Please see below the latest comments from our Sector Heads on their high-conviction stock ideas.
BNNY - Annie's took a leg down in mid November on a secondary stock announcement in addition to broader underperformance overall within the sector. That said, BNNY is still up a tidy +4.5% since November 20th.
Our intermediate-term to long-term bullish thesis on the company remains intact. Our conviction in the company remains based on the company’s advantaged organic portfolio, strong retail positioning for growth, and easier top line and gross margin comparisons going into the back half of its fiscal year.
CCL - On a slow bookings period over the Thanksgiving weekend, Carnival engaged in some aggressive promotional discounting with the Carnival brand in the Caribbean. It appears pricing recovered strongly after Cyber Monday, particularly for F2Q and F3Q. We look for bullish confirmation in our next pricing survey.
While F1Q 2014 will be CCL’s weakest quarter, we believe it is trending in-line with management expectations. CCL is an expectations story and we believe overall pricing trends are currently trending ahead of management saw in late September, ahead of the all important Wave Season starting mid-January.
FDX - In case you missed it on "60 Minutes," Amazon CEO Jeff Bezos held a successful publicity stunt this Christmas season, suggesting it was seriously looking at using drones for its package delivery. Amid this distraction, attention should continue to be directed at FedEx’s earnings release on December 18th. In other words, avoid the drone distraction. Key issues around the Express profit improvement program at FDX should continue to drive its shares in this multi-year restructuring process.
Incidentally, the S&P 500 is up 20% since we added FDX to Investing Ideas. Shares of FedEx are up 35%.
FXB - The British Pound remains the Hedgeye Q4 Macro Theme (#EuroBull) champ. The heart our call is a bullish position on the GBP and EUR versus the USD.
- Central Bank Intervention: We expect Janet "Mother of All Doves" Yellen to remain the uber dove on policy and push out any QE taper expectations to at least late in Q1 2014. This should burn the Greenback lower.
- BOE “Hawks”: We expect Mark Carney and the BOE to remain on hold with interest rates and the asset purchase target, built on improving UK fundamentals, which should encourage the British Pound higher.
- Island Insulation: The UK was the first country to issue austerity in Europe. We are seeing the threw-put of that decision with fundamentals improving ahead of its European peers. We maintain a bullish bias on UK equities (etf EWU).
GHL- The mergers and acquisitions (M&A) market continues to under-earn with flat activity levels over the past 3 years, despite positive fundamentals. M&A activity is poised to increase with corporate cash balances continuing to build up globally and continued low funding costs to finance new deal activity.
Our research also shows that environments with low volatility have also been fortuitous for M&A and the current VIX levels in the U.S. have settled into a new low range, which should slowly break the corporate depression mentality to avoid deal making.
Greenhill, with a change in merger activity, would greatly benefit as solely an advisory firm with good balance across the globe. Also, recent M&A levels have shown some green shoots with distressed activity in Europe picking up slightly and also some renewed M&A activity in the U.S. with cash flush private equity firms that have investor money that needs to be invested.
HCA - Healthcare Sector Head Tom Tobin says we're fully baked on a really crappy ACA roll out, so as the site gets better, people sign up, it's all upside from here for hospitals and HCA. The bigger risk we see is the continued comments about getting subsidy payments from the government out to the insurers, who will surely be paying some hefty claims come January. If too much money is flowing out, and no money is coming in, then that could actually could spell the end of the program. Nothing like losing money on a massive scale to bring the ACA's problems into focus. In the meantime, employment is getting better, Medicare is comping out of a weak 2013, and there appears to be plenty of upside to surgical and outpatient volume in the coming year.
MD - We're presenting our research Monday following the sixth month of our monthly OB/GYN survey. For Mednax, maternity trends continue to look slow so far in Q413. With MD showing negative trends in NICU patients in Q313, it shouldn't be too much of a surprise this quarter. Fortunately, acquisitions and patient volume can drive revenue growth too, as well as the new payment parity rates MD has slowly been collecting more of in recent months.
Bottom line is we can model flat growth in 2014 for maternity and still come in ahead of consensus. If maternity finally reaccelerates after the worst decline in 40 years, then number, and the stock can get out of hand to the upside.
NKE - There were a few noteworthy product updates coming out of Nike this week. (Also - If you are interested in NKE’s Black Friday/Thanksgiving sales this year, please refer to the chart below in the WWW update.)
1) On Monday, Digitimes reported that Nike is on track to release a new smart watch sometime in the first half of 2014. You could have seen this coming from a mile away. The company channeled its digital accessory R&D into an updated Nike Fuelband, which came out on November 6th. But while it did this, Adidas came out and launched a new sports watch at $399. Nike's existing watch (a partnership with Tom Tom) retails for only $169. Surely, the product gurus in Beaverton can concoct a product to tap our wallets for $400. As with the new Fuelband, we'll be first in line with a pre-order to wear-test it. (Aside from the fact that the new band looks much better, the old Fuelband is better from a functionality standpoint, by the way -- better battery life, and easier to rack up Fuel points).
2) On Thursday, Nike released the Kobe 9. Under regular circumstances we wouldn’t call this out, Nike releases new shoes all the time (and makes over 300 million pairs per year), but this one is notable for one key reason. The Kobe 9 is the first professional grade basketball sneaker to use Nike’s new FlyKnit technology, which assembles the upper part of the shoe on a machine similar to a cotton loom rather than thru traditional practices. This is important because of the new Nike ID customization product that will be rolled out to stores in the future. Nike has the technology and the product, while its competitors don’t. That is a serious differentiator.
3) On Friday, the WSJ ran an article on Lebron James. No, this one wasn’t about his return to Cleveland or his love of designers watches, but instead focused on what he’s been wearing on his feet. It turns out that Lebron has being wearing the Lebron X’s during the majority of games this season. Apparently the big man doesn’t like the way his newest shoe the Lebron 11 fits. While it’s a black eye for a company that prides itself on innovating for its top end athletes, we’ve got to think that Nike is laughing all the way to the bank. Consumers don’t seem to care that the shoe, which retails at a +$200 price point, hurts LeBron’s feet because it’s been flying off the shelves.
RH - Restoration Hardware will report 3rd Quarter 2013 earnings on Thursday, December 12th. Here are a few of our expectations going into the print.
Some key factors we’re looking out for…
1) Retail comp – We expect the retail comp to improve sequentially. 26% last quarter would have been great for any retailer not named Restoration Hardware. We expect that number to come up this quarter well into the 30s, as RH should finally have ample inventory to fulfill consumer demand.
2) Real estate update – The company has announced plans for 5 design galleries in the following cities: Greenwich, Los Angeles, NYC, and Atlanta. We expect management to provide progress reports on these 5 existing projects and announce 2-3 more. These things take time, and we don’t expect to see that initial big ramp in new doors until 2015. But once we see stores open more aggressively, we should see square footage growth go from -5% to +33%.
3) RH Direct – RH Direct consists of e-commerce and catalog, with a heavy skew towards e-commerce. We expect more of the same from this channel of the business. Growth rate in the mid to high 30’s, which means direct makes up about 45-50% of total company revenue. To put that into context, WSM has 595 total company doors, and WSM Direct makes up 49% of total company revenue. That’s at the very top of retailers, in terms of e-commerce penetration. We don’t expect RH to have that same sales mix once the company’s real estate portfolio catches up to consumer demand. The key point here is that there is concern this quarter that the company will take a hit on RH Direct sales because RH eliminated the colossal Fall source book. We take the other side of that argument. We think that RH Direct won’t miss a beat – showing investors that sending a 5 pound 900-page catalog simply does not drive business. We estimate that the company saved about $35mm by eliminating the 900 page catalog; the cost savings far outweigh any sales loss risk because of one key reason, the Inter-webs.
SBUX - Starbucks just announced it's bring back its $450 metallic gift card for the holiday season. The laser-etched card includes $400 in credit and automatic enrollment in "My Starbucks Rewards Gold-level status." Only 1,000 cards will reportedly be sold, making it a very exclusive offering. Of course, this won’t exactly drive meaningful, incremental sales, but it is a newsworthy item and yet another example of Starbucks staying relevant and in-touch with consumers.
SBUX has taken a breather lately, underperforming the S&P 500 by -3.1% over the past month. However, Managing Director Howard Penney maintains that the fundamental story is intact and the coffee tailwind remains a key driver of margin expansion. Coffee prices are down -3.7% over the past week and down -36.2% on a year over year basis. this obviously continues to provide the company with commodity cost relief.
For those interested in owning the name, the stock’s recent pullback has made it more attractive from a valuation perspective. Trading at a P/E of 30.2x and 15.7x EV/EBITDA on a NTM basis, Yes, like its $450 Holiday card, Starbucks continues to be an expensive stock. We believe its premium valuation is warranted.
TROW - T Rowe Price continues to be squarely in the center of surging equity mutual fund flow with 2013 year-to-date weekly stock inflow averaging over $3.1 billion per week. This is a complete reversal from the $3.0 billion in outflow per week averaged in 2012. In the most recent 5 day period, investor funds continue to pour out of the bond market with another $4.7 billion being redeemed in fixed income funds, now the 22nd negative week out of 26 for taxable bonds, and the 26th consecutive week of outflows for tax-free or municipal bond products. With this drastic redemption ongoing in bonds, leading equity managers including T Rowe Price stand to benefit handsomely with continued incremental demand for stocks at the expense of fixed income.
WWW - Below is a chart that breaks out the Athletic Footwear point-of-sale data for the all-important Black Friday week from 11/24 through 11/30 and compares those numbers to the similar time period in 2012. By Black Friday we now mean Thanksgiving Day, Black Friday, and Thanksgiving Weekend.
As you probably heard, sales during the four-day period were down 3% for the entire retail sector compared to last year. Athletic footwear, on the other hand was up 2.4%. This data has similar limitations to the athletic apparel data we showed you two weeks ago, but it does offer a pretty large snapshot of the market in total. It’s interesting to note that while the entire retail sector was classified as highly promotional during the Black Friday Week/Weekend athletic footwear held steady with average sale prices falling just 0.6%
Wolverine World Wide was paced by strong growth in Merrell and Wolverine. Sperry is irrelevant in this discussion because no one goes running in boat shoes (less than 5% of Sperry’s sales are represented by this data). Overall, the growth in Merrell continues to be promising. While sales at Saucony look disappointing, one thing to keep in mind is that we are working off a pretty small base. Brands like Saucony are at their peak selling season during the later parts of July and early parts of August. We’d always like to see a positive year/year change number in the sales column, but this isn’t Saucony’s season as much as it is for brands like Merrell and Wolverine whose assortments feature more seasonal items.
Please see below two timely, topical and potentially profitable investment ideas that we sent out recently to our institutional clients. Click on the title to unlock the content.
Just Charts - #EuroBulls
The heart of Hedgeye's #EuroBulls call is a bullish position on the GBP and EUR versus the USD and a bullish position on UK and German equities, built on a few central factors.
JCP: The Bear Case Lacks Intellectual Integrity
We're surprised at how many people are hanging on to the stale bear case on JCP. Seriously, at least acknowledge that things are improving.