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INVESTING IDEAS NEWSLETTER

Takeaway: Current Investing Ideas: CCL, DRI, HCA, HOLX, LM, LO, OC, RH, TROW and ZQK

Below are Hedgeye analysts' latest updates on our TEN current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.

 

We added two new names this week: Hologic and Legg Mason.

 

We also feature three research notes from earlier this week which offer valuable insight into the market and economy.

 

INVESTING IDEAS NEWSLETTER - YO YO LEVELS

 

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

HEDGEYE CARTOON OF THE WEEK

INVESTING IDEAS NEWSLETTER - Fed balloon03.25.14 normal

IDEAS UPDATES

 

CCL – Carnival traded down 6.8% this week while the S&P 500 Index was down 0.5%. Last week’s optimism regarding improving European economies and stronger European consumer spending was quickly tempered when Carnival announced fiscal first quarter 2014 earnings on Tuesday prior to the market open. Recall, our proprietary March 2014 cruise line pricing survey indicated the Carnival brand showed the greatest positive pricing momentum in sequential pricing among the big 3 cruise line operators in March 2014. 

 

During the company’s earning conference call, Carnival confirmed the uptick in pricing we saw in our survey – which is a positive fundamental trend.  However, investors reacted negatively to Carnival’s forward earning guidance. 

 

Our full-year fiscal earnings estimates remain above management’s guidance as we remain convinced the recent pricing power is both sustainable and enduring – and will ultimately translate into better than expected revenues and earnings. We view the recent price weakness as temporary, as well as a great entry point for accumulating CCL shares. 

 

 

DRI – Earlier this week, Barington Capital wrote a letter to Darden’sindependent directors suggesting they begin their search for a new CEO.  Barington CEO James Mitarotonda blasted current Darden CEO Clarence Otis, noting his concern with the “rapidly deteriorating financial performance” of the company. 

 

It’s becoming an increasingly fragile situation over at Darden

 

Shareholders and activists are beginning lose all faith in the current management team.  Mitarotonda, who previously called for the Chairman and CEO role to be split, is leading an increasingly public campaign against the company.

 

In response to Mitarotonda’s letter, Darden once again urged shareholders to reject the special meeting and, once again, failed to provide a legitimate reason to do so.  If the company is so confident in their plans, they should welcome the meeting and leave the floor open to debate.  Instead, they are doing everything in their power to push forward with the plan to spin-off Red Lobster – without the approval of shareholders!  This tells us they are hiding something and puts a huge question mark on the company’s already questionable credibility.

 

INVESTING IDEAS NEWSLETTER - dri

 

HCA – Since being added to Investing Ideas on 6/14/13, shares of HCA Holdings have risen 27% doubling the 13.5% return on the S&P 500. Healthcare Sector Head Tom Tobin will have a new update next week.

 

INVESTING IDEAS NEWSLETTER - hca

 

 

HOLX – Hedgeye Healthcare Sector Head Tom Tobin added Hologic to Investing Ideas earlier this week. Click here to read the full report.

 

 

LM – We added Legg Mason (click here to read the full report) an asset management company based in Baltimore to Investing Ideas this past week.

 

In a nutshell, we think shares have over 20% up over an intermediate term duration.  

 

Our investment thesis on the stock is predicated that “at funded” U.S. corporate pensions are now de-risking from equities after over 5 years of outperformance in the asset class and are shifting asset allocation into fixed income and alternatives. This will benefit leading bond managers most specifically Legg Mason which has the largest exposure of the publicly traded asset managers to institutional fixed income assets.

 

Separately, we estimate that as the Fed starts to taper and come off of the bond curve, that interest rates will actually decline and not increase because a reduction in quantitative easing will slow growth. This will also benefit leading bond fund managers as fixed income performance can improve after last year’s dismal returns. We think the company can earn $3.50 next year, 10% above Street estimates, which at an industry multiple would translate into a fair value of $60 for the stock. 

 

INVESTING IDEAS NEWSLETTER - lm1

 

With 11% short interest (the second highest in the group) and the lowest ranked stock of the big 6 public asset managers (with only 3 buys in coverage by 18 analysts) even just marginally improved trends should send this stock to a much improved valuation range.

 

INVESTING IDEAS NEWSLETTER - legg2

 

 INVESTING IDEAS NEWSLETTER - legg3

 

LO – Shares of Lorillard were up 2.3% on the week – in-line with a stock we think will grind higher on advantaged menthol fundamentals, limited regulatory risk, and a growth engine in blu e-cigarettes. 

 

This week we held conference call with the President of LOGIC, a private e-cig manufacturer since 2010 with the #2 national brand in unit and dollar share for C-Stores in the United States (according to Nielsen).The substance of the call substantiated our bullish outlook on the e-cig industry.

 

We continue to believe that the e-cig industry will consolidate, led by Big Tobacco, and in particular by Lorillard. We expect blu to continue to maintain its category leadership, despite increased e-cig competition from RAI (Vuse) and MO (MarkTen).

 

 

OC – This past Monday CEO Keith McCullough, appeared on “Opening Bell” with Maria Bartiromo and pointed out companies like Owens Corning which are able to absorb inflation in its pricing. While #InflationAccelerating is not the dominant point of our thesis, we believe it will not be a headwind compared to other companies, who are dependent on lower energy and food costs.

 

We are more interested in supply and demand imbalances. With residential and non-residential construction needing to double to return to post-WWII averages, the company with the largest market share (among other factors) in building products subsections can benefit tremendously from these imbalances. Owens Corning holds approximately 40% of a reasonably consolidated market for fiberglass insulation. OC shares ended the week up 2.3%.

 

INVESTING IDEAS NEWSLETTER - oc7

 

 

RH – Shares of Restoration Hardware rocketed over 12% on Friday after the company reported better-than-expected results and guidance. 

 

INVESTING IDEAS NEWSLETTER - rh7

 

For the record, RH remains our highest conviction long idea in the Retail space, with ultimate earnings power of $11 per share and a stock price in excess of $200.

 

The company’s 4Q print supported our thesis in many ways. But despite all the positives around revenue outlook, store growth, and margin upside, the biggest growth in the quarter from our perspective was not found in a line item…it was in the CEO.

 

When we talk to investors about RH, almost every single critic lists Gary Friedman as a chief concern now that (former Co-CEO) Carlos Alberini has left the picture. In investors’ minds, Gary was the product guy, and Carlos did everything else. That’s an incorrect view, but like it or not, that’s the perception. Well, this quarter Gary literally sounded like a different person. He spent more time talking about ROI, capital deployment and managing risk in the business as he did talking about product and merchandising. The only question to be answered is whether this is just a temporary Gary we’re seeing in the immediate wake of Carlos’ departure, or if this marks a structural change to how he approaches his role. Critics will claim the former. We think it’s the latter. Time will tell, but there’s no disputing the change as it appears today.

 

We’re not making any material changes to our estimates. We still think that the company will have a far better year than it’s guiding. As much as that should make the stock continue to grind higher, the real upside comes from earnings expansion as this growth story plays out – which literally begins in April/May with the redesign of its product line, launch of its Sourcebook (all 3,200 pages of it), and the opening of the new store in Greenwich (which kicks off a mini-burst of square footage growth).

 

 

TROW – Shares of T Rowe Price are bouncing around with the market as of late, but we encourage investors to stay the course. In our initial asset management sector launch in the middle of last summer, we highlighted a forthcoming investable shift in mutual fund flows from outsized fixed income asset allocation by retail investors since 2008 and the Financial Crisis into equity mutual funds which hadn’t seen any annual inflow since 2007. This would benefit T Rowe Price as the leading equity mutual fund provider with the industry’s best performance in hoovering returning equity inflow.

 

INVESTING IDEAS NEWSLETTER - trow

 

The shift into equity funds from bond fund has been significant over the past 9 months and we estimate this will be well reflected in the upcoming 1Q 2014 earnings report from TROW, which will have the best numbers in the group. We then think shares will have appreciated to a level for investors to take a breather on TROW stock and focus on Legg Mason, which has better intermediate term prospects on institutional asset management trends as outlined above.

 

 

ZQK – One of the points of emphasis for Quiksilver is footwear. The company’s CEO, Andy Mooney, has a strong pedigree in the space having grown up at NKE, and it’s a category that is significantly underpenetrated accounting for just 25% of sales in 2013. There is opportunity for all three brands, but the main focus of that push will be concentrated on the obvious candidate, DC.

 

DC was in the worst shape post management shakeup in early 2013. Take a look at the brands recent US Wholesale sales trends below. What happened is DC rode a fashion trend from Spring ’12 through the end of that year and purchased inventory based on the assumption that those trends would continue. Except the trend didn’t continue into ’13 and the company was left with a pile of inventory on its balance sheet. In order to liquidate the excess, DC was forced to up its promotional cadence and ASP (average sale price) has fallen for 16 straight quarters.

 

INVESTING IDEAS NEWSLETTER - zqk

 

Coming out of 1Q14 the company is in a much better inventory position and able to buy appropriately for the company’s push in 2H. This coincides with the brand repositioning itself in the vulcanized footwear segment. 120mm pairs of vulcanized shoes are sold per year at the $45-$55 price point – DC, who focused on higher priced technical product, has virtually no presence in this lifestyle segment which is dominated by Vans. Starting in the fall, DC will finally go to market with an assortment focused on the lifestyle consumer and we expect ZQK to leverage DC’s extremely relevant brand identity to kick start footwear.


 

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Panera Bread: Expect Some Near-Term Pain

Restaurants Sector Head Howard Penney has upped his conviction in PNRA as a high-quality short. 

 

INVESTING IDEAS NEWSLETTER - panera

 

Does the Emerging Market Relief Rally Have Legs?

We are inclined to believe the current relief rally across EM capital and currency markets has legs w/ respect to the intermediate term.

 

INVESTING IDEAS NEWSLETTER - globes

 

Bubble Up: SP500 Levels Refreshed

"I’ve seen a lot in trying to trade markets for the last 16 years," writes CEO Keith McCullough. "But I haven’t yet seen something like this."

 

INVESTING IDEAS NEWSLETTER - bubble

 


Poll of the Day Recap | Beware of Bears

As the quarter-end approaches, the S&P 500 remains mostly flat at +0.5% year-to-date. We wanted to keep it simple in today’s poll. So we asked:  Are you bullish or bearish on US equities on a TREND duration?


At the time of this post, 54% of respondents said BEARISH and 46% said BULLISH.


People voting BEARISH listed a variety of concerns.

 

Some BEARISH responses:

  • “The market has risen far more than justified by the anemic economic growth and is overvalued.  That's been true for awhile, but what's new now is that the grossly overpriced momentum stocks are finally starting to correct and not immediately bouncing back.  I see that as a sign that a significant correction or bear is beginning.”
  • “Global growth is slowing as biotech and social media bubbles are popping.  In addition, the dollar is in a bearish formation as it gets pummeled by Fed heads.  Upside is limited.”
  • “1) Seasonality 2) April 15 – tax day 3) Newton's Law of Gravity. However, if everyone is bearish then the market will do just the opposite and take a bite out of the shorts.”
  • “Market looks extremely weak and extremely overbought. In addition there is a lot of paper profits that people are going to realize before the Yen carry comes unwound.”
  • “Too many data points that only occur when we are in or about to be in a recession coupled with a complacent and overvalued (by any measure) market...”
  • “Growth is slowing, markets are due for rest, and in seasonally weak time, especially during 2nd year of presidential cycle.”
  • “I have been taking long profits quickly so I guess I must be considered bearish. Definitely NOT 2013.”
  • “I cannot see all this world debt being resolved.  Very soon it becomes unglued. Yes, even in the US.”
  • “Really Bear-Bull-Bear. Short term correct. Then Medium term bigger bubble, then Kaboom!”

 

Of those who were BULLISH, voters explained that:

  • “Markets were so depressed coming out of the biggest modern day depression in '08 - markets overcorrected and thus still have room to run - this Bull will run for 2 more years.”
  • “The Spring will bring growth (Chauncy Gardner). The economy is bobbing along, growing, albeit slowly and despite headwinds from the Fed $$$ burn.”
  • “Long term bullish trend intact however setting up for near term correction similar to January.
  • “Everyone's printing money and that is all that matters until something breaks. And something will break.”
  • “I think we go up for another couple of months. Bull markets end in exhaustion. After a few months we'll start to feel the effects of the taper and fall hard.”

Stay tuned.

SUBSCRIBE TO HEDGEYE.

 


THE WEEK AHEAD

The Economic Data calendar for the week of the 31st of March through the 4th of April 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


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BEST IDEAS UPDATE: PARTY TIME IN BRAZIL?

Takeaway: Our bullish bias on the BRL is working and, as anticipated, so are Brazilian equities & EM assets broadly. We see further upside from here.

EM RELIEF RALLY “ON”

On Wednesday, we published our updated thoughts on EM capital and currency markets strategy (CLICK HERE to review). That piece was long and thorough, so in the interest of not taking up too much of your time on a Friday afternoon, we’ll keep this note brief...

 

The key takeaway is simple:

 

We are broadly bullish on EM assets with respect to the intermediate-term TREND duration. On a forward-looking basis, we no longer see the same globally interconnected headwinds that caused us to get so pervasively negative on emerging markets roughly 1Y ago when we introduced the first of many subsequent presentations supporting our #EmergingOutflows theme.

 

Indeed, it would seem that the relief rally we started to call for on our FEB 27 conference call on Brazil has materialized and we anticipate further upside. Moreover, the nature of the rally (i.e. being led by the countries generally perceived as the most risky) is very much in line with our expectations.

 

  • EM assets are up +1.9% on average at the asset class level since then… that compares to a -0.3% decline for the US equity market over that same duration.
  • EM country-level ETFs are up +1.6% on average… India (EPI) at +11.9%, Turkey (TUR) at +10.6%, Indonesia (EIDO) at +7.6% and Brazil (EWZ) at +7.2% account for the four positive divergences (i.e. > +1 sigma vs. the mean) in the sample.

 

PARTY TIME IN BRAZIL?

Looking into Brazil specifically, yesterday we received the first of what is likely to be several supportive catalysts with respect to our bullish bias. Specifically, a CNI-Ibope poll showed President Rousseff’s approval rating  ticked down to a record-low of 51%; that marks the first sequential decline since JUL ’13, when millions of Brazilians took to the streets across the country in protest over inflation and the mismanagement of public funds.

 

The results of the poll are supportive of our belief that: A) the threat to Dilma Rousseff’s presidency is real come OCT 5th; and B) at the bare minimum, popular discontent will amplify the perceived failures of her economic policies during the campaign season, which opens the door for her Worker’s Party (PT) to cede share in the Brazilian legislature. One-third of Senate seats are up for grabs in the upcoming general election and as are all 513 seats in the Chamber of Deputies. To the extent opposition parties form a stronger mandate we could see a gridlock-induced cap on Rousseff and Finance Minister Guido Mantega’s expansionary fiscal policies – assuming they even return to power in 2015.

 

In conjunction with the news release yesterday, the BRL jumped nearly a full +2% vs. the USD; Brazil’s benchmark Bovespa Index ripped +3.5% and was led by state-run companies like Electrobras (+9.8%) and Petrobras (+8.1%). We continue to think contrarian equity investors will find PBR as attractive on the long side as we do amid the prospect for fuel pricing reform and a likely acceleration in production growth. Refer to our FEB 27 slide deck for more details.

 

Lastly, we just wanted to thank Standard & Poor’s for Monday’s downgrade of Brazilian sovereign debt for helping cement what we clearly think is: A) a bottoming process in the prices of Brazilian financial assets; and B) a topping process in pervasively bearish sentiment towards Brazil among international capital allocators.

 

IT’S NOT JUST A BRAZIL THING

If you are looking for some long ideas in the EM space, then you’ve come to the right place. We have a number of high-conviction ideas that: A) have been working; and B) we expect will continue working as additional catalysts materialize.

 

  • Long India: The EPI ETF is up +12.4% since we outlined our thesis on OCT 29; that’s good for the third best performance across the basket of EM country-level ETFs we track.
  • Long “New China” (CQQQ + CHIQ)/Short “Old China” (CHIX + CHXX): On an equal-weighted basis, this strategy is up +18.4% since we outlined our thesis on DEC 4.
  • Long Indonesia: The EIDO ETF is up +19% since we outlined our thesis on JAN 30; that is the best-performing EM country-level ETF over that duration.

 

BEST IDEAS UPDATE: PARTY TIME IN BRAZIL? - EM Divergence Monitor

 

BEST IDEAS UPDATE: PARTY TIME IN BRAZIL? - 2

 

We need to do more work on the long side of Turkey (TUR), lol… the mean reversion opportunity afforded by a -33.9% YoY decline is substantial indeed!

 

In all seriousness, please shoot us an email if you want to see our work on any of these plays and we’ll be happy to get the relevant materials over to you and/or to set up a call.

 

Have a great weekend,

 

DD

 

Darius Dale

Associate: Macro Team


Stock Report: Legg Mason Inc (LM)

Stock Report: Legg Mason Inc (LM) - HE LM T 3 28 14

THE HEDGEYE EDGE

A recent speaker’s series call with a leading pension fund consultant relayed that “at funded” U.S. corporate pensions are now de-risking from equities and are shifting asset allocation into fixed income and alternatives. 

 

The biggest exposure to institutional fixed income of the public asset managers is at Legg Mason with 71% of the company’s business within institutional mandates with the majority of that in bonds.

 

Separately we estimate that as the Fed starts to taper and come off of the bond curve that rates will actually decline and not increase because a reduction in quantitative easing will slow growth. This will also benefit leading bond managers.

 

 

TIMESPAN

INTERMEDIATE TERM (TREND) (the next 3 months or more)

With 11% short interest (the second highest in the group) and the lowest ranked stock of the big 6 public asset managers (with only 3 buys in coverage by 18 analysts) even just marginally improved trends should send the stock to the lows 50 per share range.

 

 

LONG-TERM (TAIL) (the next 3 years or less)

Within this pension de-risking theme we estimate that up to $500 billion should come into leading fixed income managers and up to $1 trillion should be redeemed within core S&P 500 institutional equity mandates. If this theme materializes Legg should see a disproportionate amount of inflow versus other managers which would lead to substantial earnings power above Street estimates.

 

We think the company can earn $3.50 next year, 10% above Street estimates, which at an industry multiple would translate into a fair value of $60 for the stock. 

 

  

ONE-YEAR TRAILING CHART

Stock Report: Legg Mason Inc (LM) - HE LM C 3 28 14


Stock Report: Hologic, Inc. (HOLX)

Stock Report: Hologic, Inc. (HOLX) - HE HOLX T 3 28 14

THE HEDGEYE EDGE

We think Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In out view, Hologic and it's new management are set to show solid growth over the next several years.

 

We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  

 

The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time.

 

In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading.

 

TIMESPAN

INTERMEDIATE TERM (TREND) (the next 3 months or more)

Carl Icahn has recently declared his interest in Hologic.  We are not quite sure what his plans are to improve the company. Speculation has been somewhat dampened by public comments made by management.  At a minimum, Icahn's involvement provides some downside protection for the shares.

 

 

LONG-TERM (TAIL) (the next 3 years or less)

If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.  When we measured the increase in products and services these typically younger uninsured individuals will consume when they get insurance, Hologic's products are at or near the top of the list.  As the ACA matures over the coming years, we'd expect a tailwind for HOLX.

 

  

ONE-YEAR TRAILING CHART

Stock Report: Hologic, Inc. (HOLX) - HE HOLX C 3 28 14


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