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INVESTING IDEAS NEWSLETTER

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

Please see below Hedgeye analysts' latest updates on our nine current 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 recent research notes we believe offer valuable insight into the market and economy.

 

INVESTING IDEAS NEWSLETTER - LEVELS 2 28

 

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

 

BNO – Got #InflationAccelerating yet? Hedgeye's macro team added Brent Oil to Investing Ideas this past Thursday after the convergence of several key macro price signals. We will be sending out a full report outlining our case.

 

INVESTING IDEAS NEWSLETTER - oil99

 

CCL – Micky Arison’s (Chairman of Carnival) 5 million share sale put a damper on an otherwise good week for Carnival. While Arison's sale was due to estate planning, we do wish Arison would focus more on his Miami Heat games and less upon his stock ownership. At any rate, the sell-side is (finally!) warming up to CCL. Several reports this past week indicate that.

 

As we have mentioned before here, Mother Nature has been a fortuitous bullish catalyst for CCL shareholders. This winter's unrelenting bitter cold and above average snow fall has certainly been boosting bookings in addition to a very promotional environment. While discounting is now a given, we still haven’t seen pricing fall off a cliff for CCL during Wave season. We’ll have another important pricing update next week. Stay tuned.

 

 

DRI – We woke up to news Monday morning that Starboard Value is seeking to put Darden management’s controversial plan to spin-off Red Lobster to a shareholder vote.  We continue to express our concerns with management’s plan because, to us, it makes very little strategic sense and fails to get to the heart of the problem.  Darden remains a company saddled with an inefficient operating structure. 

 

On the day Darden’s strategic plan was announced, the stock closed down 4% to $51.  While we can't speak for others, this didn’t exactly strike us as a big vote of confidence in management’s plan to create value.  Just two days later, activist Starboard Value announced a 5.5% position in the company. Voila! The stock rallied 6%.  For the most part, the stock has traded sideways since then, until rallying 3% on the news that Starboard retained former Olive Garden president Brad Blum to serve as an advisor in its battle against Darden.

 

The takeaway from stock action (and, in our opinion, sentiment since 12/20/13) is that DRI rallies when there is movement toward replacing management and sells off when management publicly digs their heels in.

 

We continue to prefer Darden on the long side with the expectation that the activists will be successful in forcing significant change.

 

Finally, our old friends over at CNBC are apparently hot on the DRI case now. In case you missed it, their website featured an interesting front-page critique on Friday "Darden Uses Lobster Claws on Critical Analysts" exposing DRI's woeful management style and and highlighted the work of Hedgeye Restaurants analyst Howard Penney.

 

 

FXB – We remain bullish on the British Pound versus the US Dollar (etf FXB) over the intermediate term TREND duration.  On Friday (2/28) we sold FXB to take a gain on a currency we’ve liked for the past 6 months as it signaled immediate-term TRADE overbought.

 

Data out of the UK remains strong.

 

This week preliminary Q4 GDP was released at +2.7%, or 10 basis points below the initial reading, with private consumption and government spending slightly underperforming expectations.  House Price data according to Nationwide remain elevated, registering +9.4% in February year-over-year. 

 

Over the longer term, we continue to expect prudent management of interest rate policy from the Bank of England. GDP estimates continue to move higher (according to the BOE +3.4% in 2014 vs a previous estimate of +2.8%) and we expect a strong Pound to accelerate alongside a rosier growth profile and a more confidence consumer. 

 

 

LVS – It was a very good week for Las Vegas Sands shareholders with the stock gaining 5.4%. 

 

INVESTING IDEAS NEWSLETTER - mac4

 

Early next week, Macau’s February gross gaming revenues will be released. This is a big deal for the company. We think it will show spectacular growth (+30%) with Las Vegas Sands as the prime beneficiary and market share leader. The question now becomes whether modest growth can be sustained as we roll into more tougher comparisons in March and April?  While the bar is set high, LVS has surpassed that recently. 

 

INVESTING IDEAS NEWSLETTER - lvs 22

 

HCA – It was a good week for HCA Holdings with shares finishing the week up 2.4%, doubling the gain for the S&P 500. I

Universal Health Services (UHS), a great hospital company, reported their Q413 results last night which largely disappointed sell-side expectations. Despite weak volumes and pricing, the stock price has held up rather well on Friday.

With all of the Hospital operators having reported similar results  (lower volume and better pricing) UHS largely followed the script.  Sometimes the reaction to a number like UHS reported can be far more negative than what happened today when expectations and the multiple are stretched. 

 

Right now it looks like expectations and the multiple for HCA Holdings (while having had a huge move) remain essentially subdued relative to its Healthcare peers and the S&P 500.  HCA's growth will outpace the broader market yet the multiple remains well below the market multiple.  In fact, HCA's relative multiple has grown even cheaper in the last several months. 

 

This isn't to say we don't see any risks to HCA's stock price from here. We do. And there is plenty to be concerned about fundamentally.  Next week we'll get the February survey data on physician visits.  January was exceptionally weak.  A weak February and we'll be looking to sell some longs including HCA. We are watching these developments very closely.

 

INVESTING IDEAS NEWSLETTER - tob1

 

INVESTING IDEAS NEWSLETTER - tob2

 

RH – Pier 1 Imports took down its 4Q EPS guidance by 15% Friday morning. The company cited weather as the main culprit in this revision, but noted that e-commerce traffic and sales were up. The biggest problem it faces is that e-commerce is only 5% of total sales. Stack that up against Restoration Hardware at 47% and it puts considerable risk on the business when store traffic is under pressure due to factors like weather.

 

Numbers like this strengthen our conviction that RH will be able to weather the 4Q storm (pun intended) because of the strength in its direct channel. And, it seems like the market is beginning to see it our way, with RH shares up ~15% over the past 2 weeks.

 

 

TROW – The proprietary fund flow survey Strategic Insight (SI) is flagging that T Rowe Price in January had the strongest net inflow in over 3 months. This is consistent with our short term thesis that the company should now have a positive inflection point after burning off historic institutional outflows in the second and third quarter of last year. We report on industry related mutual fund trends weekly from the Investment Company Institute (ICI) which outline broad mutual fund trends for the sector but the SI survey quantifies fund flow trends at the manager specific level.

 

INVESTING IDEAS NEWSLETTER - cast22

 

According to SI, TROW gathered $3.3. billion in net new inflow in January alone, substantially higher than the results it produced in October, November, and December which averaged over $1.0 billion in inflow per month. We are looking for a positive result for the company’s first quarter in both earnings and net inflows which will assist the stock in the short term.

 

 

ZQK – Quiksilver reports 1Q14 earnings on Thursday, March 6th after the close. One of its biggest competitors Billabong (BBG-AU) reported earnings last week and one thing was abundantly clear. ZQK is light years ahead of BBG in terms of organizational health.


INVESTING IDEAS NEWSLETTER - quik22


Quiksilver started the restructuring process over a year ago. While that process isn’t complete, good progress has been made and we continue to believe that we will see the fruits of the company’s new strategy starting in FY15. Billabong is only starting that process and from a much worse starting point. On the call, management outlined the progress it has made on its profit improvement plan since the infusion of capital and management change implemented in September. The front office is just starting to take shape with a number of key hires still left to be made. Significant spending cuts are also needed in order to free up capital to fuel growth in the company’s core – consisting of RVCA, Element, and the company’s flagship Billabong.

 

We expect ZQK to leverage its brand awareness from a position of strength as it begins to re-invest in its brands to grow the top line and steal market-share from the companies like Billabong.

 

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Click on each title below to unlock the content.

 

#GrowthSlowing: 4Q13 GDP

We’ve been vocal in our expectation for a deceleration in the slope of domestic growth over the last couple months and while Friday's downward revision to 4Q13 wasn’t particularly surprising, it does offer some positive confirmation to that view.

INVESTING IDEAS NEWSLETTER - econ1

 

Weight Watchers: Why We're Still Short

We have been mulling over what to do with WTW shares, wondering if there was anymore downside left in the short after selling off almost 30% since its earnings release. WTW price suggests limited room for error moving forward; in other words, we can stay short until the street finally gets the secular decline theme.

INVESTING IDEAS NEWSLETTER - fat

 

Is China About to Get Loose?

We are increasingly of the view that the People's Bank of China might be setting up to ease monetary policy over the intermediate term.

INVESTING IDEAS NEWSLETTER - china1

 

 

 


 

 

 


THE WEEK AHEAD

The Economic Data calendar for the week of the 3rd of March through the 7th 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.

 

THE WEEK AHEAD - week


Got #GrowthSlowing Right? We Did. (Back In December)

Takeaway: Our price signals were spot on regarding #GrowthSlowing.

So...U.S. Q4 GDP was revised sharply down this morning from 3.2% to 2.4% in the latest sign of slowing economic growth. For the record, we were virtually alone in our #GrowthSlowing macro call made back a couple weeks before Christmas.

December 12th to be precise.

Got #GrowthSlowing Right? We Did. (Back In December) - snails

 

Here's an excerpt:

 

Today, we received a great follow-up question from a very sharp client in the fixed income space: “What is the data you’re looking at to support your view that GDP growth will slow down?”

 

As with any inflection-based call on growth and/or inflation, we start with the market’s risk management signals – which tend to lead the reported data. The USD is decidedly broken from a quantitative perspective and long-term interest rates are making lower-highs vs. the YTD peak in both growth data and #GrowthAccelerating expectations.

 

Got #GrowthSlowing Right? We Did. (Back In December) - chubs

 

In short, this is how we have managed and communicated our non-consensus macro call over the last 3 months: 

  • #GrowthAccelerating was our view for most of 2013. The call was to be long pro-growth/consumption exposure.  
  • As we moved through Q4, we became increasingly cautious on the slope of growth….but, the price signal remained positive and we repeatedly highlighted that we knew we were “buying the bubble.”  
  • The price signal (10Y/VIX/$USD) started to break down from a quantitative perspective. So, we got decidedly less bullish on pro-growth leverage.
  • The fundamental data began to come in increasingly negative, confirming the price breakdowns and we got longer of slow-growth/yield chasing assets (bonds/gold/commodities, etc)  

Now here we are.

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podcast | McCullough: Janet Yellen's Crazy (There I Said It)

 

Hedgeye CEO Keith McCullough goes no holds-barred on the Fed's serial dollar debauchery and how this "Burning Buck" policy is creating major risks and opportunities. 

 



KSS: Dot.Com Trends Rolling in the Wrong Direction

Takeaway: KSS '14 guidance is still too aggressive. $800mm in revenue is at risk for JCP, and eroding dot.com weakens a pillar of support.

Conclusion: We already stated our belief that KSS 2014 guidance is too aggressive – in fact, we don’t even think it will comp positive. While the crux of our argument rests in $800mm in revenue that we think is at risk to JCP, we found the company’s e-commerce trends to be troubling as well. E-commerce sales have protected KSS' comp for the past 9 quarters. With dot.com growth slowing, we seriously question the company’s 2014 comp guidance. If we estimate a (4%) brick and mortar comp with a 15% .com growth rate, we are looking at a (3%) blended comp in FY14 -- representing about half of what is at risk for the year.

 

While not outwardly clear given dot.com and store comps are blended into one number, it’s pretty troubling that brick and mortar comps have been negative for nine straight quarters. Growth in the dot.com channel has protected the company's reported comp over that time period to some degree, as outlined in the chart below.  

 

KSS: Dot.Com Trends Rolling in the Wrong Direction - KSS comp

 

KSS definitely recognized the importance of dot.com and have grown that side of the business at a 37% CAGR over the last 5 years into a $1.7bn business. Unfortunately, the growth rate of KSS’ dot.com is clearly slowing – both on a one and two-year basis. We still dot.com growth of 15% in '14 - but it won't continue to grow fast enough off of a much bigger base to offset weakness in KSS' 1100+ doors.

 

 KSS: Dot.Com Trends Rolling in the Wrong Direction - KSS com

 

Alec Richards

HedgeyeRetail



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