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 timely 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 – Norwegian Cruise Line’s modest guidance and troubling commentary pressured all the cruise names this past week, including Carnival. There is still unease among investors on whether a price war will erupt in the Caribbean. We believe there is already some evidence of that.
While the Carnival brand may see some discounting in the coming weeks, the strong bookings environment will keep yields at or above management expectations for the year. Meanwhile, Europe continues to be the bright spot for pricing and bookings in 2014 and CCL has the most exposure there. The stock will exhibit some volatility as we get more Wave commentary but stand firm on this name.
For the record, CCL is up 10% since we added it to Investing Ideas versus a 2.4% return on the S&P 500.
DRI – Starboard Value announced in a 13D filing Thursday morning that it has retained former Olive Garden President Brad Blum to serve as an advisor in its battle against Darden Restaurants. Starboard will pay $50,000 in cash to Mr. Blum who will, in turn, use the proceeds to purchase Darden stock.
We view this as a very favorable development and continue to believe there is the potential for significant shareholder value creation. Managing Director Howard Penney wrote in an institutional research note on Thursday, “I have known Brad since his days at Olive Garden. In all my conversations about DRI I have made no secret of the fact that I consider Brad uniquely qualified to head up a restructuring and turnaround at the company. I believe his expertise and experience make him an extremely valuable asset.”
A large part of our thesis revolves around the company’s ability to fix the crown jewel: Olive Garden. We think Mr. Blum could play a critical role in this turnaround and, apparently, Starboard does as well.
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). The BOE recently revised its 2014 GDP estimate higher, to +3.4% from +2.8% previously forecast. We continue to expect a strong Pound to accelerate consumption growth in the UK. This week UK Retail Sales for January were up +4.3% year-over-year – yes up, even with the weather!
HCA – Since HCA Holdings was added to Investing Ideas on 6/14/13, the S&P 500 has risen 12%. HCA has doubled that gaining 24%. Healthcare Sector Head Tom Tobin will have a new update for HCA next week.
LVS – Las Vegas Sands has had the perfect start to Chinese New Year (CNY). For the first time, LVS may end the month as the market share leader. The company can thank its surging mass business, particularly at Sands Cotai Central. The numbers coming out of CNY have been spectacular. Better luck has played a part, but gaming volumes have also been quite strong. Can the momentum be sustained in the next few weeks as the holiday throng exits Macau? We still expect +20% gross gaming revenues growth for February.
RH – Here is a look at our Retail Sentiment Monitor for Restoration Hardware. Our sentiment monitor is a quantitative scale to combine Sell-Side Ratings, Buy Side Short Interest, and Insider Trading activity. We pretty much catch all angles.
We use this tool in two different ways; 1) First, we look at directional changes in sentiment for each stock. 2) Second, we analyze the absolute level for each security. A reading above 90 has statistically proven to signal that the market is overly bullish on a name, and that it’s often advantageous to go the other way. Conversely, a reading below 10 suggests that the market is overly bearish, at which time it is usually prudent to go long.
The sentiment reading for Restoration Hardware is at an all-time low.
Fears over weather and the recent management shake-up have contributed to the fall in sentiment, but even before then, people were finding every reason they could to be bearish. We continue to view Restoration Hardware as THE name in retail with the greatest upside. Currently at around $63, we think that RH will touch $200 over 3-years.
TROW – Equity mutual fund flow had another strong period of asset gathering this week posting $7.2 billion of net inflow, an acceleration from the week prior of just a $1.8 billion inflow. Importantly, equity mutual fund trends year-to-date have improved by a solid 60% over 2013 trends, with 2014 averaging a weekly inflow of $4.8 billion versus last year’s weekly average of a $3.0 billion inflow.
Thematically we estimate that the over allocation by retail investors to bond funds over the past 5 years is fueling the continued reallocation of investment funds out of fixed income and into equities. There is an undertow that the entire allocation to fixed income by retail investors in 2012 of $330 billion may be unwound and being that 2013 only resulted in an $80 billion annual outflow from fixed income means there could be a continued influx of retail money into stock and out of bond funds.
T Rowe Price benefits from this re-allocation as a leading provider of equity mutual funds. We are traveling with the company next week to see clients and will have a more detailed update on the story then.
WWW – We’re one of the few bulls on Wolverine Worldwide. More importantly, we have heard absolutely nothing that shakes our confidence in this story. We continue to believe (regardless of guidance) that WWW will print outsized revenue growth at an incremental margin nearly 2x the company average as it scales its newer brands over its superior international infrastructure and de-levers along the way.
We’re modeling $1.78 and $2.28 in 2014 and 2015, respectively, with ultimate earnings power of $4.18 out in 2018, which is roughly 50% above the consensus. This stock used to be expensive, with earnings catalysts. Now it’s cheap with the same catalysts.
ZQK – Shares of Quiksilver have been under pressure since we added it to Investing Ideas on 1/8/14. This week, Retail Sector Head Brian McGough would like to highlight our continuing bullish case on the stock via this unlocked institutional note.
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Click on the title below to unlock the institutional note.
Our intermediate-term view calls for investors to be OVERWEIGHT/LONG UK, Germany, Eurozone and China vs. UNDERWEIGHT/SHORT US and Japan.
It was a disappointing quarter. Potbelly remains on our Hedgeye Best Ideas list as a SHORT.
The acquisition price for WhatsApp is greater than its app's addressable market (assuming they can ever monetize it.)