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SHORT CAKE: CONFERENCE CALL TODAY 1PM

We’re hosting a quick conference call TODAY at 1pm EST to hit on the key points of our thesis and field questions. Please send any questions over to .

 

We added CAKE to our Best Ideas list as a high conviction SHORT yesterday.

 

After being the bull on CAKE for the majority of 2013, we have reversed course and turned bearish heading into the 4Q13 print and throughout 2014 for several reasons including, but not limited to:

  • The secular decline of the casual dining industry
  • The end of the road for CAKE’s margin story
  • Growing complacency on the street

Trading at a peak multiple, we see 20-30% downside to the stock in 2014 as full-year earnings estimates and expectations are revised down.

 

Click here for the full report: CAKE: BEST IDEA SHORT

 

Call Details:

Toll Free Number:

Direct Dial Number:

Conference Code: 331331#

 

 

Howard Penney

Managing Director


[podcast] McCullough: What's Working (And What's Not)

Hedgeye's Keith McCullough discusses #GrowthDivergences (a Q1 Hedgeye Macro Theme) on this morning's Macro Conference Call, what countries and S&P sectors are winning (and losing), and where investors should be focusing their attention.

 


Contrasting Winners & Losers

Client Talking Points

ASIA

That smell you’re smelling? It’s Asia from an equity market perspective. It stinks.  All the majors have major issues. Despite what’s been a pretty decent week for US stocks, Asian stocks evidently did not care. Just go down the Asian line for 2014 year-to-date. China is down -5.3%, Japan is down -3.4% and South Korea is down -3.3%. 

UK

UK economic data looks nothing short of fantastic. Check out the retail sales number ripping +5.3% year-over-year in December; that’s versus 2% in November (which itself was a good number). Note to Keynesians who burn currency: Strong pound? It’s a good thing. Strong purchasing power? Good thing.  Incidentally, European stocks continue to crush it year-to-date. Check out Spain, up another +0.3% this morning to +6.4% year-to-date. Yes, we stand by our #EuroBulls Macro Theme. Bottom line is it’s been a fantastic start of the year in Europe. 

S&P 500

Look at Consumer Discretionary (XLY) and even Consumer Staples for that matter. Both of them are broken now from an immediate-term trade perspective in our Hedgeye model. This is A) new news and B) bad news. The XLY is down -2%. That stands in stark contrast to Healthcare which is up 3%. 

Asset Allocation

CASH 27% US EQUITIES 18%
INTL EQUITIES 20% COMMODITIES 8%
FIXED INCOME 0% INTL CURRENCIES 27%

Top Long Ideas

Company Ticker Sector Duration
DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

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.

Three for the Road

TWEET OF THE DAY

In hindsight, this $RH selloff will prove to be one of the best buying oppties this year in retail. Liked it a lot at $28. Love it at $57. @HedgeyeRetail

QUOTE OF THE DAY

"I know where I'm going and I know the truth, and I don't have to be what you want me to be. I'm free to be what I want." -Muhammad Ali

STAT OF THE DAY

Sochi is preparing to host the most expensive Olympic Games ever at a cost of about $50 billion. The staggering price tag, which includes a major upgrade to Sochi's infrastructure, outstrips the $40 billion China is thought to have spent on the Beijing Summer Games. And it's more than three times the cost of London 2012. (CNN)


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

January 17, 2014

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BULLISH TRENDS

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BEARISH TRENDS

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The Law of Least Effort

“Progress isn't made by early risers. It's made by lazy men trying to find easier ways to do something.” 

-Robert A. Heinlein

 

When it comes to stocks, progress is having the right answer to a simple question most of the time; is the price heading higher or lower.  A simple question, with only 2 options, yet with an infinite number of ways to get there.

 

Investors are Heinlein's kind of lazy, they look for short cuts to the answer about the next price.  In defense of the investor, getting the answer right is anything but a lazy man's game.   Sifting through data, other people's opinions, quant, inside information, chart formations, the confidence in a CEO’s voice, you name it, and it takes long hours.

 

Heinlein would agree with The Principal of Least Effort, as do some corners of Evolutionary Biology.  We may just be hard wired like our Paleolithic ancestors to find food in the most efficient way while not being eaten each day.  In searching for information, the Principal of Least Effort means you stop looking as soon as you find "minimally acceptable result", or for a stock, the answer to the up or down question.

 

The paradox is that people will go to extraordinary lengths to make the least effort.  It starts innocently enough by saying "wouldn't it be great if....".  Guttenberg might have said something like "wouldn't it be great if I didn't have to copy this Bible by hand!" The founders of Twitter perhaps said "wouldn't it be great to send short 140 character messages to my friends!", although I can't imagine why.  But after they did, they got to work.

 

Back to the Global Macro Grind

 

The BIG MAC is one of  Hedgeye Healthcare's  "wouldn't it be great if" ideas.  "Wouldn't it be great if I knew how all of this macro data connected to the stocks I care about."   So we built a database of thousands of macro and company data, tools to update them, tools to sort them, in order to discover how they relate to each other.  In theory, one can react with reasoned calm to new economic data that may be pushing stocks around on a given day, or forecast important company drivers, or recognize a new and unexpected relationship that leads to a great stock idea.

 

We're constantly evolving the process, adding new data, refining the analysis, looking for easier ways to do things.  Below are some examples of what we've found interesting lately.

 

Consumer Confidence is rising, that's good for Healthcare stocks, right? No, changes in medical consumption are highly inversely correlated to Consumer Confidence.  Falling confidence sends people to the doctor.  When consumers feel good, they go to the mall.  Consumer Confidence is currently slowing year over year.

 

Is there a healthcare stock that I can use to get levered to Hedgeye's#Eurobulls theme?  Yes.  Long XRAY, their European growth is tightly correlated with changes in German Unemployment.  Germany happens to be XRAY's biggest EU market.  In the US, the dental market tracks Dentist Office Employment which continues to rise.

 

Hospitals are up on a rope, should I stick with it?  Yes, highly profitable surgical cases which represent 30% of hospital revenue started growing again and it looks sustainable.  We track a single medical Producer Price Index series (of the hundreds reported each month) to forecast the ICD businesses at BSX, MDT and STJ, while growth for US Orthopedic sales closely follow a  monthly employment number representing 16% of the workforce and just started to turn.  Hospital admissions are weak in Q413 because flu and maternity are weak, and don't pay well, while the surgical indicators are both rising after a multi-year declines.

 

UNH was down a little on their earnings yesterday, is it a good time to buy it? No. Deflating their medical cost trend with a key macro series suggests utilization is beginning to accelerate after years of soft or declining trends.  At the same time, realized pricing is steadily making new lows, in line with the Employment Cost Index Health Insurance and the Producer Price Index for Managed Care.  Additionally, managed care premium rates are growing slower than the rates they pay to hospitals, their largest expense. A de-levering of the pricing spread is a massive headwind that Obamacare, private exchanges, dual eligibles, or Optum can offset.

 

Deciding how to weight BIG MAC signals can be challenging sometimes.  While a BIG MAC query is a key part of our process, we still do all of the other things too.  We sift through data, read other people's opinions, listen for the confidence in a CEO’s voice, look at charts, talk to experts; everything except the inside information thing.   Remember, it's a simple question with no easy answer.  You better have a process.

 

Our immediate-term Global Macro Risk Ranges are now (TREND in brackets):

 

SPX 1 (bullish)

DAX 9 (bullish)

VIX 11.84-13.55 (bearish)

USD 81.54-81.32 (neutral)

Gold 1 (bearish)

 

Always be #evolving!

 

Thomas W. Tobin

Healthcare Sector Head

 

The Law of Least Effort - UNH Table

 

The Law of Least Effort - Virtual Portfolio


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