The Best of This Week From Hedgeye

Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.


Controversial best-selling author James Rickards sits down with Hedgeye CEO Keith McCullough to discuss a number of important subjects in this wide ranging interview.


Here's a short excerpt from an institutional conference call that restaurants analyst Howard Penney held with YUM CFO Pat Grismer earlier this week.


Hedgeye CEO Keith McCullough takes a look at key market and economic issues investors should be focusing on right now but aren't.


Buy in May and pray or just go away?

The Best of This Week From Hedgeye - Sell in May 05.05.2014


The next crisis will be a crisis of confidence in central planning.

The Best of This Week From Hedgeye - KinKongCartoon5.7.2014


The Best of This Week From Hedgeye - Corelogic



Twitter shares got royally shellacked on Tuesday falling almost 18% after its IPO lock-up period ended. Shares finished trading around $32. Click here to view the poll and results.

The Best of This Week From Hedgeye - 2



Penney Nails Another 'Best Idea' Short | $BLMN

The Best of This Week From Hedgeye - blmn

A couple of weeks ago, we highlighted how Hedgeye restaurants analyst Howard Penney nailed his short call on Panera Bread. He did it again with Bloomin' Brands (BLMN) which he added as a Best Ideas SHORT back on 11/27/13. Click here to continue reading.



Did the 10-Year U.S. Treasury Go Over The Waterfall?

The Best of This Week From Hedgeye - 05.05.14 10 year yield post nfp

In a research note CEO Keith McCullough originally wrote before the market opened on Monday, he asked, "So, did the 10-year US Treasury Yield just go over the waterfall of interconnected risk?" Click here to read more.



When It Comes To Twitter, We Tried To Warn You | $TWTR

The Best of This Week From Hedgeye - twitter e1399390329867

Twitter stock tumbled over -14% on Tuesday as the lock-up period for early investors has expired, but that doesn’t surprise Hedgeye Internet & Media analyst Hesham Shaaban. He has been the bear on $TWTR. Click here for more.

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

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


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




DRI – Managing director Howard Penney doesn’t have any updates on Darden this week, but he still considers the company stock a "generational buying opportunity" as he explains in this exclusive HedgeyeTV video.


HCA – There are comments in the press about HCA Holdings' intent to purchase an Australian hospital system. Frankly, we don’t know too much about analyzing Australian hospitals, but we’ll cross that bridge when we get there. We’d rather HCA focus more on the opportunity in the United States. We believe the US hospital industry is on an accelerating pace of consolidation which will lead to increase pricing and purchasing power. 


We spoke recently to an orthopedic surgeon who recently started receiving an income statement for his procedures and for the department. This kind of transparency, in his view and ours, will lead to better pricing from medical supply and equipment manufacturers. A long time ago we calculated the total raw material cost for a prosthetic knee at roughly $200. This is a shockingly low number compared to the $12,000 a hospital may pay for the device implies there is plenty of margin to go and get, assuming you had the right data, that is. 


Expanding overseas is an interesting move for HCA, but we feel there is plenty of opportunity here at home too.

HOLX ­­– We continue to like the set up for Hologic. One of potential pools of upside is located within their sentiment metrics, i.e. short interest and sellside ratings. For HOLX both of these metrics sit at multi-year highs (short interest) and lows (sellside rating). For Hologic, this is positive for returns typically. 


When short interest has been at this level in the past, the forward returns on a 3-month, 6-month, and 12-month duration are 14%, 27%, and 69%, respectively. The sellside rating history would suggest 13%, 20%, and 41% returns over the same time periods. If we are right on adoption for Digital Breast Tomosynthesis adoption, the shorts will cover and the sellside will upgrade their ratings.


LM –  In a quiet week of news flow after asset manager earnings season last week, the price action in the market spoke volumes. For the week ending May 9th, the defensive, fixed income related asset managers all had positive performance in their stocks versus the more equity related managers subcombing to fears that the strong run in stocks is stalling out which will affect their assets under management. Franklin Resources (BEN) and Legg Mason had strongly positive moves in their stocks in the most recent week ending May 9th which appreciated by 3.7% and 2.0% respectively. BlackRock (BLK), with its leading legacy fixed income business also eked out a gain this week as the market became more defensive. On a year-to-date basis, second place is first loser, with Legg Mason the only asset management stock in positive territory. The gain of 9.9% for LM is nothing to bat an eye at either considering current LM performance is over 10% ahead of the next best performer in the group and also well ahead of the S&P 500 with just a 1.5% gain this year. We are sticking with the LM story and still think it is worth in the neighborhood of the high $50 per share range on a revival in fixed income inflows from pensions and the fact that the stock has high short interest and very low Wall Street sentiment.







LO – Lorillard was relatively flat on the week, yet followed the prior week’s monster +8.5% move which we commented was mostly fueled by rumors that RAI is interested in acquiring the company. Clearly the rumors subsided this week, which is in-line with our opinion that a hypothetical deal (especially an imminent one) is challenged.


We maintain our bullish stance on LO (originally released in our Best Idea call on 3/4/2014, and before any takeout rumors) supported by 1.) Its leading share and profitability of its core menthol business, 2.) Our belief in the limited menthol regulatory risk over the longer term (substantiated by a Washington, D.C. tobacco expert), and 3.) The upside growth in its blu e-cigarette business that commands leading share in the U.S.

OC – Owens Corning’s weakest business in Q1 2014 should benefit as we head towards warmer weather. The Roofing & Asphalt segment exited Q1 with -18% in sales YoY with an operating margin of 16%. Historically, its operating margin is impacted by the colder quarters as seen in the graph below. The U.S. roofing market is still 20% below its 15 year average as noted in an OC investor presentation this past Thursday. Furthermore, the roofing industry has consolidated to 4 companies (including OC) with 90% of the U.S. market compared to 10 companies owning 90% of the market in the 1990s. This implies as roofing activity picks up in the summer – impacted by the weather and an increase in demand – the four largest players should capture the majority of the gains.




RH – This week, Restoration Hardware released its new Source Book showcasing a redesigned product assortment. This ‘Source Book’ is actually 13 books in one, and is made up of over 3,300 pages (Yes, RH is keeping Dunn & Bradstreet in business). Clearly too big to mail, the books will be sent out to customers via UPS. While it will be more expensive, it’s worth noting that this will give RH certainty that the books will actually be delivered to the customer instead of being thrown near the mailbox on the street, and will also give RH better data usage. We should note that the mere existence of a Source Book does not get us excited, but the fact that there is a full assortment of product around 13 different categories ultimately helps the in-store business (53% of sales) in addition to catalog/e-commerce.  In addition to the catalog launch, the company will also host a Grand Opening Gala (and make no mistake, it is a Gala) at the new Greenwich store next Thursday, May 15. Knowing how ‘Hollywood’ RH makes these events, it’s likely to be a positive experience for anyone in attendance.     




ZQK – Sector head Brian McGough has no new updates on Quiksilver this week, but in this flashback HedgeyeTV video from December 2013, he explains why he sees top-line growth for Quiksilver and, ultimately, a higher stock price for the action retailer.


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Qualified Mortgage Pressuring Housing Finance

Macro analyst Christian Drake highlights how the Fed Senior Loan Officer Survey is supportive of Hedgeye's #HousingSlowdown call as residential mortgage demand and availability continue to decline.


Tapering = Rates Falling

The Financials team explains why rates have been falling since the taper began, why they think this will persist, and how to position for it. 



New Target CEO Has to Take EPS Down, A Lot

Retail Sector Head Brian McGough analyzes why the new CEO of Target has to take earnings down before they can go up.


Week Ahead

The Economic Data calendar for the week of the 12th of May through the 16th of May is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.


Week Ahead - 05.09.14 Week Ahead

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Poll of the Day Recap: 53% See Pain Ahead For the S&P 500 | $RUT $SPX

Takeaway: 53% said PAIN AHEAD; 47% ALL CLEAR.

As CEO Keith McCullough wrote in today’s Morning Newsletter, the Russell 2000 small-cap index “is down -9.1% from its all-time-bubble-peak in March…Whereas the SP500 is only -0.8% from her all-time-twitter-muscles-but-but-the-market-isn’t-down-yet peak.”

That said, we asked in today’s poll: Is the big drop in the Russell 2000 predicting pain ahead for the S&P 500?


Poll of the Day Recap: 53% See Pain Ahead For the S&P 500 | $RUT $SPX - 4097410360 df7bd876aa z 620x413

At the time of this post, 53% agreed they saw PAIN AHEAD; 47% said ALL CLEAR.

Voters who think there is PAIN AHEAD said:

  • “$RUT led the way up, it will lead the way down. It does not have the slow growth sectors within it, like Utilities, Telecom, Staples, etc.”
  • “As realisation the FED is cornered takes effect the low volume won't be able to support these prices.”
  • “Record leverage, Yen, unrealized profits, Macd on the monthly chart looks VERY SCARY!!  Completing very defined head and shoulders. Running out of morons to buy. Volume and Breadth is absolutely pathetic.  Can’t figure out what the delay is all about except the big boys are trying to gently distribute without bringing the market down. I think the supply of idiots is beginning to run low. Looking for a big move soon.  OH, almost forgot, Keynesian economics is a fraud designed to usurp political power from morons, not really gonna "actually" work financially. Oh well I guess all of our kids and grandkids will figure it out since they will have lots of time to do their homework on it without all those pesky jobs to take up all their time.”
  • “Quarterly earnings seem to be more about buybacks than beating what were already lower adjusted estimates. YoY consumer spending for things other than food, gas & electricity will show deceleration. This will not bode well for next quarter.”


Conversely, those who believe it is ALL CLEAR said, “Don't fight the FED,” and that “this is just a bump in the road.”


This Stock Cratered -50% Since Hedgeye's Todd Jordan Issued His Warning

Takeaway: Reason #474 why you should be tuning into HedgeyeTV.

Don't say we didn't warn you.


This Stock Cratered -50% Since Hedgeye's Todd Jordan Issued His Warning - TJ

On October 11th, Gaming, Lodging & Leisure Sector Head Todd Jordan appeared on HedgeyeTV and warned investors about Scientific Games (SGMS). The stock is down 50% since Jordan's short call.


It gets better (or worse -- depending on who you ask).


He also warned viewers about IGT.


This Stock Cratered -50% Since Hedgeye's Todd Jordan Issued His Warning - TJ1


Click video below to see the other stock he warned about.

BLMN: Still Bearish

BLMN remains on the Hedgeye Best Ideas list as a SHORT.

BLMN reported underwhelming numbers this morning, missing both top and bottom line estimates by 69 bps and 288 bps, respectively.  Same-store sales across all four main concepts decelerated on a two-year basis in 1Q14, despite initiatives aimed at stemming this decline.  Traffic trends remain anemic, although they continue to outpace the casual dining industry according to Knapp Track data.  This is to be expected, as weekday lunch continues to rollout across Carrabbas and Outback restaurants.  Management maintained full-year guidance of 1-2% comp growth for its core domestic brands and GAAP diluted EPS of at least $1.21 on a calendar basis.  Trends will need to accelerate meaningfully throughout the rest of the year in order for BLMN to hit the numbers.  The real disconnect, however, comes in FY15 with the street expecting 20% EPS growth on 7% EPS growth.  These numbers are far too high and will be revised down, over time, as this becomes a realization.


We continue to believe the casual dining industry is in secular decline.  In the new era of casual dining, companies with large, diverse portfolios are at a structural disadvantage to smaller, more nimble players.  Darden is currently having issues operating its vast array of brands and we believe Bloomin’ is on a similar path.  As it stands, Bloomin’ has some of the worst operating margins in the entire restaurant industry.  Despite claims of significant efficiencies, its profit margins have essentially remained flat since the beginning of 2011. 


Aside from taking issue with the structure of the company, we continue to question the strategic rationale behind the company’s capital allocation decisions.  Management seems intent on maintaining its unit growth story, despite less than desirable results.  Carrabbas, for example, should not be growing at all.  Recognizing a problem and not immediately addressing it is a flawed strategy that will inevitably come back to haunt the company.


What We Liked:

  • Outback Steakhouse same-store sales growth of +0.8%
  • Interior remodel at Outback complete, exterior remodel underway
  • Currently rolling out Saturday lunch at Bonefish Grill; new core menu coming in 3Q
  • Brazil same-store sales and cash flow generation remain strong
  • Maintained +2-4% commodity inflation outlook; majority of 2014 needs are locked


What We Didn’t Like:

  • Two-year same-store sales decelerating across four core brands
  • System-wide traffic decline of -1.6%
  • Carrabba’s same-store sales decline of -1.8%; cited competitive pressure in the Italian segment
  • Carrabba’s new menu (rolled out at the end of Feb.) “hasn’t driven incremental traffic”
  • Bonefish same-store sales decline of -1.5%
  • Weakness in Korea largely offset strength in Brazil
  • U.S. restaurant margins were negatively impacted by a new menu launch and advertising costs
  • Operating margins decreased to 8.4% from 8.9%
  • Management refuses to halt new unit growth at Carrabbas



BLMN: Still Bearish - 1


BLMN: Still Bearish - 2


BLMN: Still Bearish - 3


BLMN: Still Bearish - 4




Howard Penney

Managing Director


Fred Masotta