The Scarcest Commodity

“Ideas are incapable of confinement or exclusive appropriation.”

-Thomas Jefferson


One of the biggest push-backs I’ve been getting from both US stock market bulls and bears throughout the 2nd half of 2013 is one and the same – “I can’t buy that up here – I missed the move.” And my response continues to be that Mr. Market doesn’t care about what you did or did not miss. The market’s price is both dynamic and non-linear. As Jesse Pinkman would say, ‘it’s evolution, yo.’


Pinkman is not Jefferson. The aforementioned quote comes from a great book on the evolution of entropy economics that I’m still reviewing: George Gilder’s Knowledge And Power. If you are a growth investor (and/or you just want to be long growth as a Style Factor right now), read Chapter 10: “Romer’s Recipes and Their Limits” (Paul, not that raging Keynesian, Christina Romer).


“Still, change keeps coming, fueled by technology, as Romer’s 1990 paper reminded the economics fraternity. As productivity grows, technology keeps freeing people. And this … really is, in some sense, the scarcest commodity: the power of the human intellect.” (Knowledge and Power, page 96)


Back to the Global Macro Grind


BREAKING: the Global Macro call of 2013 is basically baked into the cake. You were either long growth, or you were not. With the Russell 2000 closing at another all-time high on Friday (1114 = +31.2% YTD), long virtually anything growth has absolutely pulverized the #EOW (end of the world) “new normal” thing (Gold, Bonds, Utilities, etc.).  


In terms of 2013 US Equity Market Style Factors, here’s how awesome growth, as a style, looks at the all-time highs:

  1. LOW YIELD (i.e. growthier stocks) = +35.2% YTD (vs High Yield Div stocks +14.9%)
  2. TOP 25% EPS GROWTH (Top Quartile of SP500) = +34.1% YTD (vs Bottom 25% = +20.8%)
  3. TOP 25% SALES GROWTH (Top Quartile) = +31.4% YTD
  4. HIGH BETA = +30.5% YTD



To be clear, growth (as an investing style) can be very frustrating to A) embrace and B) capitalize upon. I think the reasons for that are bountiful (it’s called a cycle), but here are three big ones:

  1. STYLE: Growth Investing hasn’t worked like this since the 1990s – and few were positioned for an early 1990s style US recovery
  2. CYA: many equity investors are still fighting the last war of getting smoked in 2008 – consensus is long yielding income, not growth
  3. MULTIPLE EXPANSION: expensive gets more expensive on the way up

That last one is really tough for people to swallow, primarily because there are just so many people managing money these days. How many people do you know short stocks because they’re “expensive”?


I’d argue that part of Carl Icahn’s resurgence as an activist has a lot to do with being mucho long Style Factors 4 and 5 (HIGH BETA + HIGH SHORT INTEREST). With what was working locked into his sights, all he needed was Bill Ackman pumping those factors live @CNBC.


How many investors break the market down by Style Factors?


I’d say a lot fewer than you might think. And, to a degree, this makes Institutional Investing a lot like Moneyball was before Billy Beane did Moneyball. In the end, a chubby 1st baseman with a high on base % beats a pretty boy “highly concentrated” activist long ball hitter.


So what if my writing this note top-ticks growth vs. slow growth for 2013?

  1. That could very well happen – the performance divergences between growth and slow growth styles is at its YTD high
  2. That could very well not happen – if you started short selling growth in 1995 or 1996, let me know how that went by 1999

This is why the 1994 Global Macro Market metaphor (bond market blew up) really matters to me. As you can see in the Chart of The Day:

  1. Utilities (XLU) = -17.4% in 1994, 0.2% in 1996, -12.8% in 1999
  2. Tech (XLK) = +19.1% in 1994, +43.3% in 1996, +78.4% in 1999

How many investors are positioned for 2013 being 1993? How about 1995?


I don’t know if this is the top of growth investing. If it is, it ends with the Twitter IPO. But I do know that The Scarcest Commodity out there right now is being a raging growth bull. And that’s all I have to say about that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.58-2.69%



VIX 11.55-15.19
USD 79.21-80.28

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Scarcest Commodity - Chart of the Day


The Scarcest Commodity - Virtual Portfolio


TODAY’S S&P 500 SET-UP – October 21, 2013

As we look at today's setup for the S&P 500, the range is 59 points or 2.49% downside to 1701 and 0.89% upside to 1760.                        










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.28 from 2.27
  • VIX closed at 13.04 1 day percent change of -3.26%

MACRO DATA POINTS (Bloomberg Estimates):



  • 10am: Existing home sales, Sept., est. 5.30m (prior 5.48m)
  • 11am: Fed to purchase $3b-$4b notes in 2019-2020 sector
  • 11:30am: U.S. to sell $35b 3M, $30b 6M bills
  • 4pm: USDA crop-condition reports


    • Deadline for comments to Fed, FDIC, Office of the Comptroller of the Currency on rule to amend leverage-ratio standards for U.S. bank-holding companies
    • 9:20am: CFPB Director Richard Cordray will discuss agency’s latest regulatory initiatives at ABA convention in New Orleans
    • 11am: NABE holds conference call briefing to discuss survey on business conditions


  • JPMorgan said to reach $13b U.S. mortgage-bond settlement
  • AT&T to sell, lease 9,700 towers to Crown Castle for $4.85b
  • FHFA said to seek at least $6b from BoFA for MBS sales
  • Office Depot, OfficeMax to get FTC merger approval: WSJ
  • Sinclair skirting FCC rules on station ownership, WSJ says
  • Apple to debut new iPad tmw as tablet mkt becomes crowded
  • NYSE cancels mistaken options trades on DJIA, S&P 500 on Fri.
  • Eli Lilly to maintain R&D spending as competitors cut: WSJ
  • Netflix poised to report passing HBO in paid U.S. subscribers
  • Caesars drops Gansevoort name from Vegas project post-probe
  • Almost 500k apply for Obamacare; team to help fix website
  • “Gravity” leads N.A. box office for 3rd time with $31m
  • China urges economic policy implementation to spur rebound


    • AO Smith (AOS) 7am, $0.43
    • Gannett (GCI) 8:24am, $0.41
    • Halliburton (HAL) 7:03am, $0.82 - Preview
    • Hasbro (HAS) 6:30am, $1.28 - Preview
    • Lennox Intl (LII) 8am, $1.27
    • Manpowergroup (MAN) 7:30am, $1.08
    • McDonald’s (MCD) 7:58am, $1.51 - Preview
    • Sonic Automotive (SAH) 7:30am, $0.50
    • VF Corp (VFC) 7am, $3.78 – Preview


    • American Campus Communities (ACC) 4:01pm, $0.42
    • BancorpSouth (BXS) 4:01pm, $0.27
    • Brookfield Canada Office Properties (BOX-U CN) 5pm, $0.42
    • Discover Financial Services (DFS) 4:05pm, $1.21
    • Helix Energy Solutions Group (HLX) 6pm, $0.29
    • Hexcel (HXL) 4:05pm, $0.46
    • Idex (IEX) 4:45pm, $0.74
    • Illumina (ILMN) 4:05pm, $0.40 - Preview
    • Netflix (NFLX) 4:04pm, $0.47 - Preview
    • Sonic (SONC) 4:01pm, $0.30
    • Texas Instruments (TXN) 4:30pm, $0.53 - Preview
    • VMWare (VMW) 4:01pm, $0.82 - Preview
    • WR Berkley (WRB) 4:01pm, $0.74
    • Zions Bancorporation (ZION) 4:10pm, $0.42


  • WTI Crude Falls to $100 for First Time Since July on Supplies
  • Nickel Glut Extends to Fourth Year on China Supply: Commodities
  • Wheat Climbs to Highest in Four Months on Argentina Crop Damage
  • Gold Holds Near Highest in a Week as Investors Weigh Stimulus
  • Copper Swings Between Gains and Drops as Chinese Imports Jump
  • Alcoa Says LME Warehouse Plan To Cut Waits Should Be Suspended
  • Raw Sugar Erases Decline for Year, Extending Gains After Rally
  • Cotton Output in India Seen at Record as Rains Boost Crop Yields
  • Money Managers Were Net Long on Cocoa in London 65,234 Contracts
  • Zimbabwe Needs $5.3 Billion Investment for Platinum Expansion
  • Shale Overload to Spur U.S.-China Fuel Trade: Energy Markets
  • Rebar Ends Near Three-Month Low on Slower China Investment
  • Rosneft, Exxon Face Unrivaled Challenges in Russian Arctic Basin
  • Rubber Snaps Three-Day Losing Streak as Weaker Yen Boosts Appeal


























The Hedgeye Macro Team














In The News: Hedgeye's Howard Penney

Takeaway: Hedgeye analysts have a habit of making news. Here's a handful of recent headlines involving Restaurants Sector Head Howard Penney.

Editor's note: Hedgeye Restaurants Sector Head Howard Penney has been gathering quite a bit of attention lately on a number of prescient market calls and observations including a bold, ahead-of-the-curve call on Darden Restaurants. Here's a handful of recent stories featuring the veteran analyst.

In The News: Hedgeye's Howard Penney  - news1


In The News: Hedgeye's Howard Penney  - wsj

At McDonald's, Salads Just Don't Sell

McDonald's is "focused on trying to be all things to all people, whether it's catering to health-minded people with oatmeal or to Millennials with snack wraps. They've gone so far afield from their core menu that they're not really resonating with anyone," says Howard Penney, managing director at Hedgeye Risk Management, an independent investment research firm.

"McDonald's is never going to be perceived as healthy, so for them to spend too much time on healthy items doesn't make a lot of sense to me," Mr. Penney said.


Continue reading at the Wall Street Journal.


In The News: Hedgeye's Howard Penney  - todd

Goldman to advise Darden on activist proposal

Barington Capital is an activist investment firm that takes big stakes in companies and usually works behind the scenes with management to make operational changes to improve performance. The firm occasionally makes its efforts public, sometimes when disagreements undermine planned changes.


"They are likely not seeing eye to eye," said Howard Penney, restaurants sector head at research firm Hedgeye.


"The CEO of Darden has built the company this way, and he will likely contend that it should stay that way," Penney added. "If Goldman is asked by Darden to come upwith an opinion, they will likely not agree with Barington's position."


Continue reading at USA Today.


In The News: Hedgeye's Howard Penney  - oz

Darden must make major changes, analysts say

Barington doesn't own enough of Darden to force change, analysts say, but it could bring persistent pressure. And Hedgeye Risk Management analyst Howard Penney predicted Darden could attract another activist investor. "There will be someone who will be louder and bigger," he said.


Continue reading at Orlando Sentinel.


In The News: Hedgeye's Howard Penney  - adage

Starbucks Concocts Plans for Fizzy Drinks; Is Sodastream in Its Sights?

Some analysts see the availability of Fizzio at-home as a few years off, given carbonated drinks are only being tested in select markets. The Fizzio trademark may be an early move "to cover their bases," said Hedgeye Managing Director Howard Penney, adding that Starbucks typically tests concepts at its stores, then rolls them out nationally before considering sales in external retail outlets or as machines.


Continue reading at Advertising Age.

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Takeaway: Current Investing Ideas: BNNY, BYD, FDX, HCA, HOLX, MD, NKE, RH, SBUX, TROW and WWW

Below are the latest comments from our Sector Heads on their high-conviction stock ideas.



BNNY – Consumer Staples analyst Matthew Hedrick says the long-term bullish picture remains intact for Annie’s as shares finished trading this week at a new all-time high. Hedrick remains a bull on the stock and says the health-conscious premium dining segment looks here to stay come economic rain or shine.

BYD Gaming, Lodging and Leisure Sector Head Todd Jordan has no new update on Boyd Gaming this week.


FDX FedEx shares rallied sharply this week on the news of a new repurchase program targeting 32 million shares, or approximately 10% of shares outstanding.  Industrials sector head Jay Van Sciver has long believed FDX shares to be undervalued – management apparently agrees (maybe they’ve been reading his research…?)  Van Sciver says the repurchase should add value at the margin. 


Perhaps more important for the long-term outlook, it also appears to signal that FDX’s Board of Directors and senior management team have confidence in the eventual success of the company’s profit improvement plan.  Van Sciver believes FDX can deliver on its profit improvement plan over time and expects the shares to reward patient investors.


HCA – Health Care sector head Tom Tobin originally became interested on the long side in HCA Holdings back in 2011.  As with most things healthcare, trends in the hospital segment are slow to glacial, leading Tobin to say “much of the effort along the way has been spent holding on, rather than talking ourselves out of a good position.”  That said, HCA has rewarded that patience and, says Tobin, “maybe even made us look smart, although there is always some luck involved too.”  HCA preannounced on Thursday after the close, announcing that their 3Q13 and 2013 operating results will come in better than expected.  Consensus had been turning bearish in recent months, with several sellside surveys of hospital CEOs suggesting very weak volumes in Q313, and the short interest was climbing. 


By announcing that admissions were slightly positive (not negative as expected), that pricing was solid  (confirming Tobin’s view), and cost controls tight (which HCA communicated last quarter) management got a positive reaction in the stock in the immediate term.  There remain open questions going forward, like whether HCA can still find upside from Obamacare, hospital consolidation, pricing, cost control, and M&A. For now, says Tobin, we are staying the course.


MD and HOLX – Tobin and his team surveys 50 OB/GYN practitioners every month, asking a series of questions which are relevant to a number of stocks in the sector, but with particular significance for Mednax and Hologic.  The 50 doctors in the survey collectively see approximately 20,000 patients per month, of whom 70% are commercially insured (not Medicaid or Medicare).  The concept is to get a look into trends among people who are more sensitive to the economy.


The survey continues to indicate that patient volume is modestly positive, which for HOLX, is critical.  Maternity trends are mixed with deliveries down in September, which is critical for MD.   Pap testing continues to fall since the release of the Cervical Cancer Screening Guidelines last year.  OB/GYNs are reporting Pap volume is down close to 15% overall, but the good news is that trend appears not to be getting any worse.   For MD, the survey suggests Q3 results are likely to be choppy – a situation Tobin continues to monitor for signs that it may be time to trim a position.  HOLX’s fiscal year ended in September.  Tobin says the bearish outlook across both the buyside and sellside has him willing to take the risk into their earnings release, scheduled for early next month. 


NKE – Retail Sector Head Brian McGough has no new update on Nike this week.


RH – Retail Sector Head Brian McGough says Restoration Hardware (RH) is one of the best opportunities he’s seen in retail in the last twenty years. According to McGough, most analysts have a $70-80 price target on the stock. He says these targets are way too low. He is at $175. "This is a name I loved at $28 dollars at the IPO" McGough says. "As our research has evolved, I like it even more today at $65. There is a tremendous amount of upside here."


According to McGough, one of the things that really jumps out at him is that RH has got the biggest square footage growth acceleration he's ever seen in retail, along with actual sales per square foot which are also accelerating on the margin. He notes that that doesn't usually occur while square footage is growing. Bottom line is that McGough believes Restoration Hardware is destined to be a three-bagger.


SBUX Hedgeye Restaurants Sector Head Howard Penney remains one of the biggest Starbucks bulls on the street. He says his bullish thesis remains intact. Interestingly, Penney notes that over the past three months, shares of the Seattle-based global coffee chain have outpaced gains in the S&P 500 by over 1,200 basis points. Not too shabby.


TROW – With T Rowe Price earnings upcoming this week on Thursday October 24th, Financials Analyst Jonathan Casteleyn is optimistic that one of the major negative catalysts can burn off on the TROW story. The one eye sore from T Rowe’s recent second quarter earnings result was that the firm had large institutional outflows from Asia which put a blemish on an otherwise good report last quarter. Our mid-quarter checks with the company yielded an update that no major new institutional outflows has occurred so barring a late quarter change, this could remove one of the big uncertainties from the story and more the stock higher after the earnings.


In addition, one of the strongest categories in the BlackRock quarterly report this week was their LifePath fund business which grew assets by an annualized 17% in the quarter. T Rowe has a similar product which comprises a much bigger percentage of business, so the very strong LifePath 401K fund business at Blackrock could be indicating that the Target Date 401K products at T Rowe also had a good quarter.  LifePath comprises just under 2% of assets-under-management at BlackRock but the 401K and Target Date fund business at TROW is over 15% of assets-under-management, so a similarly strong result could really have a bigger impact at TROW.  T Rowe remains the biggest beneficiary in the asset management group of positively trending stock markets.


WWW – Retail Sector Head Brian McGough remains the sole Wolverine World Wide bull on Wall Street. He says WWW is "the most efficient shoe company in the world." He adds that the company has the "best overall reach on the planet, far better than Nike and Adidas" and that brand integration will continue to drive numbers and lead share prices higher. He is looking for a pure double within the next three years.



Macro Theme of the Week – Eurozone Ho!


Last Friday, Hedgeye’s Macro team presented our Q4 Macro Themes call.  On Monday, as the Congressional dogs fought for space in the manger, Hedgeye CEO Keith McCullough took a trip to Europe – which was featured as one of our three Macro Themes for the final quarter of 2013.  While the Full Faith and Credit of the United States was teetering on a knifepoint, the Europeans were feeling somewhat better about themselves, with good reason.




Hedgeye’s bullish call on Europe replicates our earlier bullish call on the US economy.  Hedgeye’s model includes a four-quadrant fundamental analytical module, tracking economic growth against inflation, and reflecting appropriate policy responses to economic growth conditions.


Quad 1: “Growth accelerating as inflation decelerates,” giving rise to neutral government policy. 


Quad 2: “Growth accelerating as inflation accelerates,” generally triggers a hawkish policy response.    


Quad 3:  “Growth slowing as inflation accelerates,” which results in policy being “in a box,” damned if government does, damned if government don’t.  We note that this is generally the most dangerous place for an economy.  Governments go into a frenzy of policy-making, partly driven by demand from the business sector that “somebody has to do something,” partly by politicians’ innate need to always be doing something.  Or at least, to always appear to be doing something.  No one ever got elected on a platform of “These things usually take care of themselves...”


Quad 4:  “Growth slowing as inflation decelerates,” which calls for a dovish policy response.


The decline in Eurozone growth has slowed and stabilized, and our Macro work indicates the slope of the line has moved into a growth upturn.  This was the same scenario we laid out in our Q1 2013 Macro Themes call, under the rubric #GrowthStabilizing as we turned bullish on US growth.  Looking at the data from Europe, the decline has halted and stabilized, with recent statistics marginally flat-to-better.  Stability is the foundation for growth and is a signal to start investing.  If you wait for the growth to be firmly in place, you will miss most of the upside in this fundamental economic trend.


Our Macro work sees growth and inflation rotating properly from Quad 4 – growth slowing with decelerating inflation – into Quad 1, which is accelerating growth, as inflation continues quiescent.  Making aggressive policy decisions at the wrong time can rock the boat of economic growth, but Keith says the Eurozone has been largely on target in matching policy to the economic picture – kind of an astonishing balancing act, given that politicians are involved – which has allowed the region to return to growth, while inflation remains largely off the radar.


Unlike the muscular efforts of our central banker to reverse the forces of nature, Europe has actually allowed economic gravity to occur.  This permits the natural cycle to rotate from Quad to Quad in our model.  Europe moving from quad 4 to quad 1 now is bullish for two significant reasons: it is outright bullish because there’s real economic growth on the horizon.  And it is especially bullish in the face of the insanity in Washington, as it appears the Europeans are actually behaving like adults.


The Sloping Line Tells A Story


Stabilization comes first, then comes growth.  While financial media and policy mouthpieces are focused on the latest data point, it is the slope of the line that is the more important indicator that actual growth is taking hold.  If the growth momentum is steady, the economic data will follow.  More, if the trend remains in place, occasionally weekly or monthly data blips will not disrupt the fundamental story.  Among the key indicators, Eurozone-wide PMIs (Purchasing Managers Index) are turning positive in both the manufacturing and services sectors.  The PMI is a key monthly measure of economic activity, because purchasing managers are uniquely positioned to see emerging economic trends before most other economic actors.  Purchasing managers must source raw materials and components to fill orders.  Thus they see both the demand side and the supply side of the economy, generally before anyone else.  Thus the PMI is considered a reliable early call on upcoming economic trends.


PMI figures are reported on a scale of 1-100, with readings above 50 being deemed positive, while those below 50 indicate negative growth.  Both in manufacturing and in services, Eurozone PMI readings turned back above 50 during the summer months after suffering a largely sluggish first quarter.  Perhaps unsurprisingly, the UK and Germany have fared the best of the lot, but the entire region appears to be revving its engines on the “on-ramp” to renewed economic growth.


Other key indicators that have turned positive include trade figures, industrial production, retail sales, and sales of automobiles.  Business and consumer sentiment are definitely trending higher – both showing a strong and steady diagonal to the upside.  Again: the slope of the line is much more important than any individual reading.  Any of a number of factors can cause an outlier spike in reported numbers.  What we look for is the emergence of a steady trend, and we have identified one here in renewed Eurozone growth.


Super Mario?


Keith is fond of saying, “You tell me what the Dollar is doing, I’ll tell you what just about everything else is doing.”  Right now, an analogous process is unfolding around the Euro as it continues to strengthen.  A strong currency has two almost immediate effects: it drives confidence, and it drives down inflation locally – what we call “deflating the inflation.”


European central banker Mario “the Dragon” Draghi is looking pretty good right about now.  In his “whatever it takes” speech in July of last year, Draghi jaw-jawed the Euro to new levels.  But, unlike our own Ben Bernanke and his Fed, the European Central Bank has been exceedingly sparing in its use of heroic monetary measures, drawing only sparingly on the European Financial Stability Facility (EFSF).


In the “whatever it takes” speech Draghi intimated the central bank might go all-in on the EFSF.  Draghi emphasized that the Euro and the Eurozone were much stronger than people realized, and that an astonishing degree of progress had unfolded very quickly, with major Eurozone-wide economic advances in just the first half of 2012.  And darn it, if he didn’t appear to just nail it with that call.  After seeing inflation at both the producer level (PPI – Producer Price Index) and the consumer level (CPI – Consumer Price Index) climb steadily above the Eurozone 2% target through most of 2010-2012, both measures have recently come down susbtantially.


On an individual country basis, some readings are striking, with inflation dropping from 3.5% a year ago in Spain, to 0.5% today.  Italian inflation has come down from 3.4% to 0.9% in the same period, and Irish inflation – which stood at 2.6% twelve months ago – is at zero.    


And after Draghi announced the Outright Monetary Transaction (OMT) program last August, spreads on Eurozone bonds tightened, indicating that global market participants perceived reduced risk in Eurozone sovereign debt.  All of this has the Euro in a bullish upside breakout formation, a trend that looks like it has quite a way to run before it hits significant resistance.  The Eurozone is now bullish across all three durations in our proprietary TRADE / TREND / TAIL model, with particularly strong implications for Europe’s stand-out major economies, Germany and – despite it not being a Euroz participant – the UK. 


The Filibuster Effect


Politics, they say, makes strange bedfellows.  In this instance, we wonder whether the last-minute deal to extend the debt ceiling is not a resounding negative for US markets.  Far from sending the message that American politicians will come together for the good of the nation, it may actually be telling the world that we will allow ourselves to be put through a wringer periodically by posturing politicians.  At the end of the day, much of what went down in Washington is being seen as sound and fury, signifying absolutely nothing at all.  Critics of the Republican leadership say there was never any question but that the House had the votes to pass a resolution to raise the debt ceiling.  Critics of the Democrats see this as a replay of then-Speaker Pelosi’s snarky misstep when she said “Yes, we wrote the bill.  Yes, we won the election.”  Behavior on both sides of the aisle has taken on a tone that many long-time observers of Washington find disturbing, descending to new lows of partisanship and personal name-calling, to the very clear detriment of We The People.


The biggest takeaway may be that Washington has permanently undermined global confidence in its own ability to address truly important issues.  President Obama had to stay behind to engage in a paste-up, rather than join his fellow heads of state at the Asia-Pacific Economic Conference.  This sort of stuff makes it look like America is tipping into decline, and the recognition that this whole nasty business could start up again in only three months does nothing to stoke confidence in our markets.


Students of modern European history note that the growing intransigence of the parties in Washington bears similarities to certain Western European groups.  For example, once they formally entered the democratic process and were voted into parliament, Italy’s socialists were largely obstructionist.  Rather than engage in any form of dialogue, they insisted they would never compromise on their principles.  One kind of wonders, then, why they bothered to run for office in the first place.  The refusal of this influential group to participate fully in the messy business of government did much to enable Mussolini to rise to power.  We know, we know… it could never happen here…


Sector Spotlight – Restaurants: Where’s The Beef?


Restaurants sector head Howard Penney has been kept hopping lately.  Just to whet your appetite, here’s a Tweet Howard posted on Thursday regarding Darden Restaurants (DRI), the owner of eight distinct brands, led by Red Lobster and Olive Garden: “In ’09 Darden built a new $150MM HQ in Orlando to hold the portfolio of brands.  We need more than a letter from a 3% shareholder…”  You can follow Howard at Penney@HedgeyeHWP and take our word for it, he’s been tweeting a-plenty lately.


The reference in Penney’s tweet was to DRI’s embattled management, after an activist group announced their desire to relieve the current moribund management of their duties and break up the company.


This week’s kick-off to the earnings season revealed continued weakness in the casual dining segment.  Penney says “September marked the end of an ugly 3Q13.  Same-restaurant sales showed marginal (if any) improvement and traffic remains a huge concern.”  He sees weakness persisting and remains bearish on the group – a dour view he has held since early July.  The early look at sales trends for September showed only a mild improvement after “an ugly July and August,” but the overall flow of traffic in this sub-group remains “anemic” – maybe they need to consume more red meat?


Based on the Black Box Intelligence review, only one casual dining company saw Q3 2013 same-restaurant sales estimates increased in September, as global casual dining operator Brinker International (symbol EAT) got a bullish push in the consensus survey.  The other fourteen names in the space saw their same-restaurant sales projections either flat or (mostly) lowered.  The other major profiler of dining data, Knapp-Track, also reported sales and traffic down, plus said that both metrics remained negative for all four weeks of September.


So the mere fact that folks must eat is not sufficient to guarantee a flow of business.  With the notable exception of Chipotle (CMG) – which Penney calls one of the best managed casual dining companies, and which actually managed to grow both same-restaurant sales and top-line revenues – there may be no light at the end of the casual dining tunnel.  Penney counsels investors to continue to steer clear of the casual dining stocks, saying opportunities are better in the fast food names, and may remain so into 2014.


This may also fit into a larger consumer picture.  The National Retail Federation has come out with an early look at this Christmas season.  Their forecast is “cautiously optimistic,” expecting retail sales to grow 3.9% over 2012 – better than the ten-year average of 3.3% growth.  So if it looks “optimistic,” then why “cautious”?


It turns out there are lots of variables that fall into that mysterious B-School category of “unknown unknowns.”  What will gas prices do between now and year-end?  What about unemployment?  Early reports indicate that a number of consumers have already started their holiday shopping, looking to steal a march on the Thanksgiving and Christmas season.  And these shoppers expect some retailers’ quid pro their consumer quo, with pressure on stores to reduce prices early, and to extend hours to accommodate shoppers on their way home after work.  Consumers say they intend to spend about the same this year as they did in 2012, but they definitely expect more for their money, which could put a dent in retailers’ bottom lines.  It may be simply that, at the margin, people who are working figure they should do their shopping now, while they still have jobs.


The consumer picture being uncertain works in favor of fast food – people rushing home from shopping are more likely to grab a taco or a burger, and less likely to gather the family together for an outing. 


And of course, our Investing Ideas food sector favorite, Starbucks, keeps on chugging.


The Reshaping Of Things To Come?


Penney’s long-held bull case on Darden Restaurants (DRI) is predicated on the compelling notion that the company has gold-plated brands, but tin-plated management.  With such all-American names as Olive Garden and Red Lobster in their portfolio – and with an entrenched management that has not been able to realize the value locked up in these franchises – Penney has been patiently advising anyone who would listen that the company is a sitting duck for an activist.   


This week an investor group spearheaded by New York investment firm Barington Capital went public with their conversations with DRI management, saying they want to break up the company.  Penney’s Twitter stream heated up in the past few days as he told followers he expects DRI management to circle the chuck-wagons – and wouldn’t be surprised to see Goldman Sachs, retained to advise DRI, take a similarly protective stance, at least initially.   


What does this mean for the casual dining segment?  It is far too early to predict where the Barington-DRI fight will lead, though Penney’s case for breaking up the company is so compelling, we are surprised that DRI’s management didn’t take early retirement months ago.  If Penney’s outlook on the sector holds – and he has been right on his call on overall trends in dining – we would expect to see another quarter or two of sluggish earnings in casual dining.  Sluggish earnings translate into sluggish share prices – which become increasingly irksome with the S&P hitting all-time highs.  And irksome shareholders turn into activists.


In the aftermath of the Barington announcement, Penney issued a report on Bloomin’ Brands (BLMN)  calling it “Different House, Same Neighborhood,” a clear reference to DRI and a strong thesis that BLMN could be the next sitting duck to be plucked.  BLMN’s portfolio includes Outback Steakhouse, Roy’s and Fleming’s Prime Steakhouse, among others.  While he considers BLMN’s management to be more capable than DRI’s, Penney says this multi-brand casual dining company “needs to go easy on the unit growth story.  In our view, the street will never give the company credit for it and excessive growth will only get them in trouble.”    


Penney thinks overall sluggish growth in the group will likely drag down BLMN’s earnings.  He would not be surprised to see management issue negative guidance – or even a disappointment.  If that happens, other activists could find the company appetizing.


Thus do boring industries become thrilling overnight.  While we’re waiting to see how much steak is on the bone at Darden, there sure is plenty of sizzle. 


Investing Term – Same Store Sales


How do you know whether a store is selling more products now than in the same period last year?  It’s not a trick question.  You put last year’s receipts alongside this year’s, and voila!  Now, how do you tell whether a retail chain with multiple outlets is actually growing organically?  Welcome to the concept of Same Store Sales (SSS).


SSS compares seasonal revenues in individual stores open for at least one year, providing a like-to-like comparison of a retailer’s established sales outlets, during the same season.  This shows what percentage of new revenues have come from sales growth, versus the effect of adding new stores, and enables investors to determine what portion of growth in a company’s business is organic, and what portion comes from expansion. 


Same Store Sales, also known as “comps” (from “comparisons”) are generally presented as a percentage increase or decrease, comparing a current reporting period to the same period in the prior year.  This can be a source of relief – if this year’s comps are down substantially, but there is a macro or other exogenous factor that has nothing to do with the segment or the company’s management.  It can flash a warning signal – when everything appears to be going fine in the sector and in the broad economy, yet SSS inexplicably drop.


And it can help investors gauge when a chain’s expansion is reaching a saturation point.  This occurs when incremental new stores come on-line with diminishing sales performance, indicating that the market for that type of outlet is close to tapped out.  Saturation can relate to a variety of factors: product mix can be affected by long-term consumer trends; product pricing can be impacted by broad economic conditions; location and store style or configuration can become less attractive, or demographic shifts can rob a chain of core customers. 


Retailers on an expansion program can use SSS to get an idea of how well new stores should be expected to perform, and mature companies can use comps to adjust their mix of products and pricing.  Growth in SSS can come from capturing increased share of local markets, and from increased flow of repeat business, including “upselling” more expensive goods to existing customers.


Negative comps, on the other hand, are just plain bad.  They are a fundamental warning that the company is in trouble.  This can be due to saturation, as chains expand and then run out of new markets to enter.  This can lead to overcrowding, which results in new locations draining business from established ones. 


Comparing revenues at specific stores helps management to set parameters for planning such initiatives as store expansion or remodeling, new store openings, and when is the best time to run a sale.  Finally, looking at specific locations can help investors understand seasonality by region within a large retail operation.  Christmas sales may peak earlier in certain regions in a retail chain, and seasonal dining trends may be very different for a national fast food operator.  Knowing these general patterns gives you a valuable extra data point that helps you determine whether or not to panic. 


- By Moshe Silver

Moshe is a Hedgeye Managing Director and author of the Hedgeye e-book Fixing A Broken Wall Street





This note was originally published October 18, 2013 at 16:11 in Macro

The Economic Data calendar for the week of the 21st of October through the 25th 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.




The Economic Data calendar for the week of the 21st of October through the 25th 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.



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