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FDX: REMOVING FROM INVESTING IDEAS

Takeaway: We are removing FedEx (FDX) from Investing Ideas.

We are removing shares of FedEx after a strong run. 

 

FDX was added to Investing Ideas on 2/27/13. Shares have gained over 30% during this time compared to a roughly 19% return for the S&P 500.


FDX: REMOVING FROM INVESTING IDEAS - fdx

Industrials Sector Head Jay Van Sciver explains that we are removing FDX as a good portion of our thesis has played out and we are developing other ideas for next week that may offer better future returns. 

 

There is nothing ‘wrong’ with FDX according to Van Sciver, and we would look for re-entry points should the shares retreat.  FDX shares may continue to work well for investors, but the recent market retreat has opened up better opportunities in our sector.

 


MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD

Takeaway: 1) Investors are debating the growth outlook. 2) #InflationAccelerating is working. 3) Hedge funds are regaining confidence in short selling

CONCLUSIONS:

 

  1. Making sense of which style factors to be over-indexed to and which to sell/short is becoming increasingly difficult to discern. For example, HIGH Consensus LT EPS Growth Expectations is outperforming the pack along with LOW Consensus LT EPS Growth Expectations. Clearly, with the US economy threatening  a trip to Quad #3 for the first time in over a year, investors are trying to figure out if they want to be completely in or completely out of the growth style factor.
  2. Another thing that is working in 2014 is our 1Q14 Macro Theme #InflationAccelerating. The spread between HIGH Consensus NTM Sales Growth Expectations and LOW Consensus NTM Sales Growth Expectations is the widest divergence among each of the individual style factor pairs. We interpret this as the market preemptively punishing those companies that won’t see enough sales growth to offset a likely increase in COGS and/or SG&A expenditures over the intermediate term.  
  3. Lastly, both HIGH and LOW Short Interest as a % of Float are among the worst performing style factors in the YTD. We interpret this as hedge funds reacting to finally seeing their shorts work (on an absolute basis) and looking for new names to short (vs. agreeing to “hide out” together in consensus short ideas amid a raging bull market).
  4. If the emerging signals highlighted above start to trend, we want to be doing the same – i.e. looking for un-shorted names that have low consensus sales growth expectations. A simple multi-tier sort our S&P 500 Style Factor Equity Screener shines a bright red light on PetSmart (PETM) and Aflac (AFL). Both are broken from an intermediate-term TREND perspective on our quantitative factoring. As such, they both warrant your full attention from a research perspective.

 

When in doubt, blame #EmergingOutflows. According to the most recent data from EFPR Global, YTD outflows from EM equity and debt funds are already at 79% and 32% of their respective 2013 outflow totals! Never mind that domestic economic growth is slowing on the margin (we’ll see if this fundamental TRADE becomes a TREND), we would agree that a race for the exits in EM assets has contributed to the jump equity volatility in the YTD (the VIX is up nearly +30% in the YTD and now bullish on our intermediate-term TREND duration).

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - VIX

 

That ramp in fear has investors broadly de-risking their portfolios at the margins. Specifically, the S&P 500 Index is down over -3% in the YTD, while US Treasury bonds have done little more than go straight up since their DEC 31st bottom. The former is now seriously threatening its TREND line of support, while the latter is demonstrably broken. If the SPX breaks our TREND line, there’s no real firm support down to our long-term TAIL line of support at 1678 (i.e. a hundred handles lower).

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - SPX

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - UST 10Y

 

From a style factor perspective, the YTD round-up is a bit more interesting. Making sense of which style factors to be over-indexed to and which to sell/short is becoming increasingly difficult to discern. For example, HIGH Consensus LT EPS Growth Expectations is outperforming the pack along with LOW Consensus LT EPS Growth Expectations. Clearly, with the US economy threatening  a trip to Quad #3 for the first time in over a year, investors are trying to figure out if they want to be completely in or completely out of the growth style factor.

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - UNITED STATES   HRM

 

Another thing that is working in 2014 is our 1Q14 Macro Theme #InflationAccelerating. The spread between HIGH Consensus NTM Sales Growth Expectations and LOW Consensus NTM Sales Growth Expectations is the widest divergence among each of the individual style factor pairs. We interpret this as the market preemptively punishing those companies that won’t see enough sales growth to offset a likely increase in COGS and/or SG&A expenditures over the intermediate term.  

 

Lastly, both HIGH and LOW Short Interest as a % of Float are among the worst performing style factors in the YTD. We interpret this as hedge funds reacting to finally seeing their shorts work (on an absolute basis) and looking for new names to short (vs. agreeing to “hide out” together in consensus short ideas amid a raging bull market).

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - Chart of the Day

 

Recall that equity hedge funds underperformed the broader market by the second most on record in 2013; the raging bull market likely forced a lot of hedge fund managers to concentrate their bearishness in a few consensus short ideas. Now it appears they may finally be branching out.

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - SPX vs. HFRX

 

If the emerging signals highlighted above start to trend, we want to be doing the same – i.e. looking for un-shorted names that have low consensus sales growth expectations. A simple multi-tier sort our S&P 500 Style Factor Equity Screener (which ranks companies by the various style factors on a percentile basis) shines a bright red light on PetSmart (PETM) and Aflac (AFL). Both are broken from an intermediate-term TREND perspective on our quantitative factoring. As such, they both warrant your full attention from a research perspective.

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - 7

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - 8

 

MAKING SENSE OF EQUITY STYLE FACTORS IN THE YTD - Style Factor Equity Screener

 

Best of luck out there,

 

DD

 

 

Darius Dale

Associate: Macro Team


FDX: Still A Long-term Long, But Removing From Best Ideas List For Now

Overview

 

For now, we are removing FDX from the Hedgeye Best Ideas list.  However, we continue to very much ‘like’ FDX from a long-term perspective.  The shares meet our investment process (cycle, industry structure, valuation), but the opportunity is better appreciated at current levels relative to when we first highlighted shares of FDX.  If the Express segment margin expands as we expect, the shares may offer further appreciation.  

 

UPS’s recent report highlighted improved volume growth for the industry, part of the expectation we put forward in our November 2012 Express & Couriers Services black book.  We continue to see the potential for further share price appreciation in coming years as the value of FedEx Express is better reflected in the market’s valuation of FDX.  While at current relative levels we are removing FDX from the list, we will certainly look for opportunities to add the shares back to it in line with our long-term thesis. 

 

The shares were the 11th best performer in the S&P 500 Industrials last year and the top performing Transport in the sector from the start of the year.  The shares have outperformed the S&P 500 by about 22% since our November 2012 


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CHARTS OF THE DAY: RECORD #EMERGINGOUTFLOWS

Takeaway: Don’t write-off outflows from EM funds as panic selling. In reality, the cycle has turned and most investors are just now figuring that out.

Editor's note: This unlocked research note was originally published January 30, 2014 at 11:55 in Macro. For more information on how you can subscribe to Hedgeye research click here.

If you didn’t know the global macro super-cycle has turned, now you know.

CHARTS OF THE DAY: RECORD #EMERGINGOUTFLOWS - turkey 

As most recently outlined in our latest EM strategy note titled: “NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE” (1/27/14):

 

“We remain broadly bearish on EM assets and continue to see them for what they are: overpriced relative to a long-term TAIL investment cycle that has clearly turned in favor of DM assets, at the margins.”

 

Contrast our view with that of Mark Mobius, chairman of the Templeton Emerging Markets Group (i.e. one of, if not the world’s largest EM fund umbrellas):

 

“People are enjoying what they see as a bull market in the U.S. As we go forward, we’re going to see a lot of overweight positions in the U.S. So, given the fact that emerging markets are still growing fast, given that they have low debt-to-gross domestic product ratios, given that they have high foreign-exchange reserves, we believe that money will be flowing back in again to emerging markets.”

 

We don’t write that to pick on Mr. Mobius, who has obviously had a very long and successful career managing EM assets. In fact, he probably forgets more about emerging markets on the way to lunch than I have ever learned as a quote/unquote “26-year-old-analyst” (ask @JimCramer for context).

 

Rather, we wrote that to juxtapose how our investment framework focuses on changes on the margin – particularly relative to expectations – versus the framework employed by many investors: i.e. a narrow focus on absolutes with a dash of consensus storytelling.

 

Another reason we wrote that was to show you where the quote/unquote “smart money” consensus likely still is with respect to EM assets. We know the quote/unquote “dumb money” has been pulling funds out of EM assets for 6-9M now and are doing so on an accelerated basis in the YTD. With respect to the current asset price cycle, you tell me who’s “smarter”?:

 

  • “The MSCI Emerging Markets Index of equities is off to the worst start to a year since 2008, with about $468 billion erased from stocks this year.” – Bloomberg (1/30/14)
  •  “More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created, data compiled by Bloomberg show.” – Bloomberg (1/30/14)
  • “The iShares MSCI Emerging Markets ETF has seen its assets shrink by 11 percent, while the Vanguard FTSE Emerging Markets ETF is poised for the biggest monthly redemption since the fund was started in 2005.” – Bloomberg (1/30/14)
  • “The WisdomTree Emerging Markets Local Debt Fund is on track for an eighth straight month of withdrawals… About $58 million has been withdrawn from the WisdomTree debt fund this month, bringing the total redemption since June to $752 million.” – Bloomberg (1/30/14)
  • “Withdrawals from the iShares fund and the Vanguard ETF, the largest such products by assets for emerging markets, totaled $1.9 billion on Jan. 27, the biggest one-day redemption since 2005, data compiled by Bloomberg show.” – Bloomberg (1/30/14)
  •  “ETFs accounted for almost half the $2.5 billion outflows from emerging equities last week. So far this year, a net $4.12 billion has flowed out, amounting to three quarters of the total $5.7 billion that has fled, the fund tracker said.” – Reuters (1/27/14)

 

In the context of the sheer amount of dough plowed into EM assets over the last ~10-12 years amid Federal Reserve-style financial repression, we could see EM assets underperform by much more and for much longer than many investors currently think. This is how people get blown up buying the [perceived] bottom. Don’t buy the [perceived] bottom in EM assets – at least not until you get the green light to do so from the Fed.

 

  • “Emerging markets have attracted about $7 trillion since 2005 through a mix of direct investment in manufacturing and services, mergers and acquisitions, and investment in stocks and bonds, the Institute for International Finance estimates.” – Reuters (1/27/14)
  • “JPMorgan estimates outstanding emerging market bonds at $10 trillion compared with just $422 billion in 1993.” – Reuters (1/27/14)
  • “Assets of funds benchmarked to emerging debt indices stand at $603 billion, more than double 2007 levels, it said, and over $1.3 trillion now follows MSCI's main emerging equity index.” – Reuters (1/27/14)
  • “Assets of emerging equity ETFs tracked by EPFR Global ballooned to a peak of almost $300 billion, tripling since 2008 and up from next to nothing in 2004.” – Reuters (1/27/14)
  •  “Mutual fund data from Lipper, a ThomsonReuters service, shows that in the past 10 years net inflows into debt and equity markets was in the region of $412 billion.” – Reuters (1/27/14)

 

CHARTS OF THE DAY: RECORD #EMERGINGOUTFLOWS - dale1

 

If you recall the following slide (#74) from our 4/23/13 presentation titled: “Emerging Market Crises: Identifying, Contextualizing and Navigating Key Risks in the Next Cycle”, this should all sound very familiar:

 

CHARTS OF THE DAY: RECORD #EMERGINGOUTFLOWS - 2

 

Net-net, investors have two choices when it comes to playing EM assets from here: 1) buckle up; or 2) pray to God that Janet Yellen backs away from the monetary tightening ledge. Moreover, the fact that so many institutional investors have to be invested” in EM assets only insulates our bearish bias if things really take a turn for the worse because we haven’t actually seen any “real” selling yet…

 

Please feel free to ping us with any feedback or questions.

 

DD

 

Darius Dale

Associate: Macro Team


Stock Report: Las Vegas Sands Corp. (LVS)

Stock Report: Las Vegas Sands Corp. (LVS) - HE LVS table 1 31 14

THE HEDGEYE EDGE

Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike.  The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet.  The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%.  And we haven’t gotten to the $10-14 billion in mall assets that could be monetized.

 

Along with 15-20% same store growth in Macau, investors should be focused on the upcoming high ROI opportunities for LVS which include the opening of its newest mass-centric property on Cotai – The Parisian in 2015 and potential legalization in new markets such as Japan, Korea and Taiwan.  Japan, in particular, is gaining steam as the final passage of a gaming bill by the Diet could potentially happen by Summer 2014. LVS is regarded as a highly attractive candidate for building in integrated resort in Japan given its success with Marina Bay Sands in Singapore.

 

We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.

 

TIMESPAN

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

Macau fundamentals are outstanding and we expect an acceleration of growth in February.  Within that favorable industry construct, LVS is nailing it operationally.  The LVS properties continue to yield up their Mass tables impressively which is  contributing to higher margins.  Table yields have a long way to go and with the company’s extensive room base, cross marketing initiatives, and premium Mass push, LVS is likely to continue share growth in the rapidly growing Macau market. 

 

Share growth and near term strength in Macau are two near-term catalysts.  Others include potential legalization of casinos in Japan – LVS would be a leading contender to be awarded a license – and progress toward selling off the company’s significant retail mall assets.
 

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

Valuation is the main push back but with LVS’s combination of growth and cash flow, should we really be concerned with an EV/EBITDA multiple of 13x?  Certainly not, especially when considering that a good portion of LVS’s profits are not taxed (approximately 55%), a benefit that isn’t captured by EV/EBITDA. 

Future high ROI projects in Macau (The Parisian), Japan, and South Korea are also not captured.  LVS should continue to garner more widespread investor appeal with its emerging cash distribution focus (dividend investors welcome) along with the existing growth investors.  

 

ONE-YEAR TRAILING CHART

Stock Report: Las Vegas Sands Corp. (LVS) - HE LVS chart 1 31 14


Short Kinder Morgan Thesis Update - Slides and Dial-In

***CALL TODAY AT 1PM EST.  SLIDE DECK BELOW***

 

Short Kinder Morgan Energy Partners (KMP) remains a Hedgeye “Best Idea.”  Our conviction has increased since first making the call in September 2013.  Recent events, results, guidance, and new information continues to indicate that our analysis is correct.

 

“Cheap” is a LONG WAY DOWN.  We believe Fair Values are:

  • KMI: $13 - $17/share, ~57% Downside 
  • KMP: $31 - 47/unit, 51% Downside  (Preferred Short)
  • EPB: $16 - 24/unit, 39% Downside 
  • This puts Complex EV/2014 EBITDA at ~10-11x

CLICK FOR FULL SLIDE DECK: Short Kinder Morgan Thesis Update 1/31/14

 

CONFERENCE CALL TODAY AT 1PM EST.

  • Direct Dial Number:
  • Conference Code: 581275# 
  • Send questions to .

 

Kevin Kaiser

Managing Director

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