LEISURE LETTER (05/27/2014)

Tickers:  HOT, IHG, STAY, MAR, RCL


  • Tuesday, May 27 - Aristocrat Leisure: 11pm (Live Phone Number: , Passcode: 9068797)
  • Monday, June 2 - Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference 


HOT - sold its leasehold interest in the Park Lane Hotel in London, UK, to Sir Richard Stutton's Settled Estates for an undisclosed sum.  Starwood will continue to 303-room, Sheraton-branded, Art Deco property under a new long-term management agreement.

Takeaway: Don't have terms but Strategic Hotels sold its leasehold interest in the 237-room Marriott London Grosvenor Square hotel for £125.15 million ($207.7 million), or approximately £528,000 per key ($877,000). 


IHG - turned down a £6B takeover approach.  Sources believe it was either Starwood Hotels or Starwood Capital.  Industry observers in London expect the buyer to return with a rebid.

Takeaway: Given HOT's share repurchase announcement, we doubt HOT is still involved, if they ever were. IHG recently announced a large capital return so nothing is imminent from their end either.


STAY - the IPO lock-up covering 172.3M shares (84.1% of outstanding) expired on May 25. 

Takeaway:  STAY listed at $20/share vs. Friday's closing price of of $21.49/share.


MAR - insider J Marriott, Jr. sold 97,043 shares of stock on Friday, May 23rd at an average price of $59.09, for a total transaction of $5,734,270.87. Following the sale, the insider now directly owns 188,229 shares in the company.

Takeaway: More insider selling in hotel companies.


RCL - announced its year-round deployment in Singapore for the first time from 2015, starting with its ship Legend of the Seas in the summer season and followed by Mariner of the Seas in the year-end.  

Takeway: Continued focus on Asia in 2015


MSC: Sees Fantasia class ship in UK by 2017 (Cruise Business Review)

MSC is reported to be considering a return to the UK after a break next year and to have a 137,000 gross ton Fantasia class ship based in Southampton by 2017.

Takeaway:  MSC is certainly surprising some folks on how fast the company is growing.


MSC: Sasso makes the case for MSC's growth, disputes pricing alarm (Seatrade Insider)

MSC North America chief, Rick Sasso said, "We need more capacity and we have the momentum to fill [all the new ships].  Some of our competitors have had trouble filling the increased capacity in the Caribbean.  We held our pricing even as the other major brands were heavily discounting last fall and early winter. We eventually had to make our own pricing decisions as well but...we are only a small percentage of Caribbean inventory and their stress and needs were much greater."

Takeaway:  Sasso comments suggest MSC's upcoming new ships may be focused on the North America markets e.g. New York/Miami.


RCL - Jorge Vilches Named President and CEO of Pullmantur

Takeaway:  Good leadership change to turn around a struggling brand


Macau Unemployment (DSEC) - The unemployment rate for February-April 2014 was 1.7%

Takeaway:  Low unemployment remains - and many of the 1.7% may be in the underground economy.  Where will the new dealers for Cotai come from?


Hong Kong Visitation - (Bloomberg) Mainland Chinese represent 75% of Hong Kong's 54.3 million tourist arrivals in 2013. Recent protests have caused the SAR to consider limiting Mainland tourist arrivals. The city may need measures to “slow the gains in tourist arrivals or stop increases, or cut visitors,” said Hong Kong's Chief Executive Leung. “We’re making studies and will seek feedback.”

Takeaway:  Any curtailing of mainland visitation to Hong Kong will result in a slowdown in retail sales as well as potentially a minor slowdown in Macau visitation as some Mainlanders appear to be accessing Macau via Hong Kong.


Chinese Illegal Gaming Crackdown - (Shishi Daily) RMB400 million (US$64 million) of alleged gambling money was seized by the Public Security Police in a raid on a hotel in Fujian province.  The action was the result of information from the public that an illegal casino operation was taking place at night in a “downtown hotel” in Shishi, a county-level coastal city of 300,000 inhabitants in the municipal region of Quanzhou, in southern Fujian province. 

Takeaway: Not relevant to Macau. 


Japan Gaming - Japan's Prime Minister Shinzo Abe plans to visit a casino and resort complex in Singapore to assess the facility's economic benefits and effect on society.  Abe will be in Singapore to deliver a keynote speech on May 30 at an annual Asia Security Summit.

Takeaway:  Good for LVS's prospects in Japan


Macau Infrastructure - the Light Rapid Transit railway system which was expected to open between 2015 and 2018, appears to be facing major delays.  While the loop serving Taipa and Cotai is expected to be ready by late 2016, the Peninsula portion of the network is experiencing major setbacks and cost overruns. 

Takeaway:  Infrastructure delays have been persistent and not good for an area in desperate need.


Cambodia Gaming - Roxy Casino, located in Bavet City, Svay Rieng Province and 200 metres from the border from Cambodia to South Vietnam, re-opened, after undergoing refurbishment and renovation. Roxy Casino features a main gaming hall with 15 gaming tables and eight online gaming tables, plus a premium gaming area with five tables offering high-stake games, slot machines and a sports betting area focused on international football games and will operate 24 hours a day.  The property includes a four-star hotel with 20 rooms and a restaurant. The property is currently part of a reverse-listing process that will see it listed on the Australian stock exchange via a shell company, Cell Aquaculture Ltd.

Takeaway: A new, albeit small competitor for NagaWorld.  


Massachusetts Gaming Commission - is seeking a change in the gaming tax structure that would benefit operators. Reportedly the most-discussed change has been eliminating the withholding of taxes each time a $600 or larger jackpot or hand is won.


Wisconsin Tribal Gaming - The Menominee Indians disclosed Phase I of the Hard Rock casino, located on the former Dairyland Greyhound Park in Kenosha, would include 2,700 slot machines, 100 table games and 24 poker tables.

Takeaway: Potential competition for Greater Chicagoland gaming dollars. Weezer should be a constant on the play list.


Medcruise:  Western med opportunities and challenges (Cruise Industry News)

The Western Mediterranean will continue to see a build-up of capacity, according to cruise line executives speaking at the MedCruise general assembly in Castellon, Spain, May 21 – 23.  2014 is expected to be strong with further growth in 2015, including the Allure of the Seas, and a spike in 2016 with more new ships.  The executives expressed optimism about the economic recovery in North America and noted that Europe was starting to pick up as well and that they are focused on growing their European sourcing.

Takeaway:  The Med has been a bright spot this year.  Expectations will be higher in 2015.


Asian Political Tensions - A Chinese vessel rammed and sunk a Vietnamese fishing boat in disputed waters in the South China Sea.

Takeaway: Unrest in Asia continues to concern us.


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.


Post-Memorial Day Mashup

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.


Post-Memorial Day Mashup - 1


DRI: We’re relegating Darden to the Watch List as a long following the Red Lobster fire sale.  We need to see the majority of senior management and the Board replaced before we can have high-conviction in our bullish thesis.  Starboard will seek to replace the entire Board at the company’s annual meeting later this year and has nominated a highly qualified slate of replacements.  While this may seem unusual and quite aggressive, we firmly believe Starboard could be successful in this attempt.  Until then, however, we’d be cautious as FY14 and FY15 earnings estimates will be revised down and lingering uncertainty could be a drag on the stock. 

Recent Notes

05/19/14  Monday Mashup: Darden Sells Red Lobster

05/20/14  BNNY: Reiterating Short Into Earnings

05/21/14  DRI: Simply Egregious

Events This Week

05/28/14  CBRL Earnings Call 11am EST

05/28/14  DIN Annual General Meeting 12am EST

05/28/14  WEN Annual General Meeting

05/29/14  PLKI Earnings Call 9am EST

05/29/14  CAKE Annual General Meeting 1pm EST

05/29/14  BNNY Earnings Call 5pm EST

05/29/14  RUTH Annual General Meeting

Chart of the Day

DFRG (15.02x TTM EV/EBITDA) two-year same-store sales have been on the decline since 3Q11, yet the fine dining steak chain is up +40.6% over the past year and trades at a substantial premium multiple to its most comparable peer RUTH (9.43x TTM EV/EBITDA).


Post-Memorial Day Mashup - 2

Recent News Flow

Monday, May 19th

  • BLMN closed debt refinancing, effectively lowering its interest rate.  The Company expects cash interest savings of approximately $6.0 million in FY14.  The savings from the refinancing will be used primarily to fuel the development of a second concept in Brazil, where Outback Steakhouse has had great success.
  • DRI Barington Capital publicly opposed the Red Lobster sale, citing concerns with the cheap sale price and the highly tax inefficient transaction.  Barington was clearly displeased with the Board, writing: “It is clear to us from the Board’s decision to pursue this imprudent transaction and its horrific record in the area of corporate governance, that Darden’s independent directors are neither focused on, nor responsive to, shareholder concerns.  In over 14 years of investing, we have never seen a group of directors that have allowed a company to be run with such a blatant disregard for shareholder interests.”
  • BWLD announced the opening of a multi-level, 15,000 square foot restaurant in Times Square.
  • DNKN appointed Irene Chang Britt to its Board of Directors.  Ms. Chang Britt is currently President of Pepperidge Farm and serves as Senior Vice President, Global Banking and Snacking for Campbell Soup Company.  Prior to joining Campbell in 2012, she held senior positions with Kraft Foods and Kimberly-Clark.
  • CAKE entered into an exclusive licensing agreement with Maxim’s Caterers  to development at least 14 restaurants over the next 10 years throughout Hong Kong, Macau, Taiwan and the People’s Republic of China with the potential to expand into Japan, South Korea, Malaysia, Singapore and Thailand.  According to the release, the first restaurant will open in FY15.

Tuesday, May 20th

  • DRI Credit Suisse maintained its underperform rating and lowered its PT from $48 to $46 following the Red Lobster transaction.
  • PBPB appointed Susan Chapman-Hughes, current Senior Vice President of U.S. Account Development Global Corporate payments at American Express Company, to its Board of Directors.

Wednesday, May 21st

  • DRI Starboard Value announced its intention to replace Darden’s entire Board of Directors.

Thursday, May 22nd

  • BJRI announced the opening of its newest, 8,500 square foot restaurant in West Palm Beach, Florida.  BJ’s now has 17 restaurants in the state of Florida.

Friday, May 23rd

  • TXRH announced a quarterly cash dividend of $0.15 per share and increased its share repurchase authorization to $100 million.
  • WEN introduced a new summer-LTO, the Steakhouse Jr. Cheeseburger Deluxe.  According to the release, “The new limited-time cheeseburger boasts a fresh, never frozen beef hamburger patty seasoned with steakhouse seasoning, melty cheese and a creamy garlic aioli sauce made with roasted garlic, onion and Dijon mustard.  The hamburger patty is topped with sliced red onion, hand-cut tomato and hand-leafed lettuce.”  The burger, which is part of the Right Price Right Size Menu, costs $1.49 at participating locations.

US Macro Consumption

The XLY (+2.1%) outperformed the SPX (+1.2%) in a convincing manner last week.  However, both casual dining and quick service stocks, in aggregate, underperformed the broader XLY index.


Post-Memorial Day Mashup - 3


Post-Memorial Day Mashup - 4


The Hedgeye U.S. Consumption Model is signaling bearish for the second week in a row, flashing red on 7 out of 12 metrics.


Post-Memorial Day Mashup - 5

XLY Quantitative Setup

From a quantitative perspective, the sector is now bullish on an intermediate-term TREND duration.


Post-Memorial Day Mashup - 6

Casual Dining Restaurants

Post-Memorial Day Mashup - 7


Post-Memorial Day Mashup - 8

Quick Service Restaurants

Post-Memorial Day Mashup - 9


Post-Memorial Day Mashup - 10


Howard Penney

Managing Director


Fred Masotta


Just Charts: Bullish Large Cap Charts

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.

Just Charts: Bullish Large Cap Charts - 1


Consumer Staples was flat week over week versus the broader market (SPX) up 1.2%. XLP is up 3.0% year-to-date versus the SPX at 2.8%. 


Events This Week (in EST):


Earnings Calls

Wednesday (5/29): SAFM 11am

Wednesday (5/29):  BNNY 5pm


Citi Global Consumer Conference

Tuesday (5/28):  BUD (9:05am); BG (9:05am); THS (11:20am); JAH (11:20am); DEO (2:25pm); SAB (3:55pm)

Wednesday (5/29):  MDLZ (8am); NUS (1pm); HAIN (2:30pm)


Sanford Bernstein Strategic Decisions Conference

Wednesday (5/29):  CL (8am); KMB (10am)

Thursday (5/30):  MKC (8am); EL (11am)


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

Just Charts: Bullish Large Cap Charts - 2


The Hedgeye U.S. Consumption Model has shown steady improvement over the past three weeks, with 5 of the 12 metrics flashing green for the second week in a row.

Just Charts: Bullish Large Cap Charts - 3


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 19.6x)
  • 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, and fell to 34.1 versus 34.9 in the prior week

Just Charts: Bullish Large Cap Charts - 4

Just Charts: Bullish Large Cap Charts - 5

Just Charts: Bullish Large Cap Charts - 6



Top 5 Week-over-Week Divergent Performances:

Positive Divergence:  DF 7.7%; POST 5.0%; LO 4.5%; REV 3.9%; HLF 3.6%

Negative Divergence:  SODA -7.6%; HRL -4.7%; TSN -2.9%; CPB -2.3%; FLO -2.1%



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 – bullish on almost every style factor that is working (big cap, slow-growth, etc.); TREND support = $105.87

Just Charts: Bullish Large Cap Charts - 7


DEO – recent bearish to bullish intermediate-term TREND reversal confirmed last week; TREND support = $125.28

Just Charts: Bullish Large Cap Charts - 8


KO – bullish on almost every style factor that is working; intermediate-term TREND support = $39.83

Just Charts: Bullish Large Cap Charts - 9


PEP – correction last week didn’t change the bullish intermediate-term TREND here – support = $83.87

Just Charts: Bullish Large Cap Charts - 10


GIS – still one of the best looking big cap slow-growth consumer names on my screens – TREND support = $51.72

Just Charts: Bullish Large Cap Charts - 11


MDLZ – correction last week came on no volume; bullish intermediate-term TREND intact at $35.45

Just Charts: Bullish Large Cap Charts - 12


KMB – stock has traded sideways for 3 months but remains a bullish intermediate-term TREND signal @Hedgeye with $108.09

Just Charts: Bullish Large Cap Charts - 13


PG – correction here looks more concerning than MDLZ or PEP as the TREND line is nearby at $80.13

Just Charts: Bullish Large Cap Charts - 14


MO – bullish TREND that holds most of the slow-growth-yield-chasing style factors the market is rewarding; TREND support = $38.61

Just Charts: Bullish Large Cap Charts - 15


PM – bearish to bullish TREND reversal confirmed again last week; intermediate-term TREND support = $83.48

Just Charts: Bullish Large Cap Charts - 16



Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


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For a Bounce

Client Talking Points


At the all-time-high (Friday), total US Equity Market volume was down -23% and -41%, respectively, versus its one- and three-month averages. I still much prefer being short growth (Russell2000) than this crowded SPX short (-114,248 net short contracts as of Friday in the CFTC non-commercial data versus the six-month average net long position of +9,810 contracts).


US Dollar up (+) Rates up last week was good for anything growth, for a bounce. If we were to see USD and Rates up beyond Hedgeye TREND signals, I’d be getting ready to change my mind on the growth call – unfortunately they are not.


Big rip to higher-highs for the German stock market yesterday and this morning is seeing another positive +0.4% of follow through. Contrary to central planning ideology, European stocks need a stable/strong Euro, so we’ll see if EUR/USD can hold its long term TAIL line of $1.35 support.

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.


Legg Mason reported its month ending asset-under-management for April with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.  

Three for the Road


India -0.8%, S Korea -0.6%, Singapore -0.2%, Japan +0.2% @KeithMcCullough


"The important thing is not to stop questioning." - Albert Einstein


One in every four Americans is not saving for retirement at all, either because they are not thinking about it, do not really know how or, worse, do not feel they can afford to, according to a new report. (MSN)

Looney Tune Tape

This note was originally published at 8am on May 13, 2014 for Hedgeye subscribers.

“Mister Wabbit, before you die, you can have one wast wish.”

-Elmer Fudd


Was the wast wish to buy in May and pray? They dressed ole Elmer up in a Canadian Mountie uniform for that episode. When the US stock market won’t die, blame a Canadian. Must abandon risk management process and chase the performance wabbit, right?


Uh, no. Stay with what’s been working all year – #InflationAccelerating and slow-growth #YieldChasing assets (like commodities, bonds, and any stock that looks like a bond with low-beta and high-dividend-yield).


And on the short side, take your time and “be vewwy, vewwy quiet…” I’m hunting high-muwtipoh-momentum-bubbo wabbits that have popped back up out of their bombed out holes.


Looney Tune Tape - PeLooney8002


Back to the Global Macro Grind


“Wisten to the wippling wythm of the woodwinds…” and you’ll hear volume cwickets.


Yesterday’s total US Equity Volume reading was:


  1. -10% versus the 1 month average
  2. -31% versus the 3 month average


In other words, other than emotional hedge funds that shorted last week’s lows in almost every oversold momentum short (we sent out cover signals in IWM, ITB, YELP, last week #timestamped) there was no legitimate volume (read: conviction) behind yesterday’s rip.


In fact, going into the open yesterday:


  1. The net short position in SPX (Index + E-mini) was at a 6 month high of -54,587 contracts
  2. Three months ago (when you could have bought #MoBro top), the net short position was -30,429 contracts


“So”, many hedge funds were getting squeezed yesterday and those that still believe US GDP growth is going to be +3-4% in 2014 just kept averaging down into growth stocks, I guess.


While CNBC was nailing it with the Dow “at all-time-highs” yesterday, we sent out a short DIA (Dow ETF) signal in #RealTimeAlerts. But that’s not the best short idea we have – it’s waiting on the stocks that have been smoked to pop back up to our signal lines (YELP, TWTR, etc).


Don’t forget that the Nasdaq and Russell 2000 are still -4.9% and -6.2%, respectively, from where your broker could have plugged you buying the all-time-bubble-stock-high in early March. Most of these momentum, social, and housing stocks are still broken.


“Dwat that wabbit”


Yep, both the bond and currency market agree this morning:


  1. US Dollar Index is nowhere near overcoming its long-term TAIL risk line of $81.17 resistance
  2. US 10 year Treasury Yield of 2.65% couldn’t care less about people chasing performance wabbits in equities


“So”, if you have to buy something this morning, what do you buy?


  1. Utilities (XLU +10.3% YTD) have pulled back and are registering another buy signal
  2. Gold (GLD +7.3% YTD) has pulled back small and is a buy closer to TREND line support of $1271


And, what do you sell?


  1. Consumer Discretionary (XLY -3.3% YTD) has rallied on no volume to lower highs, so keep selling that
  2. US Dollar (UUP -0.2% YTD) has rallied sharply off its YTD lows, and remains bearish TREND


Yep, it’s really a macro call. Get the US Dollar and Rates right, and you’ll keep getting your Sector & Style Factors right. If you disagree with our view, you should be buying Dollars and growth stocks and shorting Bonds (like we did at this time last year) in size.


If you ask most consensus economists if they had the process to have you in the opposite this year as you were in last year (from an asset allocation perspective), they might go all-American-excuse-making Elmer on you too… “Yes! I mean NO, that is… I…. er… um…”


Looney Tune Tape, this has become. Chasing performance is not a repeatable risk management process. No worries though, I am sure the cartoon that this has all become will end willy willy well.


UST 10yr yield 2.57-2.67%

SPX 1871-1899

RUT 1094-1144

VIX 12.14-14.52

USD 79.11-80.01

EUR/USD 1.37-1.39

Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Looney Tune Tape - Chart of the Day

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.