“Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.”
Valuation is an analytical staple in deciding whether an asset, company or asset class should be bought or sold. The challenge with valuation? As a decision making tool, the inputs are often more important than the outcome. Regularly on Wall Street, especially when some of the large investment banks are involved, valuation becomes an even more amorphous thing.
Yesterday our CEO Keith McCullough discussed price targets for the S&P 500 in 2014 (see video "Is Consensus Too Bullish?") that are being established by some of our peers and the arbitrariness of the multiples being applied to come up with the target. Now to be fair, coming up with a view on the future price of a market is difficult at best because as Einstein notes all the factors that matter “cannot necessarily be counted”. (In part, this is why we stay away from precise long-term price targets on the broad market.)
Valuing a company has its challenges as well. Take for instance the Kinder Morgan companies, which are a massive group of pipelines, terminals and oil and gas productions assets cobbled together by billionaire Rich Kinder over the years. We are currently short $KMI and $KMP on our Best Ideas list because we, simply put, think the company is grossly overvalued.
I won’t steal his thunder but my colleague Kevin Kaiser will be giving an update on his short thesis on Kinder Morgan today at 1pm EST and his presentation starts with the following views on valuation:
- “Cheap” is a LONG WAY DOWN. We believe Fair Values are:
- KMI: $15 - $20/share
- KMI Warrant: near $0
- KMP/KMR: $30 - 40/unit (Preferred Way to Play This)
- EPB: $25 - 30/unit
Back to the Global Macro Grind...
In my inbox last night was a summary note on the equity markets that was titled, “Equities Explode.” I’m hoping it was a tongue in cheek title because up 1.1% on less than impressive volume was far from an explosion. In the Chart of the Day today, we take a look at the last three weeks and highlight the point of accelerating volume on market down days.
The equity bulls are trying to regain the market’s upward momentum, but meanwhile the bond bulls have just experienced the euphoria of a meaningful move in rates. Since January 2nd the 10-year bond yield has declined from +3.0% to the most recent yield of +2.7%, for a +12% expedited move down in the last twelve days. So, now the Fed has finally starting tightening by the way of tapering, why are yields falling?
Simply put, economic growth is decelerating in the U.S. and Mr. Market is beginning to price this in. As a result, the SP500 is down -2.9% on the year and the VIX is up +26.0%. We see these market signals even more glaringly in sector performance. The only sectors that have had positive performance in the year-to-date are healthcare up +1.8% and utilities up +2.1%. Meanwhile the most negative two sectors in terms of performance are staples down -4.7% and energy down -4.6%.
In a recent book by Frank Partnoy, he shows that decisions of all kinds, whether “snap” or long-term strategic, benefit from being made at the last possible moment. The art of knowing how long you can afford to delay before committing is at the heart of many a great decision—whether in a corporate takeover or a marriage proposal.
The reality in the investment management business though is that you literally can’t wait until the last minute unless you have unlimited duration on your capital, like say Warren Buffett. The rest of us market minions actually have to try and stay ahead of market moves and shifts in economic outlook. This is why in our macro process identifying economic and market changes on the margin is so critical, and why long term valuation targets can be so misleading.
The question of course is whether it is possible to front run (legally) moves in the market. For example, did any of the bulls on Japanese equity shift quickly enough in 2014 to avoid the almost -9% drawdown in the Nikkei in January? Perhaps, but unlikely. After all it is human nature to value and project things for perpetuity based on the most recent data points.
An example is Kinder Morgan using $95 oil in their projections for oil or European bears projecting an abject failure of European markets when the sovereign debt turmoil was at its worst. On the last point, the healing of Europe and European credit markets has been staggering over the past few quarters.
Currently, the Spanish 10-year yield is +3.73% and the Italian 10-year yield is +3.85%, which are literally the lows for the Eurozone. This morning Italy also sold five year notes at a record low yield of 2.43% with a bid/cover of 1.49 versus a bid/cover 1.28 on December 30th.
This rampant improvement in European sovereign debt obviously begs the question of whether we are closer to the bottom then the top in European debt. But one thing is for certain, if the European debt markets are again working fluidly, it is positive for corporations that need to borrow to grow. It also begs the question of whether a short European debt and long European equities play is the best relative value play around. But, as they say, valuation shmaluation!
Our immediate-term Global Macro Risk Ranges are now:
SPX 1 (bearish)
Nikkei 141 (bearish)
VIX 15.31-20.41 (bullish)
USD 80.17-81.19 (neutral)
Gold 1 (neutral)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Takeaway: In over two decades covering this game, I have never seen such an effective jab thrown at Nike.
- "As part of the brand’s four-day take-over of New York City’s Grand Central Terminal, Under Armour held a press event today to debut the UA SpeedForm™ Apollo running shoe and 'THIS IS WHAT FAST FEELS LIKE,' the newest iteration of the brand’s I WILL™ global marketing campaign."
- "Under Armour Founder and CEO Kevin Plank unveiled the latest spot and introduced the game-changing running shoe, which was recently named 'Best Debut' by Runner's World magazine in the 2014 Spring Shoe Guide. NFL Pro Bowler Cam Newton, MMA legend Georges St-Pierre and American Ballet Theatre® soloist Misty Copeland joined Plank at the event."
Takeaway from Hedgeye Retail Analyst Brian McGough: In over two decades covering this game, I have never seen such an effective jab thrown at Nike. This Speedform shoe is a direct response to Nike's FlyKnit -- which uses a modified cotton loom to weave the upper. UA responded by using its compression fabric and technology -- which it is producing in a bra manufacturing plant -- to create similar product that eliminates waste, lowers cost, and just flat-out looks cool.
Of course, they followed up with an edgy ad that will likely get consumers pumped about the product, while simultaneously making a few hundred people in Beaverton irate at the competitive response. If one thing is certain, it's that when Nike and UnderArmour compete head-to-head (and even AdiBok -- when they show up to the game), the retailers and the consumers always win.
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Bad baseball references aside, we were relieved to see Wynn’s Mass aggression drive high revenue growth and deliver an outstanding quarter.
“Whoa! You guys are way too high” – Hedgeye client in December regarding our Q4 EBITDA estimate
Au Contraire Mon fraire. Wynn beat our Street high EBITDA and EPS estimates quite handily, although high hold in Las Vegas certainly helped. While there weren’t quite as many positive longer-term takeaway as with LVS the day before, WYNN’s quarter was certainly stronger.
WYNN became our favorite long in the gaming space in early December. As we articulated in our 10/25/13 note “WYNN TO FEAST ON THE MASS COMPETITION”, Wynn Macau began (finally) to push Mass marketing and promotional activity in October. For this reason, the stock moved into our #1 position in the space – WYNN was going to become a growth story again! The bear thesis that Wynn Macau was running at full capacity? Not true.
Well, once again Steve Wynn knocked it out of the ballpark – or as Wynn Macau’s GM Ian Coughlan said, “we smacked others out of the park”. We can forgive the Irish lad for the not so perfect baseball reference, after all he is great at hurling references I’m sure, and of course running Macau properties.
As we saw from the monthly Macau GGR reports, Wynn was a Mass market share gainer in Q4 and clearly the flow through was quite strong, as we saw from the earnings release. Shareholders are rejoicing that there is a near-term angle to this great long-term story.
Speaking of the long-term, we again heard an interesting South Korea reference. Steve Wynn mentioned he was in Seoul last week on top of Sheldon Adelson, unsolicited, bringing up the prospects for South Korea integrated resorts during the LVS conference call Thursday night. South Korea has fallen into the background with all the Japan focus but as we wrote about last year, it’s a real and potentially huge market. Back to Japan, here is where we heard arguable the only negative takeaway. Steve Wynn laid out a longer time horizon – possibly 2 years – for the legalization of gaming in Japan.
So where do we go from here? After a likely strong opening today, WYNN should trade within 5% of the January 17th high. More near-term catalysts remain. Notwithstanding bad luck at Wynn Macau here in January, Wynn should continue to pick away a little Mass market share over the coming months. Moreover, market growth should accelerate into the 20%+ area in February from 11-15% here in January. Longer-term Wynn may not be quite as well positioned at LVS but it’s hard to argue against this other long-term growth/cash flow story.
This note was originally published at 8am on January 17, 2014 for Hedgeye subscribers.
“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 1837-1855 (bullish)
DAX 9546-9761 (bullish)
VIX 11.84-13.55 (bearish)
USD 81.54-81.32 (neutral)
Gold 1221-1267 (bearish)
Always be #evolving!
Thomas W. Tobin
Healthcare Sector Head
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.65%
SHORT SIGNALS 78.62%