In this weekend's edition of Investing Ideas, we feature our regularly scheduled updates on Hedgeye analysts' nine current high-conviction stock ideas. As we're sure you already know, 2013 was a very good year to be an Investing Ideas subscriber. From Nike to Starbucks, to Wolverine World Wide and many more, our analysts uncovered myriad stocks which outperformed the benchmark S&P 500 which itself was up 30%.
We are also pleased to highlight two institutional research notes following the stock updates which shed some macro light on current market and economic dynamics.
Finally, please see below CEO Keith McCullough's refreshed levels for our current high-conviction stock ideas.
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
- "Trade" is a duration of 3 weeks or less
- "Trend" is a duration of 3 months or more
- "Tail" is a duration of 3 years or less
Investing Ideas
CCL – Shares of Carnival have risen 11% since we added it to Investing Ideas just before Thanksgiving. For comparison's sake, the S&P 500 is up 2% during that time. The Gaming, Leisure & Lodging team remains bullish on CCL and says there are no new news or catalysts this week.
FDX – Shares of FedEx closed the week north of $140, near its all time high. Industrial Sector Head Jay Van Sciver says all the negative press around delayed Christmas deliveries is likely to have little relevance for FDX shares, which he adds is one advantage of operating in a rough domestic duopoly. If anything, higher than expected capacity utilization in the capital intensive Express segment would seem favorable. The press also highlights FDX’s exposure to e-commerce, which could again become a solid growth narrative. Van Sciver expects the next key data point in UPS’s earnings report on January 30th.
FXB – Positive economic data out over the holiday week, while sparse, offered further, confirmatory evidence of emergent strength in the UK economy. UK mortgage approvals hit a 6-year high, net consumer credit accelerated sequentially, and the UK Manufacturing PMI (57.3) reflected another month of healthy expansionary activity. Moreover, the UK Construction PMI printed 62.1 for December, just below the 6-year high recorded in November. In addition, with the FTSE and British Pound both holding in Bullish Formation, the quantitative risk management signal continues to support our positive, fundamental view on the UK economy.
In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the Bank of England (versus Janet Yellen et al.) will further propel #StrongPound over the intermediate term.
GHL – Greenhill & Company announced a solid pipeline of advisory mandates over the course of December, including a $2 billion mandate to advise AT&T in the sale of its wireless assets in the state of Connecticut. As a reminder, at $2.0 billion this was the largest advisory win for GHL since October.
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Shares of Greenhill remain a favorite idea of Senior Financials sector analyst Jonathan Casteleyn’s. One of the intermediate to longer-term dynamics in play will be rising interest rates, which have historically led to growth in deal activity. Corporations tend to focus less on dividends and buybacks, and more on strategic M&A activity to reward shareholders.
The recent uptick in Greenhill activity during the past week is being validated by overall industry volumes. According to Bloomberg, weekly announced M&A volume in December in both the U.S. and Europe is showing signs of both a sequential and year-over-year improvement. Weekly U.S. M&A volume has hit $33.8 billion thus far in December, over a doubling from the $16.3 billion per week last month in November, and also a 16% improvement from weekly activity in December 2012.
HCA – HCA Holdings was up 4% this week compared to a 0.72% gain for the S&P 500. Healthcare Sector Head Tom Tobin is on vacation and will provide an update on HCA in next week's Investing Ideas.
MD – Mednax finished the trading week up almost 1% compared to a 0.72% gain for the S&P 500. Healthcare Sector Head Tom Tobin will provide an update next week.
RH – Restoration Hardware disclosed a few days before Christmas that two of its Independent Directors, Thomas Mottola and Mark Demilio, purchased approximately $1 million and $500 thousand worth of RH stock, respectively. Insider buying and selling is something that we track on an ongoing basis, and it makes up a considerable part of one of our most important financial screens – the "Retail Sentiment Monitor," which we provided for you in the 12/21 installment of the Investing Ideas Newsletter.
We track these sales and purchases for good reason. At the end of the day, company Executives and Directors are motivated by the same forces as everyone else – profit. We could reference countless Sentiment charts where the price line fills up with red circles (indicating an insider sell) and the price sinks like a stone soon after, and the same is true for the inverse.
Company insiders have unparalleled access to the health records of the company, so insider buys are generally viewed as a bullish event and sells would be bearish. As we stated earlier, this is simply an idea screen and isn’t sufficient analysis on its own. However, when coupled with a deep dive on the fundamentals, it can provide an insider’s take on the trajectory of the business. In the case of RH, it only serves to strengthen our conviction in our thesis.
TROW – T. Rowe Price remains a favorite long idea of Senior Financials sector analyst Jonathan Casteleyn as rates continue to rise. Fed tapering is fueling bond selling, which, in turn, is driving outflows from bond funds. These outflows are begetting further selling, and around and around it goes. Bonds are currently still in the early stages of underperformance and that underperformance will lead to further outflows.
Some of those bond outflows are going to find their way into actively managed US equity funds, and historically the funds that garner the biggest share of inflows are Morningstar 4 and 5 star rated funds. TROW stands out among peers on this front, as it has 72% of its fund assets held in 4 and 5 star rated funds. By comparison, fund manager Janus has just 34% of its fund assets in 4 and 5 star rated funds. This positively disposes
WWW – Wolverine World Wide announced that they will be presenting at the annual ICR conference on January 14th. Retail Sector Head Brian McGough will be there in Orlando to hear management first hand. He will report back after the conference. In the meantime, McGough remains the bull on WWW. Shares of Wolverine are up over 42% since he added it to Investing Ideas. The S&P 500 is up 15%. Not a bad run.
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Please click on the titles below to unlock the institutional research notes.
A second week of “clean” initial claims data confirms a return to the Trend rate of improvement, ISM New Orders and Employment both continued their respective advances to multi-year highs and, while Bloomberg’s weekly confidence data deteriorated marginally WoW, the positive reversal for consumer sentiment in December was unanimous across all the primary survey’s.
Industrials Fishfinder: Improving Process
(Editor's note: The following note was written by Industrials Sector Head Jay Van Sciver)
After a long tenure on the buy side, I can only evaluate a year by performance. A research and investment process that fails to generate performance is of no value. Capital markets are noisy, making it difficult to extract the feedback needed to improve one’s process rapidly. But a year is a good chunk of market time and year-end is a decent moment to reflect on what is working and what is not. So how did we do in 2013? Pretty well and we can get better.
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