The Economic Data calendar for the week of the 24th of February through the 28th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
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 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.
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.)
Takeaway: The Burning Buck arrested its decline for all of 24 hours off its year-to-date lows.
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Takeaway: If UA's equipment really kept the U.S. off the Olympic podium, we can't imagine that they'd stay married to UA.
Everyone has an opinion on this issue. So here's ours. Simply put, this whole thing is ridiculous.
If you were going to 'go for gold' in the Olympics, do you think that just maybe you'd have tested out your suit before the games? We have to think that these athletes did (in fact, they did at the Olympic trials -- and did not complain when they were beating athletes wearing Nike suits).
A few of the classier athletes -- like Shani Davis -- stood up and said something like "I'm not blaming the suit. I went out there and gave it my all, and other skaters were simply faster". #respect, Shani. We give the US credit for sticking to its guns with UnderArmour despite this PR mess. If they really thought that it was the equipment that kept us off the podium, we can't imagine that they'd stay married to UA.
Takeaway: With ~90% of companies having reported, 2 trends have been clear: The Neg. divergence for Consumer & the return of forecasting fundamentals
CONSUMER COMEDOWN: As we’ve highlighted for a couple weeks now, consumer companies have turned in the notable, negative divergence in 4q13 earnings with just 30% of Consumer Staples companies besting revenue estimates.
Consumer Discretionary sits just ahead of Energy to round out the bottom third in sector level topline BEAT percentage.
Operating trends are diverging negatively as well with consumer facing companies reporting the worst momentum in operating performance with just 26% and 42% of companies registering sequential acceleration in sales and earnings growth, respectively, according to bloomberg data.
That negative divergence continues to get discounted by investors as Consumer Staples now sits as the worst performing sector YTD despite relative outperformance in slow growth/yield chase equities and the balance of the defense trio in Utilities/Healthcare sitting at the top of sector performance.
*Prices as of close 2/20/14
THE PRINT: The mini-resurgence in the import of forecasting fundamentals has been notable this earnings season as companies missing earnings continue to be sold aggressively. Of the minority of companies that have missed bottom line estimates, 71% have gone on to materially underperform (-5.1% on ave.) the market over the subsequent 3 trading days.
BEAT-MISS: No real change in trend WoW. With ~90% of SPX constituent companies having reported, the Sales Beat percentage stands 63% - well above both the 53% in 3Q13 and the 54% TTM average. At 73%, the EPS beat percentage is basically inline with the 3Q13 and TTM average of 74% and 73%, respectively.
Christian B. Drake
MINIMUM WAGE PROPOSAL ANALYSIS:
WAGES & LABOR’s BAD BANK:
Earlier this week the CBO released its analysis of the employment and growth impacts likely to occur should the federal minimum wage – as has been proposed by lawmakers - be raised over the course of the next three years.
Below we review the prevailing, conventional view of wage controls on labor economics, summarize the CBO’s main conclusions, and offer some additional commentary on the current state of the labor market and prospects for the slope of wage inflation.
THE IMPACT OF WAGE CONTROLS: THE TEXTBOOK
The scope of effects stemming from legislated wage controls are ranging but conventional economic analysis suggests a few primary, and non-mutually exclusive, impacts on employment and aggregate demand.
Ironically, rising demand for higher-skilled workers may perpetuate a recurrent, self-defeating cycle for policy makers as decreased/increased demand for low/high wage workers can serve to drive further wage disparity, ensuring a re-emergence of the same wage disparity dynamics lawmakers were targeting in the first place.
CBO’s CONCLUSION: On net, real income would increase by ~$2B.
GROWTH: Positive in the shorter-term, negative longer-term
The marginal propensity to consume is generally higher for low-income individuals. Thus, a legislated rise in income for low-wage employees is likely to flow through to consumption rather immediately.
However, over the longer-term, in which aggregate output is determined by the size of the labor force, the capital stock, and factor productivity, the CBO estimates a smaller workforce would lead to lower national output than would otherwise be the case.
So, on net, a legislated federal minimum wage increase would benefit low income families, primarily via an income shift from business owners and higher income families and would work to support consumption in the short-term while reducing per-capita GDP over the longer-term.
Source: CBO - HERE
LABOR’s BAD BANK: IS THE LABOR MARKET TIGHTER THAN IT APPEARS?
There’s a credible case to be made for a Good Bank/Bad Bank view of the current domestic labor market.
The current employment base and new workers with relevant skills (collectively “the good bank”) are in relatively good shape as initial claims base near frictional resistance and the economic stabilization matures while the long-term unemployed (“the bad bank”) remain unattached and in a terminal run-off of sorts.
SUPPORTING EVIDENCE: Initial Jobless Claims continue to move along near their historical, frictional lower bound at ~300K, the NFIB “Job Openings Hard to fill” Index continues to advance, Business Hiring Plans continue to make higher highs as does the Job Openings and Quits rate data in the JOLTS survey (Job Opening & Labor Turnover Report).
Further, recent research out of the Philadelphia Fed (HERE), which analyses worker flow and non-participation data from the BLS’s Current Population Survey (CPS), offers compelling evidence that nearly 80% of the decline in the labor force participation rate (LFPR) since the beginning of 2012 is accounted for by the increase in non-participation due to retirement (which, in turn, is driven by domestic age demographic trends).
This analysis, which sits in general agreement with our prior analysis (see: EARLY LOOK: PARTICIPATE), suggests the cyclical impacts of the recession on the LFPR have largely faded, and the secular drivers of the decline in labor force participation - which began in 2000 – are again reemergent.
Source: Shigeru Fujita, Federal Reserve Bank of Philadelphia (study link above)
So, there exists a fairly steady drumbeat of improvement across a range of labor market metrics.
DOES A TIGHTER (than it appears) LABOR MARKET AUGUR RISING WAGE INFLATION?
Recent research from the NY Fed (Here) examining the impact of unemployment duration on compensation growth suggests that long-duration unemployed exert less of an influence on wages than short-duration unemployed.
In the context of a good bank/bad bank labor market model, evidence that short-duration unemployment exerts a disproportionate influence on compensation growth argues that labor market slack may be less than total unemployment figures suggest and inflationary wage pressures greater.
CHICKEN OR EGG? Inflation, however, is generally a lagging indicator and wage inflation vs. broad price inflation presents as a chicken or egg problem. Specifically, can you get wage inflation without rising prices or accelerating demand?
On balance, evidence supporting wage pull inflation – rising wages sparking broader price inflation via a wage-price spiral - isn’t particularly convincing. Most arguments for higher wages causing higher prices pre-suppose higher demand or fail to address the initial reason wages increased to begin with.
Indeed, wage and unit labor cost growth moves largely in tandem with broader measures of price inflation and discerning the direction of causality isn’t clear.
Overall, it’s hard to argue for any material/sustainable wage inflation in the absence of a broader rise in prices or without rising demand or an acceleration in credit expansion and/or corporate investment.
Source: Linder, Peach, and Rich (study link above)
SURVEYING WAGE TRENDS
Despite near universal lamentation about the lack of wage inflation, the Trend in salary and hourly earnings growth has been positive. Below we profile a number of the primary measures of wage growth. Generally, on both a 1Y and 2Y basis the slope of improvement remains positive across each of the metrics.
Pulling the charts back, however, reveals the chief source of economist discontent. While we’ve experienced consistent, ongoing (albeit slow) improvement in wage growth, we remain well below historical averages. For example, nominal earnings growth for production and nonsupervisory employees currently sits just above 2% vs. a long-term historical average of ~3.1%.
PATIENCE OR PROTRACTED PENURY?
The frustration and impatience on the pace of the recovery that pervades media reports and pundit commentary offers an interesting juxtaposition against the almost universal acknowledgement that balance sheet crises and the back end of long-term credit cycles invariably augur protracted periods of sub-trend growth.
We’ve purposefully offered a one-sided take highlighting the evidence that the labor market may be tighter than it appears superficially and there are certainly credible arguments supporting the case for secular stagnation. There’s little argument that the pace of the recovery remains stubbornly slow, but broader labor market trends remain positive.
Passivity doesn’t sell advertising and generally doesn’t drive AUM, but a little more patience and little less manic punditry is probably the right prescription
Christian B. Drake
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