia volume +11% with a strong marketing calendar tied to the 2014 Sochi Winter Olympics
  • COGS decreased -5%
  • Eurasia and Africa volume up 9% (benefitting from Aujan partnership)
  • New guidance on the effective tax rate of 23.0% for 2013 vs last quarter’s estimate of 23.5%

What we didn’t like:

  • Net Revenues were down -2.6%  in the quarter and missed estimates ($12.75B vs $12.96B)
  • Operating income fell -1.5% in the quarter
  • Europe volume -4% (vs -4% in Q1 2013) on colder weather and flooding in Germany and central Europe


Matthew Hedrick

Senior Analyst

Behold the US Bull

Client Talking Points


Bears are not sleeping well. US stocks notching new all time-highs. (All-time is a long time.) S&P 500 up +18.4% year-to-date. Russell up even more +23.7% year-to-date. It's the seventh consecutive day where all 9 Sectors in our Hedgeye S&P Sector risk model are bullish on both TRADE (3 weeks or less) and TREND (3 months or more) durations. In other words, even the sectors we don't like like Utilities (XLU) and Basic Materials (XLB) aren't shortable, yet. Immediate-term Risk Range for SPX is 1670 - 1701. Bottom line? Buy US Stocks on red; Sell Treasuries on green – rinse and repeat.


It's still Japan (bullish) vs China (bearish). Nikkei was down -1.5% overnight to 14,589. But it did hold our 14,448 line of support. Japan was down for the first day in five. We are keeping a close eye on the Nikkei. It's getting interesting there. Meanwhile, Chinese stocks continued to get rocked. China is down 3.7% in the last 3 days. Beijing is a certified gong show right now; its not where you want to be putting your capital. Liquidity trap anyone?

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road


US Equity Fund Flows (ex-ETFs) ripped the perma 2013 bears another new one last wk, +$3.7B inflows w/w



“Detroit has been working its way to a level of insolvency for decades, continuing to borrow, continuing to defer pension payments, continuing not to pay its bills on time, continuing a deepening insolvency -- $18 billion.” - Kevyn Orr, Detroit's emergency manager (Bloomberg)


The AAA daily tracking of gas prices rose another penny Thursday to $3.66 for a gallon of self-serve regular, the 11th straight day of rising prices. Gas is up nearly 20 cents a gallon, or about 6%, during that period. (CNN)


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