Below are Hedgeye analysts' latest updates on our NINE current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.
*Please note we have removed TROW from Investing Ideas.
We also feature three research notes from earlier this week which 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
HEDGEYE CARTOON OF THE WEEK
CCL – Hedgeye gaming, lodging and leisure sector head Todd Jordan likes the stock of Carnival Cruise Lines (CCL). Jordan and his team continue to hear agent tidbits of good volumes but there also appears to be discounted pricing for summer 2014 sailings. Stay tuned for results from our proprietary pricing survey next week, which should provide more insight.
DRI – Hedgeye restaurants sector head Howard Penney maintains his bullish stance on Darden, parent company to restaurants including The Olive Garden and Red Lobster among others. In an exclusive HedgeyeTV video, Penney calls DRI a “generational buying opportunity.” Penney says DRI is an unconventional long because the management team needs to be replaced before investors can really make money on the stock.
HCA – Hedgeye healthcare sector leader Tom Tobin still likes the prospects for HCA Holdings. He sees a potential recovery in orthopedic case volume, such as knee replacements, which will benefit hospitals such as HCA.
HOLX – Hedgeye healthcare sector leader Tom Tobin remains bullish on Hologic. He has reached out to his clinical contacts in the field to get more insight regarding DBT (Digital Breast Tomosynthesis), which is a relatively new breast-screening technology that is important to driving HOLX revenue. Much of those field responses indicate that DBT take-up is continuing to grow and supports Tobin’s thesis that DBT adoption will accelerate meaningfully in the next two to three years.
LM – The mighty BlackRock (BLK) reported earnings on Thursday this past week essentially validating our view on why we think investors should be buying Legg Mason (LM) from an intermediate to longer term standpoint. BlackRock is the largest asset management company in the world with $4.4 trillion in assets-under-management (AUM) and thus has a very informed view on emerging trends within the asset management industry. On the first page of its earnings press release this week, BLK highlighted that it is seeing a noteworthy development within the pension fund market, as now “at funded” pensions are rotating from formerly appreciated asset classes (i.e. selling stocks after the recent 5 year run in equities) and are moving into other asset classes including fixed income (the bond market was down 2% last year with the first loss in 14 years so technically it underperformed and should be rotated into) and also alternatives (the hedge fund business is gaining share of pension fund asset allocation versus traditional plain vanilla equity and fixed income products). Legg Mason should be the prime beneficiary of this emerging trend with the highest percentage of institutional assets of the public asset managers at 71% of its AUM versus a group average of 42% with also a large exposure to fixed income at 52% of AUM versus the group average of 33%. Legg has also repaired its fixed income performance over the past 5 years which suffered during the 2008-2009 credit crisis with over exposure to U.S. corporate credit.
LO – Lorillard outperformed its Big Tobacco peers rising ~ +2% week-over-week (as of Thursday intraday) and traded above the Consumer Staples sector (XLP) that rose ~ +0.5% w/w.
This week LO publically praised legislation signed into law in Kentucky that will bar minors from buying electronic cigarettes. We see this announcement as an example of the responsibility Big Tobacco is taking around the regulation of e-cigs, despite still no action from the FDA to regulate the category.
We continue to believe LO will grind higher on advantaged menthol fundamentals, limited regulatory risk, and a growth engine in blu e-cigarettes. The company will announce Q1 2014 results on April 24th at 1 p.m. EST.
OC – Owens Corning Q1 2014 earnings call is set for Wednesday April 23, 2013 at 11am EST. Beating or missing estimates for Q1 will not change our bullish stance on Owens Corning. The chart below is from a 2014 investor presentation of Owens Corning’s Insulation EBIT Margin. With the margin roughly a third of its historic average, it suggests potential upside for OC’s most important segment as commercial and residential buildings catch-up to state-wide building codes. The International Energy Conservation Codes or IECC notes the majority of states of both commercial and residential buildings are at 2009 IECC energy efficient levels. So as homeowners and companies look to cut energy costs insulation is among the first materials installed.
RH – After 5 years of store consolidation, Restoration Hardware’s square footage is set to start to grow in a material way starting next month with the opening of the 6th Design gallery in Greenwich, CT and the completion of the New York – Flatiron remodel. We expect to see square footage grow from 800 thousand in 2013 to 2.5 million by 2018. This square footage growth and new product introductions will be the key drivers for the $3.5bil incremental revenue growth over that time period.
Here’s a quick update on RH’s real estate initiatives. The company will open 4 design galleries in 2014, the aforementioned spaces in Greenwich and New York, one on Melrose Ave. in Los Angeles, and a 65,000 sq. ft. store in Atlanta towards the end of the year. For 2015, we are modeling 9 new design gallery locations – 3 have been announced (Chicago, Denver, and Las Vegas). In the outer three years we see an incremental addition of 33 new additions taking the total design gallery doors to 51 by 2018.
ZQK – Quiksilver CEO Andy Mooney was brought in to spearhead the turnaround in early 2013, and the company made sure that he was properly incentivized to expedite that process. As part of his compensation package, Mooney was granted 2 million restricted stock units (RSU’s) that would vest under two conditions. 1) If the stock price, for a period of 30 consecutive days, equals or exceeds $12.50, or 2) if the company is acquired at a price that meets or exceeds $9.28. That means Mooney would stand to gain almost $20 million if the company were to be acquired above the $9.28 threshold.
Two companies that we have identified as possible acquirers are VF Corp. and Kering. We discussed the possibility of a VF acquisition a few weeks back, and added Kering to the watch list after the announcement that Kelly Slater was moving to the brand and subsequent comments by the French company’s CEO that he was looking to acquire sports/lifestyle brand portfolio to round out his company’s portfolio which already consists of Puma, Volcom, Electric, Cobra golf, and Tretorn.
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Restaurants sector head Howard Penney raises the question: Does the casual dining industry have pricing power?
Internet & Media director Hesham Shaaban extends his Total Addressable Market analysis on YELP to Europe to prove that headwinds in the United States are too severe for international to compensate.
A recent report calling to keep e-cigarettes out of the hands of children already echoes leaders’ expectations within the tobacco industry and desires for the category.