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Why I Like Krispy Kreme $KKD

Takeaway: This is an excerpt from a recent research report from Hedgeye restaurants analyst Howard Penney.

We like the Krispy Kreme story.  

 

Why I Like Krispy Kreme $KKD - kkd1

 

KKD is a small cap growth company with a growing global footprint and the potential to double in size over the coming years. 

 

It’s also a volatile stock that will see large swings in sentiment given the company’s checkered history.  That being said, we believe it’s very likely KKD will wind up in the hands of a bigger company.  The company’s aggressive growth plans and strong balance sheet make it an attractive acquisition target for a foreign company.

 

$18.16 is long term TAIL support KKD. I like it if that holds.

 

(Click here to watch Penney video, "Why You Should Short Casual Dining Stocks")

Join the Hedgeye Revolution. 



Dial-In and Materials: 1Q 2014 Macro Themes Call

Dial-In and Materials: 1Q 2014 Macro Themes Call - 1Q14Themes dial

CALL DETAILS

  • Date: Thursday, January 9th at 11:00am EST
  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 897866#
  • Materials: CLICK HERE

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. 

 

WATCH THE MACRO THEMES TEASER VIDEO


Click Here to Watch the Video


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Growth Divergences

Client Talking Points

ASIA

One of our themes is already playing out in Asian versus European Equities. In other words... #GrowthDivergences. After another rough market ride last night, here’s the year-to-date score for Asian Equity majors: China -4.2%, KOSPI -3.3%, Nikkei -2.5%. Not pretty. Meanwhile Denmark and Austria +4.7%.

#EuroBulls

Eurozone sentiment just tagged the 100 line in December (that's a new high) versus 98.5 in November. At the same time, the EUR/USD held our Hedgeye TREND support of $1.35 like a champ. We will review our bullishness on European growth at 11am during our Q1 Macro Themes call. It's undeniable at this point that European economic data continues to accelerate. 

RATES

Right on time... the taper and bubble talk in the Fed Minutes (all hawkish on the margin) are driving the short end of the curve to new 3 month highs. We're seeing 0.42% 2-year Treasury yield this morning. Meanwhile, there's no resistance on the 10-year yield to 3.05% ahead of the jobs report.

Asset Allocation

CASH 30% US EQUITIES 16%
INTL EQUITIES 18% COMMODITIES 6%
FIXED INCOME 0% INTL CURRENCIES 30%

Top Long Ideas

Company Ticker Sector Duration
GHL

Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.

FXB

We remain bullish on the British Pound versus the US Dollar, a position 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). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we 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.

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road

TWEET OF THE DAY

FX: textbook EUR/USD bounce right off the @Hedgeye $1.35 TREND line; #StrongPound too @KeithMcCullough

QUOTE OF THE DAY

"Success or failure is caused more by mental attitude than by mental capacity." - Walter Scott

STAT OF THE DAY

T-Mobile added 4.4 million customers in 2013 -- its biggest growth in eight years. The company says it's proof its "uncarrier" strategy -- aimed to upend the mobile industry -- is working after only 8 months. In Q4 T-Mobile added 1.6 million new subscribers, bringing its total customer base to nearly 47 million people. (CNN)


ICI Fund Flow Survey - Best Domestic Equity Flow in 7 Weeks

Takeaway: The last week of '13 spelled continued solid money flow into equities at the expense of bonds; Net flow was $13 B, above the avg of $7.8 B.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Total equity mutual funds experienced solid inflows for the week ending December 31st with $6.0 billion flowing into stock funds. Within the total equity fund result, domestic equity mutual funds gained $3.3 billion, the most positive result in 7 weeks, with international equity funds posting a $2.6 billion inflow. Including these year ending trends, equity mutual funds averaged a solidly positive reversal in 2013 with an average weekly inflow of $3.0 billion for the year compared to 2012's weekly average outflow of $3.0 billion. 

 

Fixed income mutual funds continued persistent outflows during the most recent 5 day period and ended 2013 with another $2.8 billion withdrawal from bond funds. This week's draw down was a sequential improvement from the $3.4 billion lost the week prior but was still worse than the 2013 weekly average which finished at a $1.5 billion outflow for 2013. This year end average for 2013 compared to the strong weekly inflow of $5.8 billion for fixed income throughout 2012.

 

ETFs experienced broadly mixed trends in the most recent 5 day period, with equity products seeing heavy inflows and fixed income ETFs seeing slight outflows week-to-week. Passive equity products gained $4.5 billion for the 5 day period ending December 31st with bond ETFs experiencing a $224 million outflow. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results.

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a $13.5 billion spread for the week ($10.5 billion of total equity inflows versus over $3.0 billion in fixed income outflows). This was almost double the 2013 weekly average of a $7.8 billion spread but was well off of the largest weekly spread of $30.9 billion and the smallest equity/debt weekly spread of -$9.2 billion (negative numbers imply a net inflow into bonds for the week).


 

ICI Fund Flow Survey - Best Domestic Equity Flow in 7 Weeks - ICI chart 1

 

 

For the week ending December 31st, the Investment Company Institute reported solid equity inflows into mutual funds with $6.0 billion flowing into total stock funds. The breakout between domestic and world stock funds separated to a $3.3 billion inflow into domestic stock funds and a $2.6 billion inflow into international or world stock funds. These results for the most recent 5 day period compare to the year-to-date weekly averages of a $451 million inflow for U.S. funds and a running $2.6 billion weekly inflow for international funds. The aggregate inflow for all stock funds this year now sits at a $3.0 billion inflow, an average which has been getting progressively bigger each week and a complete reversal from the $3.0 billion outflow averaged per week in 2012.

 

On the fixed income side, bond funds continued their weak trends for the 5 day period ended December 31st with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $2.8 billion outflow, a sequential improvement from the $3.4 billion lost in the prior 5 day period but worse than the year-to-date weekly average outflow of just $1.5 billion for bond funds. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $404 million (although this outflow was the best result in 13 weeks), which joined the $2.4 billion outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 27 of the past 32 weeks and municipal bonds having had 32 consecutive weeks of outflow. These redemptions late in the year are likely tax loss selling related with the Barclay's Aggregate Bond index down nearly 2% in 2013, the first annual loss in 14 years. The 2013 weekly average for fixed income fund flows is now a $1.5 billion weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.

 

Hybrid mutual funds, products which combine both equity and fixed income allocations, continue to be the most stable category within the ICI survey with another $1.0 billion inflow in the most recent 5 day period, although the past 6 weeks have been below year-to-date averages. Hybrid funds have had inflow in 30 of the past 32 weeks with the 2013 weekly average inflow now at $1.5 billion, a strong advance versus the 2012 weekly average inflow of $911 million.

 

 

ICI Fund Flow Survey - Best Domestic Equity Flow in 7 Weeks - ICI chart 2

ICI Fund Flow Survey - Best Domestic Equity Flow in 7 Weeks - ICI chart 3

ICI Fund Flow Survey - Best Domestic Equity Flow in 7 Weeks - ICI chart 4

ICI Fund Flow Survey - Best Domestic Equity Flow in 7 Weeks - ICI chart 5

ICI Fund Flow Survey - Best Domestic Equity Flow in 7 Weeks - ICI chart 6

 

 

Passive Products:

 

 

Exchange traded funds had mixed trends within the same 5 day period ending December 31st with equity ETFs posting a strong $4.5 billion inflow, the seventh consecutive week of positive equity ETF flow. The 2013 weekly average for stock ETFs is now a $3.5 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.

 

Bond ETFs experienced moderate outflows for the 5 day period ending December 31st with a $224 million redemption, an improvement from the week prior which lost $1.0 billion but well below the year-to-date average of a slight weekly inflow. Taking in consideration this most recent data however, 2013 averages for bond ETFs are flagging with just a $234 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.

 

 

ICI Fund Flow Survey - Best Domestic Equity Flow in 7 Weeks - ICI chart 7

ICI Fund Flow Survey - Best Domestic Equity Flow in 7 Weeks - ICI chart 8

 

 

Net Results:

 

The net spread of all equity products including mutual fund and ETF flow tallied a $10.5 billion total inflow into all equity products in the most recent 5 day period which compared to a total fund and ETF result for fixed income of a negative $3.0 billion outflow for the week ending December 31st. Thus the net of equity minus fixed income production totaled a $13.5 billion spread in favor of equity products. This compared to the 2013 weekly average of a positive $7.8 billion spread to equities but was well off of the weekly high during last year of $30.9 billion and the weekly low of -$9.2 billion (negative numbers favor fixed income products).

 

With net weekly spreads continuing to favor equity products with a rising 52 week linear trend line and a favorable setup for stocks versus bonds into the beginning of this year, our favorite long asset management idea remains T Rowe Price (TROW), the manager with industry leading stock fund performance to potentially gather outsized net new assets. 

 

 

ICI Fund Flow Survey - Best Domestic Equity Flow in 7 Weeks - ICI chart 9

 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 


January 9, 2014

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BULLISH TRENDS

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BEARISH TRENDS

January 9, 2014 - Slide9

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