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WHERE WILL EQUITY ALPHA COME FROM IN 1H14?

Takeaway: Stay with what’s been working from a style factor perspective, but be mindful of likely leadership rotations at the industry level.

CONCLUSIONS: In the note below, we highlight the key takeaways from six different analyses that will help portfolio managers appropriately allocate capital over the intermediate term.

 

  1. Quantitative risk management levels;
  2. Style factors – narrow focus;
  3. Style factors – broad focus;
  4. Hedgeye Macro GIP Model historical backtest results;
  5. Industry and sub-industry momentum; and
  6. Relative valuation.

 

We consider our primary responsibility to be the consistent identification of the most important top-down trends that will have an outsized impact on your P&L – be it from a beta, alpha or draw-down risk perspective. The vast majority of the time our efforts are focused on getting the directional component of market beta right, as well as trying to front-run meaningful drawdown risk(s).

 

Often times, we tend to help our subscribers generate alpha by simply having the correct non-consensus call on beta (e.g. our 2013 US equity bull case) or by helping them avoid the stuff that is blowing up (e.g. our 2012-13 gold and commodity bear case). #Alpha via happenstance, if you will.

 

Today, however, we’re applying a more proactive approach to the search for alpha. Sourcing analyses from a host of proprietary quantitative tools, we think over at least the next 3-6M US equity market alpha will be found by employing the following strategies:

 

1) Stay long of market beta, fading the top end of Keith’s immediate-term risk range and Buying the Damn Bubble (#BTDB) at the low end of said range. CLICK HERE for our latest S&P 500 risk management levels note.

 

2) Continue to be overweight low dividend-yielding stocks and underweight high dividend-yielding stocks as long-term interest rates continue to make a series of higher-highs and higher-lows amid pervasive bond fund outflows.

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - MACRO Indicator

 

3) High growth stocks continue to outperform across all noteworthy durations, and investors would do best to position for a continued widening of the spread between high-growth stocks – on both LT EPS growth expectations and NTM sales growth expectations – and low-growth stocks, as well as for a continued widening of the spreads between high-rated stocks and low-rated stocks and low debt stocks and high debt stocks. The relative performance of the aforementioned style factors since the DEC 9th bottom in domestic inflation expectations (via 5Y breakevens) has generally confirmed prevailing trends. Lastly, the spread between high beta stocks and low beta stocks has actually been accelerating of late and we think investors should capitalize on this momentum accordingly.

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - S P 500 Style Factor Divergence Monitor

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Taper  1

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Taper  2

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Beta

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Consensus Rating

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Debt

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Dividend Yield

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - EPS

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Insider Ownership

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Market Cap

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Sales Growth

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Short Interest

 

4) Consider overweighting the Internet Retail, Semiconductor Oil & Gas Drilling and Biotech GICS Level 4 Industries and underweighting the Trucking, Tires & Rubber, Home Furnishings and Department Stores GICS Level 4 Industries as the US economy moves into a state of #InflationAccelerating (i.e. either Quad #2 or Quad #3 on our GIP model).

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - UNITED STATES   YoY

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - Quads  2 and  3

 

5) Those focused on long/short, absolute return strategies are likely to do well by pairing off the following GICS Level 4 Industries:

 

  • Long ideas (ranked according to highest-to-lowest VAMDMI score*):
    • Education Services
    • Electronic Equipment & Instruments
    • Health Care Equipment
    • Other Diversified Financial Services
    • Airlines
    • Casinos & Gaming
    • Life Sciences Tools
    • Regional Banks
    • Cable & Satellite
    • Aluminum
  • Short Ideas (ranked according to lowest-to-highest VAMDMI score*):
    • Food Retail
    • Tobacco
    • Trading Companies & Distributors
    • Electric Utilities
    • Computer & Electronics Retail
    • Personal Products
    • Household Products
    • Oil & Gas Equipment Services
    • Wireless Services
    • General Merchandise Stores

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - VAMDMI

 

6) From a valuation perspective, the Footwear, Retailing, Specialty Retail, Apparel Retail, Home Improvement Retail, Food Retail, Distillers & Vintners, Research & Consulting Services, Data Processing & Outsourced Services, Application Software and Gas Utilities industries and/or sub-industries are all grossly overvalued from a structural perspective (i.e. relative to their respective trailing 10Y average Price/NTM Earnings and EV/NTM EBITDA multiples).  

 

The market has been straight-up-and-to-the-right for over a year now, so there’s not a ton value out there for those looking to load up on “cheap” names. That said, however, we do flag the Oil & Gas Drilling, Oil & Gas Equipment Services, Technology Hardware & Equipment and Communications Equipment industries and/or sub-industries as being relatively undervalued from a structural perspective (i.e. relative to their respective trailing 10Y average Price/NTM Earnings and EV/NTM EBITDA multiples).  

 

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - IDM  1

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - IDM  2

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - IDM  3

WHERE WILL EQUITY ALPHA COME FROM IN 1H14? - IDM  4

 

Feel free to ping us with any follow-up questions or if you’d like a list(s) of the specific tickers comprising any of the aforementioned industries and/or sub-industries. As always, we’re here to help.

 

Have a great evening,

 

DD

 

Darius Dale

Associate: Macro Team

 

 

VAMDMI SCORE EXPLANATION

VAMDMI is short for “Volatility-Adjusted, Multi-Duration Momentum Indicator”. The VAMDMI score is derived by calculating three independent z-scores of closing price data on a weekly basis and then calculating the arithmetic mean of this sample.

 

  • Short-term z-score: 1-3M sample
  • Intermediate-term z-score: 3-6M sample
  • Long-term z-score: 6-12M sample

 

Each independent sample size is determined dynamically by prevailing trends in US equity market volatility. Specifically, if the VIX Index is making lower-lows on an intermediate-term basis, then each of the sample sizes are larger in duration; if the VIX Index is making higher-lows on an intermediate-term basis, then each of the sample sizes are smaller in duration.



AND THERE IS MORE TO COME…

Only a handful of states have released gaming revenues for December but the verdict is in

 

  • Not sure the Street was ready for the onslaught of bad numbers but they’re here.
  • Ohio and Pennsylvania – relatively new gaming states – are already out with high single digit/low double digit same-store declines
  • The mature gaming state of Illinois released a -13% YoY same-store decline
  • We think the sell side will likely lower Q4 estimates for PENN, PNK, and BYD 

AND THERE IS MORE TO COME…   - ssss


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Video Preview: Q1 2014 Macro Themes

In the video below, Keith walks you through our top 3 global macro themes ahead of our Q1 2014 Macro Themes conference call tomorrow.

 

 

 

REMINDER: We will be hosting our Quarterly Macro Themes conference call tomorrow, January 9th at 11:00am EST. The accompanying presentation will detail the three most important macro trends that our team has identified for the quarter, as well as the associated investment opportunities.

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 897866#
  • Materials: CLICK HERE (slides will be available one hour prior to the start of the call)

Q1 2014 THEMES OVERVIEW

#InflationAccelerating: Across the globe, reported inflation readings are poised to accelerate from post-crisis lows as easy comps, a commodity base effect and accelerating wage pressures all come to a head in the first quarter of 2014. Moreover, the reemergence of inflation as a core macro risk threatens to materially alter the investment landscape going forward.

 

#GrowthDivergences: Looking to the U.S., Europe, China and Japan, we see the heavyweights of the world economy diverging from an economic growth perspective as some countries and/or regions are much further along in the economic cycle than others. We highlight those divergences and identify which countries and/or regions you want to be allocating assets to at the start of the year.

 

#FlowShows: in Q1 we expect a continuation of fund flows out of fixed income and into equities: the “Queen Mary” has indeed turned, aided by the Fed’s decision to begin tapering.   

CONTACT

Please email  for more information. 


Stock Report: Quiksilver, Inc (ZQK)

Stock Report: Quiksilver, Inc (ZQK) - HE II ZQK boxes 1 8 14

THE HEDGEYE EDGE

Consensus is not bullish enough on Quiksilver (ZQK). The consensus view is understandably focused upon the new management team, cost cutting, and improved efficiency. We think that gets the stock to where it is today.  Ultimately, in order to really get this stock to work, we need to see significant top line growth.

 

The only way we think we can gauge the viability of top line growth coming to fruition (for the first time in 5-years) is to roll up our sleeves, ask actual “action sports” and “surf consumers” (over 1,000 of them) an array of very detailed questions to understand the relevance of the brands, and subsequently determine whether the brands are powerful and relevant enough for the new management team to use effectively as an offensive weapon to create value. 

 

So that’s what we did.

 

Our key takeaway here is that the brands – Quiksilver, Roxy and DC – all scored far better than we even hoped.  We believe these brands all possess the relevance needed to grow from here. Statistics regarding brand authenticity, desirability, and customer loyalty (versus 20 other brands) came through as much more positive than we’d have thought, and certainly more than the consensus currently believes.

 

TIMESPAN

INTERMEDIATE TERM (TREND) (the next 3 months or more)

This is the only part of the story we’re not thrilled with. Why? 2014 will be all about cost cuts and modest (2%ish) top line growth.  As such, our estimates for 2014 are not too far off of consensus. This is all a logical progression. The management team started in early 2013. The first and easiest thing to do is reorganize the company, cut redundant functions and ensure that the team is filled with ‘A’ players.  Earnings in 2014 should be slightly positive vs. a loss of ($1.53) last year. That’s all due to restructuring. The good news is that this is largely baked, suggesting to us that there’s likely little risk of failure. That gives us confidence in minimal downside in the stock in 2014.

 

LONG-TERM (TAIL) (the next 3 years or less)

2015 and beyond is a much different story. Our long-term model has ZQK adding $600mm in revenue on top of a $1.9bn base. As a frame of reference, our top line growth forecast is over 1,000 basis points ahead of consensus.  

 

Ultimately, we’re at over $1.00 per share in 2017, which is 45% ahead of the consensus. In the end, this is a 40%+ EPS grower that’s a double if we use a 20x p/e, which we think is more than fair based on the soon-to-be-realized growth profile.

 

Bottom line: Put this stock in your portfolio and forget about it. You’ll be pleasantly surprised a year or two from now.


ONE-YEAR TRAILING CHART

Stock Report: Quiksilver, Inc (ZQK) - HE II ZQK chart 1 8 14


Charts: Germany and UK Strong Start to 2014

Europe is ringing in the New Year with some impressive data!

 

As a continuation of our top Q4 2013 Global Macro Theme, #EuroBulls, which outlined a bullish outlook on the GBP/USD and bullish positioning on UK and German equities, below we show updates to some of the charts we’re tracking that are supportive of our investment position around this theme.

 

In the Real Time Alerts Portfolio we’re currently long German equities via the etf EWG and long the GBP/USD (FXB). To get exposure to the UK equity market, we’ve traded the etf EWU in the past.

 

 

Eurozone


Steady as She Goes: broadly we continue to see a reduction in the risk profile across sovereigns and banks. Telling is that the Spanish 10YR bond is trading at 3.76% as its Italian counterpart is at 3.86%, and that both have reached spreads with the German Bund of under 200bps – back to where levels stood when Greece required its first bailout back in May 2010!

 

Meanwhile, the ECB continues to be highly accommodative with the main interest rates at 25bps. The ECB meets as soon as tomorrow to discuss any changes to monetary policy. Despite the media’s ‘deflationista’ frenzy around the inflation level (currently at 0.8% Y/Y in December and down 10bps since last month), we think President Draghi has well outlined the Bank’s forecast for an extended period of low inflation (below its 2% target).  We think the next move from the ECB could be policy measures aimed at stoking real growth to SMEs through loan mechanisms, however not via another rate cut this quarter. We believe this position, as well as its continued posture of “ready and willing to act” (to ensure the survival of the Eurozone at any cost and keep financial conditions accommodative) will continue to support the common currency and strengthen investor confidence in the equity market.

 

Additionally, despite the Eurozone unemployment rate at a high and sticky 12.1%, we expect lower levels of inflation to help spur exports, consumer spending and broader confidence. Eurozone aggregate Services and Manufacturing PMIs have shown slow and steady progress, as have retail sales and car orders, which we expect to continue in Q1.

 

Charts: Germany and UK Strong Start to 2014 - z. credit spreads

 

Charts: Germany and UK Strong Start to 2014 - z.  eurozone cpi

 

Charts: Germany and UK Strong Start to 2014 - z. eurozone exports

 

Charts: Germany and UK Strong Start to 2014 - z. eurozone retail sales

 

Charts: Germany and UK Strong Start to 2014 - z. eurozone business climate

 

Charts: Germany and UK Strong Start to 2014 - z. eurozone pmis

 

 

UK

  • Strong UK: we remain bullish on the British Pound/US Dollar and the UK equity market. Our positioning is supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). We expect the FTSE (up +14.4% last year) to be pushed higher on continued evidence of emergent strength in the economy.  In many cases, the UK’s high frequency data is outperforming that of its western European peers, including PMIs.  We believe that a moderation in CPI should spur consumer spending and that a strong Pound should bolster spending power. 
  • UK Office of Budget Responsibility in its Autumn Statement revised higher its 2014 GDP outlook, to +2.4% vs prior +1.8% and 2014 CPI at +2.3% Y/Y vs prior +2.4%.
  • We outline our levels on the GBP/USD below, and believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term. 

Charts: Germany and UK Strong Start to 2014 - z. uk retail sales

 

Charts: Germany and UK Strong Start to 2014 - z. uk halifax home

 

Charts: Germany and UK Strong Start to 2014 - z. uk confidence

 

Charts: Germany and UK Strong Start to 2014 - z. uk cars

 

Charts: Germany and UK Strong Start to 2014 - z. uk pound

 

 

Germany

  • Strong Germany: we continue to like the DAX (up +25.5% last year), which we’re currently long of via the etf EWG. Fundamentals remain grounded with a low unemployment rate (6.9% vs 12.1% in the Eurozone), CPI at 1.2% Y/Y in DEC (vs 1.6% in NOV) that is aiding exports, alongside strong PMIs and consumer and business confidence, and an inflection in factory orders to the upside.
  • Merkel consolidated her coalition late into 2013 – we expect Germany to remain the fiscal hawk vis-à-vis sovereign and bank policy.
  • The upward revision in the Bundesbank’s 2014 GDP forecast last month, to +1.7% vs prior +1.5%, is in line with our bullish outlook.

Charts: Germany and UK Strong Start to 2014 - z. germany DAX

 

Charts: Germany and UK Strong Start to 2014 - z. germany trade balance

 

Charts: Germany and UK Strong Start to 2014 - z. germany factory orders

 

Charts: Germany and UK Strong Start to 2014 - z. germany IFO

 

Charts: Germany and UK Strong Start to 2014 - z. eur usd

 

 

Matthew Hedrick

Associate


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