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Monday Mashup: YUM, BOBE and More

*Reminder: We’re hosting a call with Pat Grismer, CFO of Yum! Brands, on Tuesday, May 6th at 11am EST to talk succession planning, Taco Bell breakfast and China.

Investment Ideas

The table below lists our current Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.


Monday Mashup: YUM, BOBE and More - chart1



BOBE – We’re adding Bob Evans to our Investment Ideas list as a long.  Activist Sandell Asset Management has identified significant opportunities for value creation at the company.  We, here at Hedgeye, tend to think BOBE would also benefit from a transition to an asset light model.

Recent Notes

04/28/14  Monday Mashup: Adding ZOES, BOBE to the Watchlist

04/30/14  PNRA: Much Noise, Little Clarity

05/01/14  YUM: Conversation with CFO About Succession Planning

05/02/14  New Best Idea: Long BOBE

05/02/14  Employment Data: Beyond the Headline Numbers

Earnings Calls This Week

05/05/14  TXRH earnings call 5:00pm EST

05/06/14  TAST earnings call 8:30am EST

05/06/14  ARCO earnings call 10:00am EST

05/06/14  FRGI earnings call 4:30pm EST

05/06/14  PBPB earnings call 5:00pm EST

05/06/14  CHUY earnings call 5:00pm EST

05/07/14  PZZA earnings call 10:00am EST

05/07/14  THI earnings call 2:30pm EST

05/08/14  WEN earnings call 10:00am EST

05/08/14  JMBA earnings call 5:00pm EST

05/09/14  BLMN earnings call 9:00am EST

Chart of the Day

Monday Mashup: YUM, BOBE and More - chart2

Recent News Flow

Monday, April 28th

  • PNRA downgraded to underperform at Longbow Research with a $138 PT.
  • BOBE appointed new independent directors Kevin Sheehan, Kathy Lane and Larry McWilliams to its Board of Directors.  Gordon Gee stepped down from the board effectively immediately, while Larry Corbin and Robert Lucas will be retiring from the board when their terms expire.
  • BOBE Sandell essentially deemed BOBE’s announcement inadequate, calling it a “knee-jerk reactionary step.”
  • PZZA Papa John’s aired a TV commercial featuring NBA All-Star Paul George of the Indiana Pacers promoting its new Sweet Chili Chicken Pizza.

Tuesday, April 29th

  • THI launched its newest drink, Frozen Hot Chocolate, across all U.S. restaurants.
  • PZZA declared a quarterly dividend of $0.125 per common share payable May 23, 2014 to shareholders of record at the close of May 12, 2014.
  • DRI announced that Chief Restaurant Operations Officer, Dave Pickens, will retire effective May 23.  DRI will not replace Pickens and plans to eliminate the position altogether.

Wednesday, April 30th

  • RRGB announced it has signed purchase agreements to acquire 32 franchised restaurants in the U.S. and Canada for approximately $40M.
  • NDSL announced the opening of its first MA location in Shrewsbury with franchisee operator, Hamra Enterprises.

Thursday, May 1st

  • PNRA was upgraded to positive at Susquehanna with a $184 PT.
  • YUM announced that Chairman and CEO David Novak will become Executive Chairman on Jan. 1, 2015, transitioning from his current role.  At this time, Greg Creed, Preisdent of Taco Bell, will become the next CEO of Yum! Brands.  Novak will then form the Office of the Chairman, which will include Sam Su (YUM Vice-Chairman and Chairman/CEO of the China Division) and Greg Creed.  According to the press release, "This new Office of the Chairman will partner as a triumvirate on overall corporate strategy and leadership development to propel continued growth."
  • JMBA is re-introducing its Fruit Refreshers with coconut water for the summertime.  The Fruit Refreshers are available in three flavors: Pina Colada, Tropical Mango and Island Strawberry.
  • KKD upgraded to buy at Sidoti.

Friday, May 2nd

  • BAGL board authorized a $20M repurchased program.
  • WEN new product team was honored with the Hot N’ Juicy Award for its Pretzel Bacon Cheeseburger.
  • FRSH Papa Murphy’s IPO priced at $11.00 per share, at the low end of the expected $11.00 to $13.00 range and had an underwhelming day trading, up only +0.46% at the close.

U.S. Macro Consumption

It was a bit of a bounce back week for consumer discretionary stocks.  Following several weeks of underperformance, the XLY (+1.3%) outperformed the SPX (+1.0%) last week.  In aggregate, casual dining stocks outperformed the broader index, while quick service stocks underperformed.  The Hedgeye U.S. Consumption Model reverted back to neutral, now flashing green on 6 out of 12 metrics.


Monday Mashup: YUM, BOBE and More - chart3

XLY Quantitative Setup

From a quantitative setup, the sector remains bearish on an intermediate-term TREND duration.


Monday Mashup: YUM, BOBE and More - chart4

Casual Dining Restaurants

Monday Mashup: YUM, BOBE and More - chart5


Monday Mashup: YUM, BOBE and More - chart6

Quick Service Restaurants

Monday Mashup: YUM, BOBE and More - chart7


Monday Mashup: YUM, BOBE and More - chart8




Howard Penney

Managing Director


Fred Masotta


Over the Waterfall?

Client Talking Points


Did the 10-year US Treasury Yield just go over the waterfall of interconnected risk? After one of the more epic 2 hour moves I’ve ever seen for the 10-year yield (between 8:30-10:30am on Friday), my long-term TAIL risk line of 2.60% broke (2.58% this morning). Gold is breaking out again and European stocks don’t like it inasmuch as high multiple US Growth Stocks won’t. 


After frustrating people who missed the rip higher to $1380 in early March, Gold has been consolidating and finally broke out above my immediate-term TRADE momentum line of $1292 on Friday. There is 0% coincidence in that after the 10-year yield gave it direction. Gold loves falling bond yields.


Europe is down hard this morning (Germany's DAX -1.3%) after most European Equity markets failed to make higher-highs last week. While EuroStoxx600 was up +1.3% last week to +2.9% beats being long the Russell2000 (down -3.0% YTD), it is May… and I’m not into the "Buy in May and Pray" thing.

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


Yield Spread (10yr minus 2yr) coming in hot to +216bps - fresh YTD low (bearish for Financials $XLF) @KeithMcCullough


"Courage is fear holding on a minute longer." -General George Patton


Sorry, Vladimir. The Russian stock market continues to crash. It is down 20.7% year-to-date.

Just Charts: Sticking With What Works

Just Charts: Sticking With What Works - chart1


Consumer Staples traded in-line with the broader market last week, rising 0.9%.  XLP is up 2.8% year-to-date versus the SPX at 1.8%. The coming week is marked by a number of earnings releases.


Earnings Calls (in EST):


Monday (5/5):  TSN (9am)

Tuesday (5/6):  IFF (10am); HSH (10:30am); NUS (11am)

Wednesday (5/7):  BUD (9am); MDLZ (10am); TAP (11am and 2pm)

Thursday (5/8):  HAIN (8:30am); DF (9am); THS (9am); LNCE (9am); MNST (5pm)

 Friday (5/9):  POST (9am)



For the last two months, XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.


Just Charts: Sticking With What Works - chart2


The Hedgeye U.S. Consumption Model shows a muted outlook over recent weeks, with 6 of the 12 metrics flashing green (up from only 3 two week ago). 


Just Charts: Sticking With What Works - chart3


Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:


  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.4x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (recently rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, but improved to 37.9 versus 37.3 in the prior week

Just Charts: Sticking With What Works - chart44

Just Charts: Sticking With What Works - chart5

Just Charts: Sticking With What Works - chart6



Top 5 Week-over-Week Divergent Performances:

Positive Divergence:  ENR 17.3%; LO 8.6%; EL 4.7%; DPS 4.5%; HLF 3.7%

Negative Divergence:  AVP -8.6%; BG -6.1%; BNNY -4.5%; NWL -4.0%; BUD -2.6%



Last Week’s Research Notes


Quantitative Setup

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).


BUD – stiff selloff on a bearish volume signal, but didn’t quite break 105.23 TREND support yet


Just Charts: Sticking With What Works - chart7



DEO – still bearish TREND (despite the entire world chasing low-beta consumer staple yield); TREND resistance = $125.33


Just Charts: Sticking With What Works - chart8



KO – slow-growth-yield-chasing remains in vogue; TREND support = $39.81


Just Charts: Sticking With What Works - chart9



PEP – low-volume ramp as of late, but the bullish TREND breakout remains intact with $84.18 support


Just Charts: Sticking With What Works - chart10



GIS – still one of the best looking charts on this list; bullish intermediate-term TREND support = $50.73


Just Charts: Sticking With What Works - chart11



MDLZ – held its recent breakout from its TREND base ($34.42 support)


Just Charts: Sticking With What Works - chart12



KMB – in spite of the scare a few weeks back, the stock has held $107.62 TREND support


Just Charts: Sticking With What Works - chart13



PG – correction late last week but still holding intermediate-term TREND support of $80.73


Just Charts: Sticking With What Works - chart14



MO – big bullish-yield-chasing remains a big time bullish TREND = $37.94 support


Just Charts: Sticking With What Works - chart15



PM – recipient of the style factors the market is paying for (big cap, low beta with yield); TREND support now $83.42


Just Charts: Sticking With What Works - chart16




Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


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Nimble and Changing

This note was originally published at 8am on April 21, 2014 for Hedgeye subscribers.

“Small, nimble, fast changing.”

-Julia Lovell


That’s how Julia Lovell described early 19th century England (relative to China) in The Opium War. “While China’s slavish people had been homogenized into speaking one language … and sympathizing in the same manners.” (pg 79)


As a company or a country, you do not want to become 17-19th century China. You don’t want to be what Europe morphed into during the 20th century either. As a Canadian capitalist who came to this country in the 1990s, I often wonder what America’s 21st century will look like. It’s not what it used to be.


Sadly, the path of least resistance is one of a slower-growth bureaucracy. That’s not my opinion. That’s the history of countries who age. So don’t do that. Do what you can to put two-feet on the floor every morning and earn your keep; fight the tyranny of government groupthink; be nimble and changing.


Nimble and Changing - nimble


Back to the Global Macro Grind


If only because I finally took a vacation, watching the US equity market melt-up to lower-highs on no volume was interesting to watch, intermittently. But one week does not an intermediate-term TREND make. As a friendly reminder, it’s late April and most major US stock market indices are down year-to-date.


Inclusive of the Dow (which we are short in Real-Time Alerts via the DIA) and US Consumer Discretionary stocks (XLY) rising +2.4-2.5% last week, they are both still -1.0% and -4.6% for 2014. If you are long America thinking this is the 1990s #StrongDollar growth cycle again, that is not good.


Two of our most outside of consensus Global Macro Themes are:

  1. US #InflationAccelerating
  2. US #ConsumerSlowing

Both have continued to play out in April. While they are bearish from a cyclical and secular US consumption growth perspective (see our Q2 Global Macro Themes deck for details), there are obvious ways to play this from the LONG side:

  1. Long Inflation, explicitly, via Commodities (DBA, UNG, CAFE, etc.)
  2. Long Inflation, protection, via Treasury Inflation (stagflation) Protection (TIPs)
  3. Long #GrowthSlowing via Bonds (TLT) and any slow-growth Equity (XLU) that looks like a bond

Those speaking the Fed’s language (“there is no inflation”) and/or #OldWall consensus (“Wall Street Bond Dealers Whipsawed on Bearish Treasury Bets” –Bloomberg this morning) don’t get this, yet. But markets do.


Speaking of YTD market scores, how about those commodity markets!

  1. CRB Food Index up another +2.7% last week to +21.6% YTD
  2. Coffee and Soybean prices up again last week to +77% and +19% YTD, respectively
  3. Natural Gas +2.6% last week to +15.8% YTD

I know, I know. As long as you don’t eat and/or plan on running the air conditioning in your house this summer, those food and utility bills (according to those speaking one language in Washington) are “non-core” to what you really need to be spending on – a $600-700 iPhone 6 upgrade!


Nimble and Changing - Chart of the Day


While I was in the pool with my kids Thursday, our long Natural Gas (UNG) and Coffee (CAFE) buy-signals in Real-Time Alerts ripped. But don’t tell the Fed that. They’re still saying what US consumers had to pay (front-month) to heat their homes this winter was “transient.”


Sure, almost every “fundamental” analyst in the Federal League can tell you that there is an “over-supply of Natural Gas” in America. But most of them won’t tell you there is an over-supply of people who were long the Dow and social media stocks on January 1st.


The YTD score doesn’t lie though; those saying there is no inflation do.


Into the belly of US “earnings season” (and away from the aforementioned asset allocations to commodities and bonds), how does all of this look from a Hedgeye Style Factoring perspective (in US Equities) in the last month?

  1. Top 25% Sales Growth Companies (Top Quartile of SP500 Companies) are -2.2% (vs. the bottom 25% being +2.2%)
  2. Top 25% EPS Growth Companies are -1.3% versus the bottom quartile being +2.6%
  3. High Beta Equities are -0.2% versus Low Beta +1.8%

Since it’s also NHL Playoff season, as Herb Brooks said in Miracle, “Again!”


Again, and again, and again… for centuries, big, fat, centrally planned countries who have devalued the purchasing power of their people in exchange for political safety have lost this war. It ends with inflation. And inflation slows both growth, and the multiples markets pay for them.


Our immediate-term Global Macro Risk Ranges are now:


SPX 1833-1880

Nasdaq 3961-4149  

USD 79.11-80.03

Brent Oil 108.21-110.62

Natural Gas 4.46-4.78

Gold 1285-1330

Corn 4.94-5.11


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer

CHART OF THE DAY: 10-YR UST "Un-friending" US Growth


CHART OF THE DAY: 10-YR UST "Un-friending" US Growth - Chart of the Day

Un-friending US Growth

“There is no friendship in trade.”

-Cornelius Vanderbilt


Un-friending US Growth - facebook thumbs down


Forget about what Facebook (FB) did on Friday. In one of the more epic 2 hour moves I have ever seen, the US bond market un-friended the US growth bulls, big time.


At 8:30AM the lagging of all lagging economic indicators (the monthly US unemployment rate) was met with some of the funniest tweets my contra-stream has ever seen: “Boom!” (as in this is  great report), “Bye bye Bond Market”, “Stocks gonna rip!”, etc.


By 10:30AM, as you can see in the Chart of The Day, anyone who bought US growth stocks and sold what’s been working all year (Gold, Bonds, etc.) felt shame. #Tweetless


Un-friending US Growth - Chart of the Day


Back to the Global Macro Grind


To be crystal clear, with the 10yr US Treasury Yield -15% YTD to 2.58% and US GDP 0.11% in Q114, Mr. Macro Bond Market has completely nailed it in 2014.


Since everyone other than guys @ISI (who are trying to story-tell about 3-4% US Growth) understands the relationship between a rising bond market (falling bond yields) and falling growth expectations, the real-time price truth is on the tape.


With the Russell2000 (proxy for US Growth stocks) -3% YTD, what else is going on out there on the scoreboard?

  1. US Dollar down another -0.3% last week to $79.51 on the US Dollar Index (re-testing its YTD lows)
  2. The Currency Power Couple (Euro and Pound) were up another +0.3-0.4% last week to +1.9-3.0% YTD vs the Burning Buck
  3. European Stocks (EuroStoxx600) were up +1.3% last week (vs the Russell2000 +0.5%) to +2.9% YTD
  4. MSCI World Equity Index beat the Russell last week too, +1.2% = +1.8% YTD
  5. Canadian Stocks (TSX Composite Index) were up another +1.6% last week to +8.4% YTD

Blame Canada (who also had the “weather”, like the UK did – but didn’t spend the last 3 months blaming it like CNBC growth bulls have).


Now, if they can’t blame the weather for a 9-week high in US jobless claims (reported on Thursday, which isn’t a lagging jobs indicator), what precisely do you think they’ll start to blame as they cut their 2014 US GDP “forecasts”?


Alec, I’ll take US #InflationAccelerating for $500 (pre-tax!):

  1. Food Prices (CRB Foodstuffs Index) were up another +0.7% last week to a tasty +22.3% YTD
  2. Cattle Prices were up another +3.1% last week to +11.1% YTD
  3. Natural Gas Prices were up another +0.6% last week to +14.0% YTD

No worries though, the natural gas thing was all about the weather on the East Coast in February, right? If poor people being pulverized by food and shelter costs can’t afford the air conditioning this summer, tell them to go topless.


Cotton prices up another +1.1% last week to +12.3% YTD are prohibitive to wearing t-shirts anyway. After they eat an iPad, the median consumer in America (who makes $47,296.72 a year pre-tax and spends $42,996.83) can swallow Janet’s un-tapering reaction to slowing data, and like it.


Obviously this isn’t funny – an un-legislated Policy To Inflate (taxing 80% of Americans with QE on their cost of living) rarely is. Looking at the average American’s Spending Breakdown (slide 15 of our Q214 Macro Themes Deck):

  1. Housing = 29.2%
  2. Transportation = 17.6%
  3. Food = 12.5%

Yep, your un-elected Fed tells you all of that stuff is “non-core.” While food and shelter are primitive concepts for some, for most of us they are core costs. And since 30% of the country still rents, the all-time highs in US rents matters to real people with real costs too.


Oh yeah. I almost forgot to tie in the introduction of today’s note with the conclusion. Why is it that bond yields got slammed intraday on a “better than expected jobs report”? That’s easy. As opposed to being a backward-looking-editorial-passive-trend-follower, markets are forward looking.


My read-through on what both the bond and currency markets have been telling you for 4 months is that they’ll be telling you more of the same in the next 4 months. As growth slows, the Fed will get even easier à Dollar and Bond Yields fall further à  Inflation continues to accelerate, and real growth consensus is un-friended, faster.  


Our immediate-term Global Macro Risk Ranges are now as follows:


UST 10yr Yield 2.56-2.68%


RUT 1093-1133

USD 79.19-79.88

Gold 1

Corn 4.96-5.21


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer

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