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

Please see below Hedgeye analysts' latest updates on our high-conviction stock ideas and CEO Keith McCullough's updated levels for each stock.


At the conclusion of this week's edition of Investing Ideas, we feature three institutional research pieces we believe offer valuable insight into the markets.




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



CCL – Shares of Carnival are up 13.6% since it was added to Investing Ideas versus a 2.4% return for the S&P 500. Investors will be keeping a close eye on Norwegian’s (NCLH) earnings next Tuesday to see if there’s any indication of a price war in the Caribbean. CCL has the easiest comps among the big 3 operators, so even if discounting picks up, CCL has the most cushion. We remain bullish on CCL.



DRI – Earlier in the week, activist investor Starboard Value expressed its intent to “hold the board accountable for its actions” if the company decides to follow through with its plan to spin-off, or sell, the struggling Red Lobster chain.  Darden has plans to act upon this plan before the company’s annual meeting at the end of March and if they do, Starboard plans to assume control of the company through a shareholder vote. 


Red Lobster has significant real estate value that Starboard argues would be lost if the company were to divest the brand.  Managing Director Howard Penney sides with Starboard, citing Darden’s real estate value as one of the many features that makes this company so valuable.  All told, the activist pressure continues to build. 


We continue to like Darden as a long-term investment and believe the company has the potential to create substantial shareholder value with the right management team in place.



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 (BOE). We received updated economic and monetary policy guidance this week from the BOE’s Quarterly Inflation Report.  2014 GDP was revised higher to 3.4% from 2.8% previously forecast and the unemployment rate is expected to reach the 7% threshold target in January. In response, this week BOE governor Mark Carney amended his “forward guidance” to increase rates at the 7% unemployment level to signal that the Bank is not yet ready to hike rates despite the improvements seen in the economy and unemployment level. 


The GBP/USD acted favorably to the news, up +1.83% week-over-week.



HCA – There is clearly a lot going on these days with hospitals.  Earlier this week, reports from Health and Human Services indicated a million people had signed up for Obamacare last month, a huge number.  Unfortunately, in a separate report, only a fraction of those who enrolled in the previous months paid their first bill, which means after going through the hassle to fill out the forms, they did not actually get health insurance. 


We received the latest update of our doc survey this week.   The big finding, and negative for our HCA position, was a huge drop in patient visits for patients with private insurance.  If it persists through the quarter AND the balance of our other inputs such as orthopedic case volume and Obamacare enrollment, will probably get us to close the HCA long.  But we will run the survey two more times before getting to that point. We are monitoring this closely.


LVS – Chinese New Year off to a rocking start in Macau.  Through February 9, daily table revenues averaged $1.464 billion up 78% over comparable period last year.  The more appropriate comp is the 3rd week of February last year when table revs averaged HK$1.107 billion – so peak CNY is up about 32%. While it’s still early, Las Vegas Sands is the market share leader at 25.3% thanks to its success in the mass business. We expect another strong week of revenues as VIP high rollers start rolling into town.  For the month of February, we expect revenue growth to exceed 20%. 


RH – We hosted a conference call with our Institutional subscribers earlier this week to address issues facing Restoration Hardware over the 3 durations that we typically look at when making investment decisions. Those of course are Trade (3 weeks or less), Trend (3 months or more), & Tail (3 years or less). RH is still our favorite long in the retail space by a long shot. Here is a quick summary of the points we addressed as it relates to the Trade duration.




During the retail meltdown during December and January – RH was hit far worse than the rest of the retail sector. We’d argue that silence hurt the company more than anything. In our opinion, the market is severely overestimating the impact that the competitive retail environment and cold weather will have on RH. Remember, nearly 50% of RH sales come from the dot-com channel. We are going to have to wait to hear the company’s 4Q numbers – likely until late March, but we think that the company will report numbers in line with their previous guidance, which calls for revenue growth in the mid-to-low 20’s and earnings growth in the high-20’s to low-30’s range.



TROW – The historical relationship of lagged retail mutual fund flow to performance continues to hold into the first part of 2014 with equity mutual fund flow continuing to be positive despite a negative start to the year for U.S. stocks. Our research shows that over a 12 year period, fund flow has trailed performance by an average of 6 months which means that the +30% return in the S&P 500 in 2013 can create continued stock fund inflow through the first half of 2014 (barring any major change to the trajectory of stocks).




While most fund flow surveys focus on net flows (which is new fund sales less fund redemptions) a snap shot of solely mutual fund sales shows the strength in stocks and the continued weakness in bonds. Through December of last year, all stock fund sales are breaking to new highs which means that demand from retail investors continues to increase.


Conversely, all bond fund sales continue to trend lower from their all time highs in early 2013, in an indication of decreasing demand from retail investors. T Rowe Price is well positioned to benefit from this environment as a leading stock fund manager with 85% of its assets in equities. TROW also has de minimus exposure to emerging markets which could be a real negative theme for 2014 and beyond.





WWW – Wolverine Worldwide reports its 4Q Earnings on Tuesday (2/17). While we don’t expect any fireworks on the call due to the company’s preannouncement in early January - we do like WWW going into the print and think that it will print upside to earnings. One thing that we will be looking for on the call is an update on the company’s new international partnership agreements for the recently acquired PLG brands. Other than that, everything has been pretty much spelled out in the company’s press release and at its presentation at the ICR conference.




The company already gave preliminary guidance for FY14 and it called for “mid-single digit” revenue growth and “solid double-digit” earnings growth.  One thing to keep in mind is that WWW may be the best company in retail at managing the Street’s expectations. In the chart above you can see the change in consensus’ ’13 EPS estimates since the company reported earnings in February of 2013. Originally the Street was looking for 15% earnings growth. That number has inched its way up to where it currently sits at 25%. We expect more of the same in ’14.


Consensus is seriously underestimating the top line growth potential for the acquired PLG brands in the international marketplace. We continue to see upside potential in these markets and expect to see continued strength in WWW’s core brands.



ZQK – The key callout for ZQK comes from Friday’s less-than-stellar VF Corp results.  VFC management noted that the #1 use of cash is for acquiring other businesses. Of course, that is only intensified during times like this when organic growth is tough to find, like they’re faced with today. Management noted quite clearly that debt-to-capital is 19%, lower today than when they bought Timberland. In other words -- 'we can buy something big'.  We still think that VFC will ultimately own ZQK. The only catch is that VFC is not good at buying things that are broken. And ZQK -- though there is an exceptional plan in place to fix the company -- is broken. Our sense is that VFC will have a greater appetite for buying ZQK when at $12 once it starts growing again, than at $7 when its' top line is struggling. But it's a matter of time, in our opinion.


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Why Is Gold (and Gold Miners) Ripping?

We’ve been calling for investors to get longer of inflation-oriented assets in lieu of consumption-oriented assets, at the margins, as it becomes increasingly likely the Fed stops tapering (or incrementally eases) over the intermediate term.



CAKE: Thin Batter

The Cheesecake Factory (CAKE) remains on the Hedgeye Best Ideas list as a SHORT. The company delivered disappointing 4Q results earlier this week. When in doubt, blame the weather!



ICI Fund Flow Survey: Record Divergence In ETFs...Mutual Funds Carry On

An historic week within ETFs with record outflows in equities and record inflows into bonds...trends unchanged within mutual funds.



THE 2/5's (UN)COMPROMISE? - 4Q13 Earnings Scorecard

We’ll keep the prose pithy here on this week’s earnings scorecard update:


  • BEAT-MISS: With ~80% of SPX constituent companies having reported 4Q13 results, the Sales BEAT-MISS spread remains above the 3Q and TTM averages while the EPS beat percentage has faded some of its early momo and now sits flat with 3Q13 results.
  • CONSUMER COMEDOWN:  Consumer companies have turned in a notable, negative divergence with  <40% of Consumer Staples companies besting revenue estimates and consumer discretionary taking the penultimate position in topline BEAT percentage. Further, consumer facing companies are reporting the worst momentum in operating performance with just 2/5 of companies accelerating sales or expanding margins.  Wth the XLY and XLP both in the bottom third of sector performance YTD that relative operational underperformance is seemingly being discounted.  Also, with slow growth/yield chase assets outperforming and Healthcare and Utilities leading Sector in the YTD, its notable that the third member of the canonical defensive trio (Utilities/Healthcare/Staples) has failed to participate.    
  • OPERATION “UNDERWHELM” GREENLIGHTED:  Operating performance metrics deteriorated modestly WoW and at present just 48% and 52% of companies have registered sequential acceleration in sales and earnings growth, respectively.   The percentage of companies reporting sequential operating margin expansion is even more underwhelming at just 42% .
  • HIGH BETA, LOW EXPECTATIONS? - From a style factor perspective, High Beta and Low Yield names have performed notably better vs. prevailing topline estimates than their inverses. 
  • DON’T MISS!:  EPS misses continue to be sold aggressively as 75% of EPS shortfalls have gone on to underperform the market by -5.2% on average over the subsequent 3 trading days. 


THE 2/5's (UN)COMPROMISE? - 4Q13 Earnings Scorecard - ES OP Table021414


THE 2/5's (UN)COMPROMISE? - 4Q13 Earnings Scorecard - ES Table 021414


THE 2/5's (UN)COMPROMISE? - 4Q13 Earnings Scorecard - EPS BM


THE 2/5's (UN)COMPROMISE? - 4Q13 Earnings Scorecard - Sales BM


THE 2/5's (UN)COMPROMISE? - 4Q13 Earnings Scorecard - ES SFP 021414


Christian B. Drake




We continue to be bearish on MCD, but we are removing it from the Hedgeye Best Ideas list as a SHORT.


Our bearish thesis is centered on structural (internal and external) issues within the McDonald’s U.S. business.  While the company addressed some of its issues with the rollout of high density tables, we believe McCafe’s status as a “sacred cow” will continue to cause throughput issues.


On the positive side, however, it appears Europe has stabilized despite persistent softness in the region’s most important market – Germany.  Asia also looks to be stabilizing despite Japan finding itself in the same boat as Germany.


McDonald’s business model is resilient and the stock has benefitted from a healthy 3.4% dividend yield, which we expect to increase in 2014.  What concerns us the most in being short the name is the potential for an activist to step in or the potential for a “financial engineering” event.


Whether it is the real estate or the potential for incremental leverage, there is inherent value in McDonald’s balance sheet.  We believe someone, at some point, will come along and take advantage of this.  If Carl Icahn can push APPL to buy back more stock, we surmise he’d be able to do so for MCD as well.


For the time being, McDonald’s is treading water.  The business plan the company presented to the investment community at last November’s analyst meeting is, in our view, unlikely to deliver the intended results.  We believe the required changes this company needs will happen soon – and they are significant.


Below we highlight a few changes that we believe need to be made at MCD:

  1. Higher Food Costs – CMG has permanently changed the way consumers view fast food and MCD knows it.  In January, MCD announced its commitment to begin purchasing “verified sustainable beef” by 2016.  MCD currently sells over one billion pounds of beef and it will take a couple of years for them to “listen, learn, and collaborate with stakeholders from the farm to the front counter to develop sustainable beef solutions.”  These trends suggest higher food costs for MCD as they begin to compete in the new era of sustainability.
  2. Cutting Capital Spending – At the 2013 analyst meeting, MCD revealed their shift in strategy from “better not bigger” to “bigger and better.”  It is unlikely this strategy will improve returns.  McDonald’s capital spending has increased 100% since 2006.  The only way to fix the inherent issues within the company today is by cutting capital spending.
  3. Rethink the McCafe strategy – For Don Thompson, McCafe is a “sacred cow.”  We continue to believe McCafe is the largest culprit for declining traffic trends at lunch.  Since he pushed the strategy aggressively while running the U.S. business, it will be difficult for him to admit defeat.

Given the changing consumer needs, wants, and desires, the MCD business model is in need of a major overhaul.  Thanks to CMG and these developing consumer trends, MCD is being forced to look into selling sustainable beef.  This is only the tip of the iceberg for McDonald’s.  Its entire menu, packaging and carbon footprint will eventually need to be reengineered.  The question is: at what additional cost?



Howard Penney

Managing Director


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


Takeaway: Our intermediate-term view calls for investors to be OVERWEIGHT/LONG UK, Germany, Eurozone and China vs. UNDERWEIGHT/SHORT US and Japan.


All week we’ve been pounding the table on our #InflationAccelerating Q1 Macro Theme, which continues to broadly manifest itself in buy-side PnLs (in one direction or the other). Today, we wanted to briefly update you on our #GrowthDivergences Q1 Macro Theme, which called for investors to be OVERWEIGHT/LONG UK, Germany, Eurozone and China vs. UNDERWEIGHT/SHORT US and Japan.


Like our #InflationAccelerating theme – which continues to be VERY non-consensus based on a number of dialogues we’ve had with our always-sharp subscriber base – this theme has, on balance, worked like a charm:


  • UK FTSE All-Share Index: -1.4% MoM (the market is reacting to Carney’s hawkish tone in the near term; #BuyingOpportunity)
  • Germany DAX Index: +1.3% MoM
  • Eurozone Stoxx 600 Index: +0.6% MoM
  • China Shanghai Composite Index: +4.4% MoM
  • US S&P 500 Index: -0.3% MoM
  • Japan Nikkei 225 Index: -7.2% MoM


These deltas are generally supported by each of the respective GIP (i.e. Growth/Inflation/Policy) outlooks. Below, we offer up some quick-and-easy one-liners summing up our intermediate-term view on each economy. Lastly, we outline what we are seeing in the model that makes us sound so directionally negative on the macroeconomic setup in the US (vs. leading the bull charge in 2013).



UK: Probably the best looking economy of the bunch; the threat of +6% nominal GDP growth in 2014E plus deteriorating BoP dynamics underscore Carney’s increasingly hawkish bias – which only insulates our #StrongPound = #StrongUKConsumer view.




Germany: Our model has German GDP growth continuing to materially accelerate in 1H14, helping the country achieve 3Y highs in economic growth for 2014E. The acceleration in inflation should lend marginal support to the EUR by allowing Draghi to back off of his easing bias to some degree.




Eurozone: Very similar [bullish] setup to Germany, though we see less upside in both GDP growth and CPI on a full-year basis as structural headwinds persist throughout the periphery.




China: Our lowest-conviction bullish bias. If Chinese GDP growth doesn’t show strength against ridiculously easy compares in 1H14, the back half of the year could be a disaster from a growth perspective. Still, our analysis shows that the PBoC has adopted a marginal easing bias in the YTD, which should be supportive of our base case scenario.




US: Inching towards a deep trip to Quad #3 (i.e. growth slowing as inflation accelerates). Refer to the analysis below for more details.




Japan: Careening towards a deep trip to Quad #3. The only call to make here is whether or not the BoJ accelerates its timeline for incremental easing, which, on the margin, would be bearish for the JPY and the Japanese consumer, but bullish for manufacturing, exports, employment and wage growth. We’ll learn more post the BoJ’s policy meeting next week, but our base case scenario is that they’ll be dangerously slow to react as a result of their previous guidance and out-year inflation targets.





Growth: As compares get tougher at the margins, think real GDP growth comes in at the low end of our current forecast range for 2014E. This is a markedly different setup from 2013E, where we thought GDP would come in at the high end of our target range and accelerate throughout the year on a sequential basis.


Now we are below both the Street – which continues to take up their numbers in recent weeks – and the Fed. If we’re right on growth, the FOMC will be forced to react to a fair amount of negative economic surprises as the year progresses, likely forcing them to shift back to an easing bias.






It’s important that we make the following statistical point regarding our predictive tracking algorithm: when compares for any rate-of-change series get tougher at the margins, you need a commensurate increase in sequential momentum to prevent a deceleration in the first derivative.


In light of that, it’s important to note that recent trends in the broad balance of economic data do not support expectations for an increase in said momentum over the intermediate term. Consumption growth continues to accelerate on a trend-line basis, but industrial production growth and PMI data is clearly slowing, while confidence readings are more-or-less flat (on a trend-line basis).
















Inflation: The confluence of easy compares, annualized currency weakness, a commodity base effect and the recent acceleration in commodity reflation continues to support our directionally hawkish view of the domestic inflation outlook. Moreover, we are now well ahead of both the Street and the Fed with respect to our full-year expectations for CPI. If that view proves correct, consumption growth (i.e. ~70% of GDP) will slow domestically.












In summary, hopefully this note was helpful to further elucidate our views and is additive to your individual thought process around where to allocate risk capital. As always, feel free to ping us with any questions, comments, concerns, etc.


Happy Valentine’s Day,




Darius Dale

Associate: Macro Team

WTW: Staying Short

Takeaway: The other shoe has yet to drop. Management needs to make a decision; it's a lose-lose either way


Guidance was a considerable disappointment, missing consensus EPS estimates by over 45% at the midpoint.  Below are the main guidance takeaways from its earnings call.

  • Revenue: ~$1.4 billion vs. consensus of $1.5 billion
  • EPS: $1.30-$1.60 vs, consensus of $2.72
  • North America: Revenue & Attendance down low 20% (vs. -11% & -15% in 2013)
  • Online: Revenue to decline high-teens (vs. 4% growth in 2013)
  • United Kingdom: Revenue to decline 20% range (vs. 20% in 2013)
  • Europe: Revenue to decline mid-single digits (vs. flat in 2013)
  • Marketing: to decline $20mm y/y (-7% y/y)



WTW didn't offer anything concrete as to how it plans to reignite growth, or address the growing competitive threat from free apps and activity monitors.  


Management chose to focus on Weight Watchers being the market leader while implying it has the best product in the industry.  While that could be true, it's not a question of the value of the Weight Watchers product, but whether the end-user values its product as much as the company is looking to charge for it.  


Free apps have been out there for a while.  That's not the main issue.  The main issue facing WTW is that access to these apps continues to climb; with smartphone penetration nearly doubling over the last 3 years to 74% in 3Q13 from 40% in 1Q11.


WTW: Staying Short - Smartphone penetration 3Q13


We don't believe WTW can right the ship without taking a more aggressive approach to membership growth and retention. It's plans to cut marketing in 2014 suggests it's going the opposite way, which we believe will only exacerbate it's member retention issues.  


WTW: Staying Short - WTW   Revenues vs. Marketing 4Q13


More importantly, WTW has a decision to make.  It can maintain its current pricing ($43 for a monthly pass, $19/month for its online product) and continue to cede share, or it can reduce pricing to become more competitive.  In either event, revenues will take a hit, whether it's membership or ARPU.  


Consensus is assuming that revenues stabilize in 2015, which suggests the street is discounting the secular threat facing WTW.  So we'll remain short from here, until the street finally gets it.



Hesham Shaaban, CFA




Thomas W. Tobin



PAR FOR THE 2014 COURSE: January Industrial Production

A sub-title in our analysis of the weekly Initial Jobless Claims data yesterday was:  #Deceleration:  Par for the 2014 Course.  HERE


And since I feel like I’ve written the same note highlighting the deceleration in the rate of improvement in the domestic, fundamental macro data about 20X to start 2014, it felt fitting to just recycle that Title also. 


INDUSTRIAL DECELERATION: That industrial production slowed in January isn’t particularly surprising given the soft ISM data and the slowing sales and rising inventory of auto’s  - See yesterday’s note for more detail  PANGLOSSIAN PIQUE: JANUARY RETAIL SALES


Consumer Durables, led by the 5% decline in vehicle production, was the biggest loser but Non-Durables, Business Equipment and Industrial Supply all decelerated on both a MoM and YoY basis.  Capacity Utilization slipped to 78.5% in January, with the -0.4% MoM decline the largest since August of 2012.


MAPPING THE SLOWDOWN:  We detail IP and Capacity Utilization data specifically in the table below but, with most of the significant data points for January now in, it’s probably more worthwhile to provide a summary refresh on the prevailing slope of improvement across the preponderance of the fundamental macro series. 


Perhaps the most efficient way to get a feel for the broader trend in the slope of growth is just to look at the Economic Summary Table (below) and simply observe if there is more ‘more red’ or ‘more green’ staring back at you. 


As can be seen, the sequential rate of improvement across most of the latest higher frequency data is Worse.    


Looking a little closer, even the data currently flagged as “Better” is less than inspiring. 


Let’s take a quick tour of each of the “Better’s” in turn: 


  • NFP:  NFP employment improved sequentially in January but that’s only because December was a brick.  Employment gains are decelerating vs the 3M/6M/12M averages. 
  • Consumer Confidence:  The data here has been middling and largely equivocal to start 2014.  The Conference Board measure improved in December, the preliminary Univ. of Michigan number for Feb was unchanged vs. January, and Bloomberg’s Weekly measure is tracking below the January average thus far in February. 
  • ISM Services:  ISM services improved in January but that was really only because it completely tanked in December as New Orders saw its largest sequential decline since 1980.  
  • Case-Shiller HPI:  Media pundits still (for whatever reason) love monitoring and citing the Case-Shiller home price data.  The fact is that the Case-Shiller HPI is one of the most lagging housing measures there is.  The “better” reading in the table below is actually a November number and we already have preliminary January Corelogic data – Home price growth as measured by Corelogic has been decelerating for 3 consecutive months.  
  • Inventories:  It’s a bit of a toss-up on whether to classify accelerating inventory growth as a positive or negative.  From a strict GDP accounting perspective, rising inventories can be a positive for reported growth.  However, when end demand is slowing and inventories are rising, the other side of that inventory build drags on both corporate profitability and reported economic growth.


So, on the back of the decelerations reported in Job Openings (JOLTS), Mortgage Purchase Applications, Retail Sales, and Initial Claims earlier in the week, Industrial Production and Capacity Utilization in January both deteriorated.


I haven’t checked but I’ll bet the dollar is down, gold is outperforming and #hashtags lamenting the distortive impacts of the weather are still in crescendo  – yep, par for the 2014 ……


Happy Valentines Day. Enjoy the long weekend


PAR FOR THE 2014 COURSE: January Industrial Production - Eco Summary 021414


PAR FOR THE 2014 COURSE: January Industrial Production - IC CU Table


PAR FOR THE 2014 COURSE: January Industrial Production - Confidence Table 021414



Christian B. Drake



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