09/28/13 10:13AM EDT


Editor's note: Below are the latest comments from Hedgeye Sector Heads on their high-conviction stock ideas. Please note that Financials Sector Head Josh Steiner has removed Nationstar Mortgage (NSM) from his Best Ideas list. Josh provides his full rationale below.

In related news, we have added a new stock to Investing Ideas this week. Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan has added Boyd Gaming (BYD) as a high-conviction stock idea. We have included Todd's note sent to our Institutional Clients below as well.

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BNNY - Consumer Staples analyst Matthew Hedrick writes, "There was no real news flow in Annie's since last week. BNNY remains a buy." Hedrick adds that, "Annie's is making higher highs, and was up over 2% this week, despite a tough week overall in the US stock market where the S&P 500 was down 1%."

BYD - Please see below Gaming, Lodging & Leisure Sector Head Todd Jordan's latest Institutional Note on Boyd Gaming.

FDX - As he wrote in his Investing Ideas update earlier this week, Industrials Sector Head Jay Van Sciver remains bullish on FedEx. However, he says, “We would lighten up on our FDX long here – like sell half - for a few key reasons.

First, the shares have moved significantly higher within our fair value range. Second, the details of the most recent quarter lead us to expect an opportunity to buy the shares back lower around FY2Q results. Finally, we had expected capacity and inventory trends to turn more supportive than they have.

We are not dropping our long-term thesis and remain positive on the name, but acknowledge that no long-term thesis plays out without disruptions and trading opportunities.” Taking a magnifying glass to the company’s financials, Van Sciver notes “several unusual items that helped the Express margin, potentially introducing ‘choppiness’ to FY2Q.”

HCA - Hedgeye Healthcare Sector Head Tom Tobin is paying close attention to October 1st. That is the open date for the Exchanges created under the Affordable Care Act, better known as Obamacare.  This week the monthly premiums were released and in general were described as better than expected. 

There remains much to learn about how well Obamacare will do in reducing the number of uninsured.  The biggest question is how many of the healthy uninsured will pay for a plan.  With the government subsidy to cover the cost of insurance, many people with low incomes will pay nothing, but if you make anything over $35,000, the cost is close to $300 per month. 

Of course, having insurance is only the first step.  Obamacare sets a maximum out of pocket expense of close to $2000 per year, so co-pays and deductibles will still be a cost for the uninsured to consider.  While it’s a big problem for the health insurance industry if healthy uninsured people don’t sign up, for the hospital industry is in a little better position. 

We’re assuming those in need will gladly take on a policy and let their insurance company pay the bulk of their expenses.  For the healthy uninsured, they probably weren’t coming in anyway.

HOLX - Hedgeye Healthcare Sector Head Tom Tobin has no update on Hologic this week.

MD - Hedgeye Healthcare Sector Head Tom Tobin says there is still much to like about Mednax, but the recent absolute and relative performance is giving us pause.  Short interest continues to fall, although remains elevated, which we view positively. 

Our biggest concern is the recent survey results from our OB/GYN Tracking Survey. Births continue to look like they are running negative.  We’re still waiting for the deferred births of the last 5 years to return.  On the positive side, Medicaid rates will be heading higher in the coming quarters (ACA Rate Parity) and the company has yet to complete their acquisition goals for the year. 

NKE - Please see below Retail Sector Head Brian McGough's latest Institutional Note on Nike.

RH - Retail Sector Head Brian McGough reiterates his long-term, high-conviction thesis on shares of Restoration Hardware. McGough would like to remind subscribers that the company's recently reported numbers were excellent. In addition, he says the cadence of strategic change to achieve the long-term earnings growth we’re looking for was there.

According to McGough, 2H square footage is accelerating, comp is improving, and gross margins are on the rebound. And all of this is in the context of what we think is an extremely favorable 5-year growth trajectory. 

SBUX Hedgeye Sector head Howard Penney's message on Starbucks shares is basically, "If ain't broke, don't fix it." In other words, Starbucks remains the single best growth stock in the restaurant space that he covers.  He likes Starbucks on both an intermediate-term TREND and a long-term TAIL basis.

Penney says SBUX will show above-trend revenue growth over the next few months, due in large part to U.S. and international growth, as well as ongoing expansion in the Consumer Products Group.  CPG refers to Starbucks’ business of selling products through grocery stores and warehouse clubs, in addition to selling other branded SBUX products worldwide.

Penney also believes SBUX is poised to achieve impressive long-term growth as long as it continues to focus on its core business.  

TROW - Hedgeye Director of Financials Research Jonathan Casteleyn says that T Rowe Price is the best positioned asset manager to capitalize on the emerging trend of a reallocation out of bond funds and a replanting into equity funds. 

According to his calculations, if the current asset allocation of 68% in bonds and 32% in stocks normalizes to longer term averages, that a $2 trillion shift between the asset classes can occur.  With the industry’s best stock fund performance, T Rowe Price would disproportionately benefit by incrementally picking up a large amount of new investor funds into equities. 

WWW - Retail Sector Head Brian McGough says there's not much to report on the news front this week. With the quarter closing in less than a week, Wolverine's quiet period is just about to begin.  WWW reports in the first half of October. McGough is coming in at $1.20 vs. the Street at $1.02. It goes without saying that we think it will have a terrific quarter. 

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Financials Sector Head Josh Steiner thinks it’s time to walk away from Nationstar Mortgage on the long side as the pressures they’re likely to face on the originations business in the third quarter don’t appear to be fully understood. Much of the good news on the servicing side now seems well understood.

In light of the confluence of recent positive news and sell-side coverage, the positive recent performance in the stock and our growing concern about potential 3Q13 earnings weakness, we think it no longer makes sense to be long Nationstar. We expect some further positive catalysts in the short-term such as potential MSR deal announcements. These should help support the stock in the short-term and may push it higher. It’s 3Q earnings results that have us concerned. The company is scheduled to report earnings on November 5.

TRADE: In the short-term we expect positive MSR deal announcements.

TREND: Over the intermediate term, we are concerned about the potential for weaker-than-expected 3Q13 earnings results.

TAIL: In the long-term, there is still a tremendous opportunity for non-bank servicers like Nationstar to roll-up the servicing business. NSM is well positioned to be a prime beneficiary. Once the market has reset expectations on the gain-on-sale business we may well revisit this name on the long side.

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(Editor's note: Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan issued this note to Hedgeye Institutional clients earlier this week.)

It's been awhile since we've seen so many positive catalysts for this sell side whipping boy.

I’m in Las Vegas for meetings and wanted to relay one important highlight.  I have come away very positive on Boyd Gaming (BYD). We will expound on our thesis points in upcoming posts, but since some of the catalysts are fresh, time is of the essence.

We still worry about the regional markets and the declining base of slot players.  However, BYD maintains significant exposure to the Las Vegas locals market, an incremental positive in our opinion given the positive macro offset to tough nationwide casino demographics.  

Even in the regional markets where we are less sanguine, BYD seems to have significant room for cost cutting and thus, margin improvement.  In New Jersey, Borgata is spending less and gaining market share.  And speaking of New Jersey, we cannot forget the future, which is in online gaming.  Only a handful of companies can boast of first mover advantages - and they are huge - in the future of federal or multi-state internet poker.  BYD is one of them.

So with a return to revenue growth in the LV Locals market and likely margin improvement everywhere, we actually could see earnings upside for the first time in a long time for BYD.  Investment ratings are mostly neutral, leaving plenty of room for upgrades, especially with potentially a positive earnings surprise and higher guidance combined with the reactive nature of many on the sell side.

Here are some upcoming catalysts:


  • New Jersey tax court ruling should occur this month
    • It’s not in the numbers or guidance but a favorable property tax adjustment could result in $10m+ in annual EBITDA at Borgata.  Moreover, the last 4 years are being challenged so Borgata could also receive a $40-50m tax rebate.
  • G2E and DB/UBS investor conference in Vegas starting on 9/23
    • We expect BYD to show well and exude optimism
  • Earnings release in late October
    • We believe BYD is on track to beat consensus and provide solid guidance and commentary.
  • November approval for online gaming in New Jersey
    • New Jersey online gaming is a positive for Borgata and a marginal positive for BYD.  More importantly, BYD should have a great head start if and when online gaming rolls out nationally.  Online is the future people.

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(Editor's note: We are pleased to feature Retail Sector Head Brian McGough's bullish note sent to Hedgeye's Institutional Clients Thursday evening. As you will see below, McGough remains uber-bullish on shares of Nike.)

Takeaway: Nike is making ailing US retailers as well as its global competitors (aka Adidas) look downright silly.

What’s there to say about Nike’s quarter? We’re surrounded left and right by weakness in US retail, and yet Nike comes out and prints a quarter of Champions. 

NKE printed top line growth of 8%, and an acceleration in futures to +10%, with a nice balance of 7% growth in units, and 3% increase in price. We saw +120bp improvement in gross margins, which was far ahead of our above-consensus estimate – as pricing initiatives are being met with very little resistance, and raw materials costs are coming in below plan. SG&A was flat for the quarter, which is largely due to comparisons against event spending vs last year. But still, the growth algorithm is inarguable…sales +8%, gross profit +11%, and EBIT +40%. EPS came in at $0.86, well ahead of our estimate of $0.82 and the Street at $0.78. Inventory looked great as well, growing 6% -- below the rate of sales for the 5th quarter in a row.

You might say that Nike naturally sidesteps the US retail malaise due to the fact that it is a global company. But then why did Adidas – its closest global competitor that has a nearly identical scope, reach and mix outside of the United States – put out an announcement on September 20 taking down expectations for the quarter and the year due to weak sales globally, particularly Russia (which Nike highlighted as a strength this quarter), and golf (this was also weak for Nike, to be fair). This juxtaposition simply highlights how well Nike is managed relative to its peers.

We’re taking up our estimate to $3.25 for the year (20% EPS growth). We think that Nike is being conservative with its expectation for only 50bps of improvement in gross margins for the year, and although we’ll start to see more normalized levels of SG&A spending, the reality is that a high-single-digit growth rate in sales with 100bp+ in gross margin improvement is nothing to shake a stick at. Mid-high teens EPS growth on top of 25% ROIC makes Nike every bit worthy of its 20 forward multiple (and then some). Nike’s still a core holding any way we cut it.

We’ll return with a more thorough deep dive after Nike’s analyst meeting in two weeks. 

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