Please see below Hedgeye analysts' latest updates on our ten current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.
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.
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
BNO – Hedgeye's Director of Research Daryl Jones wrote earlier this week in Investing Ideas that our bullish case on Brent Oil is based on three key factors:
- Expected decline of the U.S. Dollar;
- Tightening global oil supply and demand,and
- A break out in our quant models.
Click here to read our full report released on Monday.
CCL – Despite wobbling back and forth a bit this past week, Carnival is up 10% and has more than doubled the return on the S&P 500 since it was added to Investing Ideas back in November. While concerns about low Caribbean pricing continue to persist, we remain confident that Carnival should keep or raise yield guidance when they report earnings in a couple weeks.
Our proprietary survey shows a significant uptick in Eastern and Western Caribbean pricing for the Carnival brand in March relative to February and December.
Carnival continues to be our top pick in the leisure space.
DRI – Darden preannounced 3Q14 results on Monday and, as we expected, they fell far short of consensus estimates. Management guided 3Q EPS to $0.82 versus prior estimates of $0.93. Darden expects same-restaurant sales in the quarter to decline 5.4% at Olive Garden, decline 8.8% at Red Lobster, increase 0.3% at LongHorn and decline 0.7% at SRG.
Despite this, they maintained their prior fiscal year 2014 guidance.
The company also held a business call update Monday morning to discuss their strategic initiatives to unlock shareholder value. We certainly weren’t impressed and published a couple of institutional notes during the week explaining why.
To top it off, Darden came out with yet another curveball on Wednesday when it announced the cancellation of its annual investor meeting, noting that the company will meet with analysts individually. Darden has been under scrutiny recently for cutting off critical analysts, such as our very own Howard Penney. Needless to say, the pressure continues to build and the activist case is growing stronger by the day.
FXB – The Bank of England (BOE) maintained the base interest rate at 0.50% this week along with its asset purchase program target (QE) at £375B.
We remain 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 BOE’s Mark Carney (oriented towards hiking rather than cutting as conditions improve).
UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers. In the BOE’s Quarterly Inflation Report (in February) 2014 GDP was revised higher to 3.4% from 2.8% previously forecast.
PMI Manufacturing came in at 56.9 versus expectations of 56.8 and PMI Services recorded 58.2 versus expectations of 58.0. Inflation continues to moderated in recent months, with CPI currently at 1.9% in January Y/Y – we expect this cut in the consumption tax to continue to boost business and consumer confidence and with it consumption
From a technical perspective, the British Pound is holding its Bullish Formation, trading above its intermediate term TREND and long term TAIL levels of support. It is up over +2% versus the US Dollar over the last month.
HCA – As hospitals continue to move toward providing outpatient services and the percentage of their revenue mix from outpatient continues to rise, patient traffic has become increasingly important to track and forecast. We received our monthly survey results earlier this week and things look good for February and March after a big drop in January. The weather has been a big topic lately, but so has growing concern that the US Economy is slowing, led by our own Hedgeye Macro team.
What gets really interesting from here is how a weakening economy has historically boosted medical consumption. While that claim doesn’t make intuitive sense at first, we’ve compiled ample evidence to prove this is indeed true. So are we seeing a rebound in patient volume because the weather got better or because the economy is getting worse? Does it matter?
We still like HCA and have been reworking our assumptions for the benefits from the Affordable Care Act. So far our conservative estimates, which are higher than HCA’s 1-2% benefit to EBITDA in 2014, look to be moving higher.
LO – Hedgeye analyst Matt Hedrick sent out a report to subscribers outlining our bullish case on Lorillard on Friday. Click here to read it.
LVS – Las Vegas Sands is up 11.7% since being added to Investing Ideas at the end of January, compared to a 4.7% return for the S&P 500. Shareholders had a great week as the stock reacted favorably to positive earnings revision over the past two weeks as a result of stronger than expected gross gaming revenues during February. As mentioned before, LVS took the market share title for the first time ever in February.
What’s even more impressive is the company’s massive stock repurchase activity since January 1, as disclosed in the 10K. Investors now look forward to March where growth will slow significantly. Nevertheless, Q1 will likely be a record.
RH – As part of our process, we created a proprietary method to track internet traffic trends for a basket of over 200 retailers. Our ranking combines a number of inputs, but the two main drivers of our ranking are unique visitors and page visits per user. In the chart below, you can see the indexed ranking for Restoration Hardware compared to Williams-Sonoma’s (WSM) three main brands.
There are three key call outs from this chart:
- WSM is a cyclical business heavily dependent on holiday specific merchandise and gifting categories. This distinction is clearly visible in dot.com traffic trends as evidenced by the significant ramp in traffic starting in November. This is one of the key differentiators between the two business models and means that WSM is far more exposed to the shaky 2013 Holiday selling season.
- RH dot.com has been on a tear. While this ranking says nothing about conversion or sales it is a good indication of interest and allows us to gague the overall health of the channel. The chart duration includes 2Q and 3Q where we saw direct growth of 33% and 47% respectivley. If we assume similar conversion rates – we are looking at another robust quarter from the direct business.
- Brand awareness is growing. For Restoration Hardware, that’s huge. After years of shrinking square footage – RH is building brand momentum through its dot.com site as it begins its first wave of expansion.
TROW – Hedgeye’s Financials team traveled with T Rowe Price management to see subscribers last week which gave us the ability to do some checks on our bullish thesis on the company. The firm is validating that the strong inflows as reported weekly in the Investment Company Institute (ICI) survey is filtering into the firm. T Rowe characterized the environment as “stronger than usual seasonally” which means its largely retail, equity centric enterprise has been seeing good inflow to start 2014 (the first quarter each year is usually the most active quarter for retail engagement and TROW is saying that this year is busier than usual).
This continues to dovetail with the ICI fund flow survey which had another positive week of results with $4.9 billion flowing into all stock mutual funds this week, with $3.1 billion of the $4.9 billion moving into U.S. equity mutual funds (TROW has a domestic bend to its business with 70% of its product offering in U.S. funds versus 30% non U.S.).
While retail equity inflows tend to be late cycle dynamic, we still think TROW shares will work their way higher, especially given that they are just burning off some un-related institutional outflows from the middle of 2013. So, the stock’s multiple should improve with better earnings as well.
We consider T Rowe Price one of the best run asset management companies in the sector along with BlackRock.
ZQK – We penned a note to our institutional subscribers on Wednesday stating that we expected this to be a transition quarter for Quiksilver, and that we were cool with it. That’s essentially what we got. When we saw the headline, we viewed it as a slight net negative (due in large part to expectations being all over the place). Let’s face it, on an absolute basis – losing $0.10 on $393mm in revenue is nothing to be proud of. Then we crunched the numbers, and we shifted our view on the event to neutral to slightly positive. Then we listened to the conference call, and viewed it as decisively positive. The market might not agree for a day or two. But that does not concern us.
We think this story is on track to redefine the business model and do what ZQK has not done in over 5-years – grow consistently. No material changes to our model.
Why do the numbers look good to us?
We look at everything on the margin. The reality is that ZQK is coming off a disastrous 4Q with sales down 15%, inventories only down 3%, and margins off by 200bp. That’s pretty much a trifecta of misery. This quarter, sales were down 5% -- though FX hurt by 2%, and exited product lines cost another 1%. At the same time, inventories were down 14%, and margins were UP by 115bp. That’s not exactly a complete reversal of 4Q, but it is a massive improvement on the margin.
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At CAT’s Analyst Meeting, the absence of negatives did not sum to a positive. Given the challenges over the past two years, a failure to acknowledge serious problems seemed a bit delusional. Investors were looking for solutions, but there were no meaningful details given on restructuring.
ISM Services printed its worst headline number since February of 2010 as the Employment series went sub-50, posting its largest MoM decline since November of 2008 and its first contractionary print in 25 months.
In the most recent week, equity mutual funds had another solid inflow albeit just inline with the year-to-date averages with bonds funds showing improving subscriptions, well above the year-to-date mean.