LEISURE LETTER (04/17/2014)



Thursday, April 17

  • Iowa Racing & Gaming Commission Meeting - scheduled to decide whether it will grant Cedar Crossing Casino a state gaming license, which would make the facility the 19th casino in Iowa.
  • BX 1Q14 Earnings – 11 am Conf Call PIN 149 943 55 – lodging comments & color?
  • TZOO  Earnings – 11 am Con Call
  • DIS – Investor Day – cruise & parks commentary?

Monday, April 21

  • Genting Singapore – Annual General Meeting

Tuesday, April 22

  • IGT FQ2 earnings:  5 p.m. Conf Call   , Passcode: IGT

Thursday, April 24

  • WYN Q1 earnings - 8:30 a.m. , Passcode: Wyndham
  • LHO Q1 earnings - 9:30 a.m.
  • PENN Q1 earnings - 10 a.m.
  • HOT Q1 earnings - 10:30 a.m. , Passcode: 12049644
  • LVS Q1 earnings - 4:30 p.m. ; PW: 18236529

Friday, April 25

  • PEB Q1 earnings – 9:00 a.m. ,



MGM - Company executives are asking the Massachusetts Gaming Commission to delay the formal award of the license, currently planned for June, because the license award would trigger $200 million in obligations for the company.  According to MGM, the company does not want to pay the fees (including, $85 million state licensing fee, which by law must be paid within 30 days of the commission making the award) while the state casino law is under the threat of a possible repeal.

TAKEAWAY: MA living up to its reputation...


PENN - PENN and the Cordish Cos., which are competing for Philadelphia's second casino license, joined forces to pursue a license in New York's Hudson Valley-Catskills region. The companies said they would propose a $750 million casino and resort in South Blooming Grove, a small town in Orange County. The casino would operate under the Cordish's Live! brand.

TAKEAWAY: Need to maintain the growth story... but what happens in 7 years when the Greater NYC becomes open to new casino development?  Not our favorite idea.


PENN - Construction of Hollywood Casino Jamul is facing a construction delay as a result of a lawsuit claiming ground excavated for the casino was relocated and illegally dumped on an Indian burial ground - thus desecrating the site.

TAKEAWAY:  A potential blow to a big part of PENN's growth story.


RCL - Royal Caribbean International reports will have the Quantum of the Seas homeport in Shanghai, China effective May 2015, following her inaugural winter season sailing out of Cape Liberty (Bayonne, N.J.).  In China, Quantum will join Mariner of the Seas and Voyager of the Seas in Asia, increasing the company's capacity in the region by 66%. 


Anthem of the Seas will debut in Southampton, England in April 2015 first and then move to New York for the winter.  This is a change for Anthem of the Seas since she was previously planned to be sailing out of Fort Lauderdale in Winter 2015. 

TAKEAWAY:  The Quantum decision is a bold but risky one.


Macau - the Legislative Assembly again voted against a bill to allow unions to organize strikes and provide workers legal advice.  This was the fifth time such legislation was voted down. 

TAKEAWAY:  We find it peculiar the Unions would have any influence with casino workers when the casino operators have repeatedly and annually raised worker wages.  


Cosmopolitan to be sold - Deutsche Bank is in talks with potential buyers of the Cosmopolitan resort in Las Vegas.  The bank is seeking more than $2 billion and has attracted at least four possible bidders.  However, other bidders believe the value is closer to $1.5 billion.

TAKEAWAY:  Given the size, location and issues, could Barry Sternlicht's Starwood Capital Group be the odds on favored buyer?  We are hearing the leading buyer has ties to USA hotel interests on the East Coast and shopping centers on the West Coast.  $2 billion could be a stretch.


Illinois Gaming Expansion – the General Assembly will again consider legislation to expand commercial gaming from 10 riverboat casinos and thousands of local video slot machines spread across the state with the expansion of four new casinos (Lake County, the south suburbs, Danville and Rockford) as well as the addition of slot machines at horse racing tracks across the state. 

TAKEAWAY:  Will this ever pass?


Massachusetts Gaming - the Massachusetts Gaming Commission on Thursday delayed the second-phase application deadline for commercial casino proposals in Southeastern Massachusetts to at least Sept. 23 – which will likely postpone the award of a casino license in Greater Boston till at least August and delay a license for Southeastern Massachusetts even longer, to February or later. The exact application deadline will likely be set at the Commission’s next meeting, when it is also expected to decide whether to waive the $500 million minimum investment requirement in an effort to encourage more applications. Such moves would delay the license award date until 2015.

TAKEAWAY:  More delays, which has become the norm in Massachusetts.


Atlantic City - Hoping to lure new carriers to Atlantic City International Airport, the Casino Reinvestment Development Authority voted to devote funding to a risk-abatement program, allowing airlines to compete for up to $5 million in total grant funding (subsidies). 

TAKEAWAY:  Need to promote new airline lift; we remain skeptical on AC's turnaround.


Atlantic City - A State of New Jersey report that preceded the creation of the Tourism District called for increasing convention business 30% per year for five years.  Data released this week show that in 1Q 2014, the number of shows hosted at the Atlantic City Convention Center remained flat compared to the first quarter of 2013, but the number of delegates who attended shows rose 9% to 21,219.

TAKEAWAY:  AC still a tough draw.


Hotel CMBS Lending - Deutsche Bank AG will lend $1.9 billion to Kyo-ya Hotels & Resorts LP, which owns five HOT hotels in Hawaii. Deutsche Bank will package the debt into about $1.5 billion of commercial-mortgage bonds, and sell the rest of the debt to investors as mezzanine loans.  The Kyo-ya portfolio includes the Sheraton Waikiki, The Royal Hawaiian, the Westin Moana Surfrider, Sheraton Princess Kaiulani and the Sheraton Maui, which are all managed by HOT.

TAKEAWAY:  The availability of securitized debt is a positive for hotel transactions as Starwood looks to continue selling assets. 


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.

TAKEAWAY:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

KMP 1Q14 Takeaways

Nothing out of the 1Q14 results changes our negative view on Kinder Morgan Energy Partners (KMP/KMR).  A few takeaways from a rather uninteresting quarter (we’ll have more after the 10-Qs are out) from the Kinder Complex:


  • KMP Financial Results Mixed, But Below Budget……KMP reported EPU (before items) of $0.73, below the budgeted $0.74, and up 11% from $0.66 in 1Q13.  DCF/unit was $1.55, missing the budgeted $1.57, and up 6% from $1.46 in 1Q13.  Segment EBDA + JV DD&A was $1,591MM, below the budgeted $1,599MM.  DCF-to-Distribution coverage was 1.12x in 1Q14, down slightly from 1.13x in 1Q13 (and 1.14x in 1Q12).  As is typical, KMP builds “excess coverage” in the seasonally-strong 1Q and will give it back in 2Q and 3Q.  KMP’s Payout Ratio (Distribution-to-EPU) was 189% in 1Q14, improving from 198% in 1Q13.  KMP’s annualized return on tangible assets (net income before items / average assets ex. goodwill) was 3.6% in 1Q14, an improvement from 3.3% in 1Q13.

KMP 1Q14 Takeaways - km1


KMP 1Q14 Takeaways - km2

  • KMP Natural Gas Midstream Has Huge Growth CapEx and Doesn’t Grow……KMP’s long-haul natural gas transportation businesses are growing well (total volumes were +5.5% YoY), driven by increased demand for north-to-south capacity on Tennessee Gas (TGP) and export opportunities to Mexico via El Paso Natural Gas (EPNG).  This strong volume growth should continue going forward with additional TGP back-haul projects, expansions into New England, and increased Mexican demand.  (Related Note: Kinder was super bullish re: demand for north-to-south natural gas transportation – bullish read-through to Boardwalk Pipeline (BWP), which has a new, underutilized south-to-north system in Texas Gas Transmission that it can repurpose.)  However, KMP’s Natural Gas Midstream segment is not growing, with natural gas sales volumes down 4.4% YoY and natural gas gathering volumes down 0.6% YoY in 1Q14.  The key questions are 1) How much capital was invested into these midstream businesses over the last year for flat-to-down volumes?  And 2)  How much of that capital was included in KMP’s sustaining CapEx budget?  Stand-alone CPNO was projected to spend $458MM of growth CapEx in 2013 according to the “Case I Projection” in CPNO’s 4/22/13 8-K.  Excluding CPNO, we estimate that KMP spent ~$400MM in its Midstream Segment (G&P + TX Intrastate) in 2013.  Pro forma, that’s +$800MM in annual growth CapEx, of which a significant portion is likely needed just to maintain midstream volumes.  This maintenance CapEx understatement is another major source of low-quality DCF for KMP and KMI, and is not appreciated by consensus, in our view. 
  • Soft Quarter for KMP E&P……KMP’s CO2 segment EBDA (before items) was down $22MM (-7%) QoQ as both oil production and the realized oil price slipped 2% sequentially.  The Midland Basin crude differential blew out in 1Q and remains at a steeper-than-normal discount to WTI.  KMP doesn’t hedge basis, and is budgeting for a -$1.50/bbl differential vs. the current -$9.25/bbl; that was a minor headwind in 1Q and should be a drag again in 2Q (see chart below).  Encouragingly, SW Colorado net CO2 production ticked up to 0.6 Bcf/d for the first time in more than two years with a Doe Canyon expansion coming online.  The most important data point for KMP CO2 is CapEx, which we won’t have until the 10-Q is out.

KMP 1Q14 Takeaways - km3

  • KMP Gets into the Coal Royalty Biz ……KMP made its first coal royalty purchase in 1Q13, a $25MM acquisition.  We’ll look to the 10-Q for more detail.  As far as we know, KMP will not include a replacement CapEx reserve to account for the fact that coal royalties are depleting assets, just like oil fields.  Every coal royalty acquisition that KMP makes strengthens our conviction on the short side.
  • On KMI's Quarter……Mixed results with EPS of $0.28 missing the budgeted $0.31, but cash available for dividends of $573MM beating the budgeted $552MM.  In the quarter KMI bought back $94MM of stock and $55MM of warrants at an average price of $1.77/warrant. 

Call with any questions,


Kevin Kaiser

Managing Director

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Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Noble Growth

“Ambition is the germ from which all growth of nobleness proceeds.”

-Oscar Wilde


As an equity investor if you are early on growth in owning a stock, that is usually a very good thing.  Parabolic growth can propel a stock to, as they say, “infinity and beyond.”  On a macro level the same lesson applies.  We’ve obviously been vocal and early on our view of growth slowing this year and the sub-sector performance of the SP500 has reflected that in spades.


On a more micro level, we’ve also been pretty negative on social media stocks, in particular Twitter (TWTR) and Yelp (YELP).  Admittedly on Twitter, we were early as we were literally negative from the IPO, but as TWTR’s first earnings report showed us, expectations will eventually meet the gravity of reality.


In adding YELP to our Best Ideas list as a short, our timing has been much better.  The key tenets of the short thesis on YELP are that customer attrition is a major issue, which no one is focused on, and also that the addressable market is much smaller than the management team is pitching to investors.  The combination of attrition and a smaller market makes us believe that revenue growth will eventually disappoint. (If you’d like to get on the distribution list of Hesham Shabaan, who runs our Internet research team, please email .)


Even as we believe that certain social media stocks are getting ahead of themselves, it is hard to deny their ambitious growth.  The boot strapping startup stories of the likes of Twitter and Facebook are worthy of admiration.  In what direction these business models evolve will be the true test of longevity, but it is hard to deny the potential of a company like Facebook where 1/8 of the planet uses the application and 64% of users visit the site daily.


Another growth area we have been focused on has been electronic cigarettes, or e-Cigs.  This has been reflected on our Best Ideas list with a long in Lorillard (LO).  For the most part, LO is a boring tobacco stock, but has an underlying growth engine in its e-Cig business, which makes its growth prospects much more exciting.  Although, admittedly, it is hard to call this noble growth. 


The research on e-cigs naturally led us to also look at the burgeoning medical marijuana market.  In states that have recently legalized marijuana it has been a boon to state tax coffers and to the extent that this legalizing expands, it is likely that tobacco companies enter the field.  But before we dive into research and start doing calls on the topic, we’d like to get your view.


In our poll of the day that will circulate later today, we will be asking the question: Would you invest in a company that produces medical marijuana? We look forward to your responses and in getting the crowds view on whether medical marijuana is noble growth.


Back to the Global Macro Grind . . .


Heading into the long weekend, many business people and investors will be taking stock of the score in the year-to-date. In the chart of the day, we have attached one of a number of the quant screens that we circulate internally daily that show relative asset class performance.


One interesting chart looks at P/Es for countries versus their 3-year mean.  Based on that metric the three most overvalued countries are Mexico, Argentina, and Saudi Arabia.  Meanwhile, the three most undervalued are Russia, China, and Japan.  There is some global macro performance to be found in that group to be sure!


Speaking of performance, it likely has not been a great year for the average long only fund as the SP500 is up a dreary +0.75% (certainly much different than what the Barron’s round table projected to start the year) and the hedge fund industry hasn’t fared much better.  According to data from Preqin, the average hedge fund returned 1.23% in Q1, which is the worst start since 2008.


Interestingly, the one strategy that has worked well is activist investing.  According to the same data, activist funds on average were up 3.3% in Q1.  We have also been very vocal on one major activist name, the restaurant behemoth Darden (DRI).   And this may fall in the category of growth that isn’t noble as well, but you should expect to see more activist ideas come from us as the year continues. 


As we noted earlier, based on a comparison to the 3-year mean in forward P/E, Japanese equities are screening as cheap.  The question that arises is whether Japan is cheap for a reason.  Certainly, one potential negative catalyst for Japan is the VAT tax.  March department store sales were up an astonishing 25.4% year-over-year in March ahead of the VAT tax that was implemented on April 1st


Meanwhile, despite buying a lot, the confidence of consumers in Japan actually declined in March.  According to the Japanese consumer confidence index, confidence declined to 37.5 in March from 38.5 in February.  Clearly not an earth shattering breakdown in confidence, but likely a leading indicator of future declines now that the VAT tax is in place.


Clearly, the Japanese policy makers are going to have some interesting decisions to make in coming months and most of them are unlikely to bode well for the Yen.  Japanese leadership may be wise to consider the words of Nascar legend Dale Earnhardt:


You win some, lose some, and wreck some”

Ultimately, Japanese policy makers will have to decide whether growth by devaluation is truly noble growth.


Our immediate-term Global Macro Risk Ranges are now:


SPX 1811-1881

Nasdaq 3

Nikkei 138

USD 79.11-80.03

EUR/USD 1.37-1.39

Nat Gas 4.49-4.72 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Noble Growth - chartoftheday


Yellen’s Dollar Devaluation

Client Talking Points


I learn a lot more from developing bears on the bounces than I do on the drops: A) bearish TREND resistance of 4203 remains intact, B) QQQ just registered a lower-high on one of the weakest volume Wednesday’s of 2014. Neither A nor B are good


Yellen’s Dollar Devaluation comments yesterday – encouraging more of what is slowing growth = inflation – keeps the US Dollar under selling pressure this morning. Four months into the year, I haven’t watched a slow-moving train wreck like this since 2011.


You’d think bonds would sell off for real (if the social media bubble was going to bubble up again, for real). Nope. The 10-year yield is actually down 2 bps in the last 48 hours – a clean cut US #GrowthSlowing signal that should have legs well into the third quarter of this year.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its 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. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


Russell and Nasdaq still -6.4% and -6.2% from their bubble highs @KeithMcCullough


"To avoid criticism, do nothing, say nothing, and be nothing." - Elbert Hubbard


Former COO Henrique de Castro left Yahoo with a severance package worth $58 million, according to a regulatory document filed with the SEC. The golden parachute is among the most generous in history, and especially notable given than de Castro worked at Yahoo for only 15 months. He was shown the door in January. (CNN)

The Art of Selling

This note was originally published at 8am on April 03, 2014 for Hedgeye subscribers.

“Selling is hard to teach because it is about what exists in your head and what goes on in your whole life.”

- Mrs. Shibata, the top salesperson at Dai-ichi Life in Japan


The quote above come from Philip Delves Broughton’s 2012 book “The Art of the Sale.”  In his book, Broughton studies the most successful habits of some of the best sales people across various industries worldwide – from a Moroccan man who sells carpets and tiles in a bazaar, to some of the world’s most famous actors and musicians, to the top saleswoman at Japanese life insurance Dai-ichi Life, to Steve Jobs making the complex simple with Apple’s revolutionary products.   


Selling is an art and there is no singular way to be successful at the art of persuasion.  Often times the same tactics fail to work consistently; hard work, persistence, patience, charisma, knowledge, perceptiveness and having extremely good product are all qualities that allow for the subjects in the text to find success selling.


The Art of Selling - handshake2


The biggest take-away is learning by observing.  Incorporating the best practices of others, while simultaneously discarding the negatives, helps us all optimize our daily processes in the never-ending, impossible, pursuit of perfection.


Whether we realize it or not, we are all selling something on a daily basis – pitching an idea to your PM, convincing your current or potential investors why your investment strategy is going to be most effective, or getting your kids to eat their daily serving of fruits and vegetables.  Many of our actions are “non-sales selling” practices – i.e. motivating & moving others.


So get out there and make a sale today.


Back to the Global Macro Grind...


In the interest of saving myself the embarrassment of providing my macro thoughts, I’ll leave you with three of our current, non-consensus investment ideas:


Long Brazil (BRL; EWZ) - Stealth call by the (self-proclaimed) best dressed member of the Hedgeye team, macro analyst Darius Dale; The Brazilian real is up +3.1% Mom and the EQZ ETF is up +12.8% MoM.  Our macro team makes calls on the slope of line, and in Brazil’s case, we believe the Growth/Inflation/Policy fundamentals are going from really bad to less – similar to Indonesia last year.  Depressed valuations and bombed-out prices make this an interesting market to get involved in if you think US monetary policy is getting easier, at the margins, like we do. 


After being the bears in 2013 and heading into 2014, we think EM capital and currency markets are poised to continue outperforming their developed market counterparts over the intermediate-term. In Brazil specifically, the World Cup and upcoming elections are two significant and underappreciated catalysts that could be very positive from both a macroeconomic and investor sentiment perspective.


Short C.H. Robinson Worldwide (CHRW) - This is a rare structural short with low barriers to entry with the advent of lower cost technology solutions creating an increase in the competitive landscape in 3rd Party Logistics.  We expect both margin and multiple compression to cut CHRW in half.  Sector Head Jay Van Sciver is presenting our black book tomorrow at 11am EST. 


Long Legg Mason (LM) – Legg is positioned as a prime beneficiary of pension fund flows out of equities and into fixed income with assets over-indexed to both institutional and fixed income exposure at 71% and 55% respectively relative to peers. We estimate half of the $1T in equity exposure outflows to be reallocated towards fixed income as institutional pension funds look to capture higher re-investment rates. With favorable style factors (i.e. high short interest and bearish sentiment), the highest free cash flow yield in the sector, and discounted multiple, LM continues to be one of our top longs.


Upcoming Events at Hedgeye:


Short CHRW – Tomorrow 11am est.

Long HOLX – Monday 4/7 11am est.

Q2 Macro Themes – Tuesday 4/8 1pm est.

Please email for access.


Covering some of the top investors on the West Coast, I have the privilege of learning from some of the top non-consensus thinkers in our industry.  It’s fun to learn from all of you on a daily basis, while hopefully helping you make some money in the process!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.67-2.82%

SPX 1865-1894

VIX 12.77-14.72

USD 79.41-80.32

Gold 1270-1321


The best defense is a good offense,


Ryan Fodor

Associate, Sales


The Art of Selling - Chart of the Day


The Art of Selling - Virtual Portfolio

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.