TODAY’S S&P 500 SET-UP – September 30, 2013
As we look at today's setup for the S&P 500, the range is 34 points or 1.23% downside to 1671 and 0.78% upside to 1705.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
Takeaway: Current Investing Ideas: BNNY, BYD, FDX, HCA, HOLX, MD, NKE, RH, SBUX, TROW and WWW
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:
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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.
Hedgeye CEO Keith McCullough speaks with T3 Live Chief Strategic Officer Scott Redler about recent market action, the Fed's recent "no taper" decision, and trends to look for over the next 6-12 months.
They also discuss the current landscape on Wall Street and how newer companies like T3 Live and Hedgeye are working to level the playing field for average investors through education, transparency and discipline.
This note was originally published September 27, 2013 at 07:48 in Morning Newsletter
Editor's note: Please enjoy this complimentary "Morning Newsletter" from Senior Analyst Darius Dale. While Hedgeye CEO Keith McCullough typically writes this newsletter, periodically, other members of the team jump in for guest appearances.
“What people fail to realize is that we spend ~70% of the time at record highs in the equity market.” Anonymous Seasoned Investor
Keith and I picked up that gem in a recent meeting with a client out in San Francisco. Truly a savvy investor, this gentleman belongs to the increasingly rare camp of investors that has managed market risk across multiple decades and economic cycles.
Regarding the aforementioned quote, he dropped that line in a discussion about the pervasive lack of enthusiasm for 2013’s non-consensus equity market rally, specifically in response to our conjecture that baggage from the hard times of 2008-09 is broadly preventing investors from buying into the sustainability of said rally.
While I believe he was merely throwing a number out there to make a [wise] point, the reality is that he’s actually not that far off as it relates to the assertion he was trying to make:
Oddly enough, when looking at aggregated fund flow and securities market allocation trends, it seems that investors are still positioned for yet another blow-up in the equity market, when, in reality, it’s the inevitable unwinding of Bernanke’s bond bubble they should be most concerned about.
Per Jonathan Casteleyn, the newest member of our highly-regarded financials team:
Regarding that last point, we get a lot of pushback from fixed income managers that bonds funds don’t necessarily need to see outflows for the equity funds to receive inflows, citing record “cash on the sidelines”.
Indeed, un-invested cash in money market mutual funds, credit balances in margin accounts and deposit and currency assets on household balance sheets currently totals ~$12.4T, which is just off of all-time highs. As a percentage of the securities market, however, it hovers just above all-time lows (23% vs. a record low of 22% in 1999 and a record high of 32% in 2009).
If in 1999 someone thought the aggregate investment community was going to take its liquidity ratio down to new all-time lows in order to continue financing a bubble in stocks or even to take up its gross exposure by simply increasing its allocations to bonds, boy, were they sorely mistaken. Making that argument in defense of fixed income right now is equally off base, in our opinion.
In summary, we continue to believe there is a compelling, long-term fund flow case to be made in favor of the equity market in lieu of the bond market.
Not from every price, however…
We need to see the US Dollar Index recapture its TREND line of $81.35 for us to believe that tapering is an intermediate-term event, rather than one that is far off in the distant realm of “potentially never”.
Simply put, as long as a collection of fear-mongering doves dominate the domestic monetary policy debate, the probability of a Japan-like, no-growth economic scenario will remain heightened.
Besides a natural monetary policy response to economic gravity, what else would get investors excited about investing for growth in lieu of safety?
Corporate America would be a good place to start. My, how they have been conspicuously absent from this recovery!
… Corporations have reduced employee headcount by -2.9% since 2007 and grown nominal CapEx by a measly +0.6% on a trailing 5Y CAGR basis – a growth rate that is just above a generational low.
Regarding the former point on corporate, QE-derived interest savings, $700B is enough to employ 9.6M workers for 1Y, assuming a $51k median income (per the Census Bureau) that represents 70% of all-in employee compensation costs (per the BLS), effectively taking up the median annual comp to $72.9k. To put that in context, there have been only 6.8M net hires since 2009 per the seasonally-adjusted nonfarm payrolls numbers.
Obviously that’s nothing more than a hypothetical analysis meant to draw attention to the fact that QE to-date has been little more than an overt transfer of wealth to Corporate America and the rest of the top-10% that owns the lion’s share of financial wealth in the this country.
It’s time both parties said, “thank you” by putting capital to work (corporations) and allocating capital back to pro-growth assets (investors).
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.57-2.74%
Keep your head on a swivel,
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