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INVESTING IDEAS NEWSLETTER

Takeaway: Current Investing Ideas: CCL, DRI, FXB, HCA, JPM, LVS, RH, TROW, WWW and ZQK

Below are Hedgeye analysts' latest updates on our high-conviction stock ideas as well as CEO Keith McCullough's refreshed levels for each stock. At the conclusion of the note, we have selected three institutional research notes we believe offer a valuable look into the current state of the markets, as well as two deep stock dives on the long and short side.

 

INVESTING IDEAS NEWSLETTER - LEVELSII

 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers. 

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

IDEAS UPDATES

The latest on Hedgeye's high-conviction stock ideas.

 

CCLCarnival was added to Investing Ideas on 11/22/13. Since then, shares have risen 9.2% compared to a 0.7% return for the S&P 500. The Gaming, Lodging & Leisure team will update on CCL next week.

 

 

DRI — Activist investor Barington Capital held a conference call this past Thursday to review its strategy for value creation at Darden. The plan called for a separation of the struggling Olive Garden and Red Lobster brands from the higher growth brands. Barington also expressed a desire to improve management focus and operational execution, unlock the value of the company’s real estate portfolio, and further reduce operating expenses.

INVESTING IDEAS NEWSLETTER - rl 

Barington cited Managing Director Howard Penney’s research several times during the call and ended the session by suggesting the company should immediately “appoint an independent chairman to protect shareholder interests.” As expected, the bull case is gaining steam and we are waiting for the other activist, Starboard Value, to present its plan for value creation in a couple of weeks.

 

 

FDX — We removed FedEx from Investing Ideas on Friday. Click here for the full report.

 

 

FXB — Hedgeye remains bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from the Bank of England. The BOE continues to be oriented towards hiking, rather than cutting as economic conditions improve.

 

 

HCA —  The massive acceleration in the US Orthopedic market is having a positive impact on HCA Holdings and the other Hospitals. The big question is ... will it continue? Zimmer, the largest manufacturer of hips and knees, saw a remarkable 9% growth in US Knees. However, they cautioned analysts to not extrapolate the last two quarters of strength through 2014.

INVESTING IDEAS NEWSLETTER - hcaa 

For now, we think growth will continue to accelerate based on our macro analysis. We show in the charts below that the housing recovery has led to faster employment growth among municipal governments. Why does this matter? Because municipal workers make up roughly 16% of the workforce, are much older than the average worker, and carry very good health benefits.

 

But we're not going to leave it at one or two data items. We're planning to run a survey in February to ask Orthopedic surgeons how full their schedule is during Q114. If we're right, we should hear they are all very busy. What does this mean for HCA? Remember, Orthopedics is the single largest revenue driver for Hospitals at 17%. More positive preannouncements from HCA seem likely if the Ortho trend continues.

 

INVESTING IDEAS NEWSLETTER - HCA1

 

INVESTING IDEAS NEWSLETTER - HCA2

 

JPM — Our intermediate and long-term outlook on JPMorgan are unchanged from a week ago – we remain bullish. However, we’re keeping a close watch on the macro risk factors across Emerging Markets, namely the currency dynamics in areas like Argentina and Turkey. Along those lines, we’ve included an excerpt below from JPMorgan’s most recent 10-K (year-end 2012), which shows their risk by country for their top 20 countries in which they do business, excluding the US. We’ve highlighted the three of those countries that appear to be near the top of the risk pile amid this current environment of rising EM concern. The company has some exposure to Brazil, India and Russia, though, for perspective, none of the three are Top-5 exposures, and collectively represent less than 2% of total assets.

INVESTING IDEAS NEWSLETTER - jpm9 

While this should offer investors some comfort, the reality is that global banks like JPMorgan will trade, in the short term, largely based on sentiment around the perceived risk – rising or falling – in these emerging markets. From our vantage point, we are much more interested in the “contagion” risk dynamic, which we actively monitor by watching both the TED-spread domestically and the Euribor-OIS spread in Europe – to date, neither of these measures has shown much reaction to what is happening in emerging markets. Were that to change, we would likely change our view on the performance outlook for JPM shares.

 

The table below shows JPMorgan’s Top 20 exposures by country (excluding the U.S.). The selection of countries is based solely on the company’s largest total exposures by country.

Click to enlarge

INVESTING IDEAS NEWSLETTER - jpm1

 

LVS — Gaming, Lodging & Leisure Sector Head Todd Jordan added Las Vegas Sands to Investing Ideas earlier this week. Click here for the full report.

 

 

RH — In September, Retail Sector Head Brian McGough wrote a research note arguing that people are asking the wrong questions about Restoration Hardware. The key question according to McGough “is when it will earn $8.00 per share. We think the answer is 2018…That’s $6.50 in incremental earnings in 5-years. Put a different way, that’s a 40% earnings CAGR. Use that as ammo next time anyone tells you that RH is too expensive or that ‘they already missed it’.”

INVESTING IDEAS NEWSLETTER - rh5 

While shares have clearly been under pressure since then, McGough remains convinced that RH’s long term growth story is incredibly bullish. His conviction is fueled by square foot acceleration, new categories, and increased store productivity which is currently being obfuscated by the quarterly guessing game. The quarters and share price will and ebb and flow, but there is no change to his $8.00 in EPS thesis by 2018 highlighted in his note.

 

 

TROW — In case you missed it, T Rowe Price reported its fourth quarter earnings results this week, beating consensus on both revenues and earnings and also finishing with record all-time assets-under-management (AUM).

 

Importantly in the quarter, TROW reported slight complex-wide inflows, which broke a streak of 2 quarters of substantial outflows which had been driven by a handful of Asian sovereign wealth management clients.

 

After speaking to TROW management after its results, we believe that the bulk of sovereign wealth redemption process is completed as remaining assets in those accounts are "substantially diminished" now according to management. Thus as we move forward into the New Year, TROW can again start to put up improved inflows, which has historically driven a premium valuation versus its peer group.

 

 

WWW Wolverine Worldwide has arguably the most diversified brand portfolio in the world. Unparalleled geographic distribution ensures that the company isn’t overly dependent on one market place. The same holds true for its brands. In light of the recent cold weather and The Walking Dead esque photos coming out of Atlanta, we pulled point-of-sale footwear data for the first 4 weeks ending in 2014.

 

Athletic footwear in general has been soft to start the New Year. Cold weather brands have benefited and athletic-centric brands have seen their sales slide. WWW’s Merrell, Sperry, and their namesake Wolverine have been outpacing the industry average by a wide margin. Below you can see the difference between WWW’s brands (highlighted in gray) and two of the heavy hitters in Nike’s portfolio and perennial cold weather outperformer Timberland. It’s a great example of how WWW’s brand diversity allows it to capitalize on different macro/weather/trend factors better than just about every footwear player in the marketplace.

 

INVESTING IDEAS NEWSLETTER - www sales

 

ZQK — Over 60% of Quiksilver’s sales are generated outside the US market. While that looks like a incredibly diverse business model at face value, it loses some of its luster when you consider that only 19% of Roxy, Quiksilver, and DC’s sales come from undeveloped markets. That revenue is spread across 82 different countries for an average of $4.3mm per country. What’s even more staggering is that revenues from China total approximately $40mm. Yes China, only accounts for 2% of ZQK’s profits. That market alone is a $400mm opportunity.

 

ZQK is a global brand, but operating inefficiencies have limited the success of its brands in developing markets. With new management’s rationalized brand portfolio and emphasis on global operating efficiency we believe that the company is in a good position to leverage its strong brands in what have historically been underpenetrated markets.

 

INVESTING IDEAS NEWSLETTER - ZQK image

 

*  *  *  *  *  *  *

 

Click on the titles below to unlock the institutional research notes.

 

Making Sense of Equity Style Factors Year-to-Date

There are three key takeaways in this deep macro dive from analyst Darius Dale:


1) Investors are debating the growth outlook.

2) Our Q1 macro theme #InflationAccelerating is working.

3) Hedge funds are regaining confidence in short selling


INVESTING IDEAS NEWSLETTER - Wall Street

 

WTW: Initiating Short in WeightWatchers

This could be WeightWatcher’s worst winter selling season in the last seven years according to analysts Tom Tobin and Hesham Shaaban. Issues could be secular.

 

INVESTING IDEAS NEWSLETTER - weight watchers

 

EAT: Blueprint for Success at Brinker

We often articulate our view that EAT is one of the best managed companies in the restaurant space.  This morning’s press release and subsequent call merely adds conviction to this belief.  It was nothing short of an awesome quarter. Mind you, this performance comes amid a less than favorable macro backdrop and a three-month period in which we suspect the majority of casual dining companies struggled.

INVESTING IDEAS NEWSLETTER - chilis logo

Hedgeye Cartoon of the Week

INVESTING IDEAS NEWSLETTER - boom

 

 

 


MO – A Mixed Stick

In our assessment, Altria reported a mixed Q4 in its release yesterday: weak cigarette volumes were offset by cigarette pricing and smokeless and wine results while its e-cigs remain in test markets and a calendar shift in the quarter and full year (one less Monday – a key shipping day) equated to a full week of less volume. In the quarter, this equated to EPS of $0.57 that missed consensus by a penny and sales that were down -1.26% Y/Y.

 

For reference, our preferred big tobacco play remains long Lorillard (LO) vs short Philip Morris International (PM).

 

What We Liked:

  • Strong pricing and lower SGA help to offset total volume weakness of -5.8% in the quarter
  • Smokeless segment outperformed, with revenues -0.7% Y/Y in the quarter and +5.1% Y/Y on the year – led by brand Copenhagen
  • The company reported that its e-cig offering MarkTen is performing well in its extended test market of Arizona where it's in 1,900 stores (Indiana was the first state)
  • We believe that MO’s partnership with PMI (announced in December) on e-cigs and reduced-risk tobacco products – to sell through each others distribution channels and share technology – will offer substantial growth prospects and profits for MO in particular given PMI’s legacy of international sales and distribution networks
  •  Company says its 2014 EPS results will benefit from lower interest expense, a lower effective tax rate, and a reduction in shares from the current share repurchase program

What We Didn’t Like:

  • Q4 Cigarette volumes were down -5.8% vs industry average of ~ -4% and last quarter +1.2%
  • We see Marlboro under pressure from lower-priced brands
  • CEO Barrington forecasts U.S. economy and adult consumer in a similar state in 2014 as 2013

 

For now we’ll remain on the sidelines with MO. The quantitative levels on the stock over the intermediate term TREND suggest a bearish set-up on the stock.

 

MO – A Mixed Stick - w. mo

 

Matt Hedrick

Associate


4Q13 EARNINGS SCORECARD: PRETTY FROM FAR

BEAT-MISS:  At the midpoint mark for 4Q13 earnings, Sales & EPS Beat-Miss spreads are expanding verses 3Q13 (53%/74%) and TTM (54%/73%) averages as 65% and 79% of SPX constituent companies have beaten Sales and Earnings estimates, respectively.   

 

Of course, the canonical means to beating estimates, particularly over the last four years, has been to progressively deflate expectations ahead of the quarter to the extent that what would have been disappointing-to-inline results ultimately gets stamped with the “Beat” label. 

 

This quarter has not been an exception as topline estimates for 4Q13 have drifted steadily lower for SPX constituents over 2H13.  

 

4Q13 EARNINGS SCORECARD:  PRETTY FROM FAR - BM Table 013014

 

4Q13 EARNINGS SCORECARD:  PRETTY FROM FAR - SPX Revision Spread

 

STYLE FACTOR PERFORMANCE:  Reported results vs expectations have been fairly even across style factors with the exception of High Beta & Low Short Interest equities which have performed meaningfully better vs. prevailing topline estimates than their inverses.  

 

4Q13 EARNINGS SCORECARD:  PRETTY FROM FAR - ES SF Table 013014

 

FUNDAMENTAL PERFORMANCE TRENDS:  Mean Reversion downside from peak corporate profitability remains the most apparant, ongoing, fundamental risk for corporate equities.  Peak, of course, can getter “peak-ier” if commodity/input costs are deflating and wage inflation remains somewhere south of topline growth. 

 

Despite the positive Beat-Miss trends, operating performance has not been particularly inspiring with 49% and 53% of companies registering sequential acceleration in sales and earnings growth, respectively.  Margin performance has been similarly unimpressive with only 42% of companies reporting sequential operating margin expansion according to bloomberg data. 

 

From a sector perspective, Financials, Industrials and Healthcare have led operating performance while Consumer Discretionary, Staples, and Tech have been the relative, fundamental laggards.  

 

4Q13 EARNINGS SCORECARD:  PRETTY FROM FAR - ES OP Table 013014

 

BETA or BEAT-MISS?  Relative to 3Q13 where Macro completely monopolized price action, "The Print" has had a moderately impactful influence on subsequent price performance thus far in 4Q.  Below we chart company Beats & Misses vs subsequent market adjusted 3-day performance.

  • Sales: 59% of companies that beat sales estimates subsequently outperformed the market to the tune of 4.5% on average.  The other 41% of companies that beat sales estimates underperformed the market over the subsequent 3-days by an average of -3.3%.  Subsequent performance for companies missing Sales estimates was similarly mixed.  
  • EPS:  Earnings performance has shown a stronger relationship with performance as 62% of companies beating EPS estimates subsequently outperformed the market by 4.1% on average while 38% went on to underperform the market by an average of -3.0%.  EPS misses have been sold heavily with 78% of companies missing EPS estimates subsequently underperformed the market by -5.4% on average.  

4Q13 EARNINGS SCORECARD:  PRETTY FROM FAR - Sales BM Perf

 

4Q13 EARNINGS SCORECARD:  PRETTY FROM FAR - EPS BM Perf

 

Enjoy Super Bowl Weekend. 

 

 

 

Christian B. Drake

c

@HedgeyeUSA

 

 

 

 

 

 


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HSY – Sticking With the Sweet Tooth

We’re sticking with what works when it comes to sweets. We’ve liked HSY over the last two quarters and yesterday’s Q4 results underlined its impressive story and informs our bullish outlook over the intermediate term.

 

Q4 was favored with the timing of Halloween and the holidays falling in the quarter: revenue of $1.96B (+11.7% Y/Y) beat expectations of $1.89B, and EPS was in-line with consensus at $0.86 and grew 24% Y/Y. Adjusted gross margins grew 80bps to 43.9% in the quarter and EBIT margin of 15.8% grew 140bps versus the prior-year quarter.

 

For the year, HSY grew sales 7.6% (it has captured >7% growth over the last 4 consecutive years -- not bad for a CPG company) and in the U.S. reclaimed its Candy, Mint, Gum (CMG) category leadership moving to a 31.1% market share., with strength in Candy and Mint offsetting weakness in Gum.

 

Its international story continues to be one that’s picking up steam: the Company grew chocolate sales in China +14% to broaden its market share to 10.2% (it was the fast growing chocolate company in country) and in Mexico improved its market share by 2% to 21%. We continue to applaud HSY’s strategy to invest to grow and diversify beyond the U.S. Given the macro headwinds across the emerging market, the results are encouraging.  Going forward we expect Asian sales to be further supported by last quarter’s announcement of a $250MM cap-ex spend to build a new plant in Malaysia to supply markets in Asia and assist existing capacity in China. 

 

According to company commentary, commodity inflation should be mild in 2014 across its broader basket (dairy being the one unknown with little visability) and in-line with our macro team’s Q1 Macro Theme of #InflationAccelerating.

 

For 2014, the company reaffirmed its FY EPS guidance of 9-11% growth or $4.05 - $4.13; net sales growth of 5-7%; and gross margin expansion of 50bps.

 

From a quantitative set-up HSY is comfortably trading above its intermediate term TREND level, confirming our bullish outlook:

 

HSY – Sticking With the Sweet Tooth - w. hsy

 

Matt Hedrick

Associate


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


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