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
HEDGEYE CARTOON OF THE WEEK
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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