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
GLD – We continue to like Gold on the long-side in the face of a downward GDP revision (-1.0% annualized in Q1 vs. expectations of -0.5%) and a yield spread that continues compressing (-9 bps w/w to 210 bps wide). Confirming our #GrowthSlowing theme, the 10-year yield decreased another 6 basis points week-over-week to 2.42% after breaking our 2.61% TAIL line of resistance two weeks ago. Reiterating our non-consensus call, we think the 10-year yield may test 2.2-2.3% before the route bottoms. The likelihood of Fed tapering shrinks relative to expectations as data surprises to the downside, and we prefer to be long GLD to hedge the dovish monetary response as the printing press operates overtime. As outlined in our Q2 macro themes call, rather than buying into underperforming, consumer-driven sectors like the Russell 2000 or Consumer Discretionary Stocks (both down -2% YTD), we like holding utilities (XLY +12% YTD), commodities (CRB Index +9% YTD), and treasuries (TLT +12%) as growth slows and inflation accelerates.
HCA – Hedgeye Healthcare sector head Tom Tobin remains bullish on HCA Holdings, but has no new updates this week.
HOLX – We held a call with an expert this week who has been one of the few people we've found who has intimate knowledge of the process by which 3D tomosynthesis will receive a Medicare code and a reimbursement amount. He confirmed our optimistic view, based on a significant amount of research, of the reimbursement level that will be announced this year.
We will be updating our 3D facility tracking data next week. As of this week there were 580 facilities in the United States who had at least one system out of a total of 8700 potential sites. That's roughly 6.4% penetrated, leaving a lot of upside from here. The reimbursement will be key to the penetration rising even faster.
LM – The pace of fixed income flow trends within the U.S. mutual fund complex quickened during the week with the latest trends from the Investment Company Institute (ICI) continuing to flash building momentum in bonds versus declining interest in equities. During the most recent week, $2.3 billion of new funds came into all U.S. bond funds according to the ICI versus just $670 million that was collected by equity funds last week. This trend is running into more important intermediate term trends with the second quarter of 2014 shaping up to be the first quarter in 9 months where fixed income is outpacing equities. Thus far in 2Q14, over $17.0 billion in total has moved into fixed income within mutual funds versus just the $8.7 billion that has moved into all stock funds. Leading bond fund managers including Legg Mason and Franklin Resources (BEN) stand to benefit from this emerging trend of which we prefer LM with still dour sell-side recommendations (only 5 Buy recommendations from 19 analysts) and still stubbornly high short interest in the stock (which will need to be covered) as bond trends improve.
LO – To be or not to be taken out? This is the question that remains square on many investors minds.
We maintain Lorillard’s fair value long-term price is $80/share. Should LO get taken out at that price (RAI is rumored to be interested) or appreciate to that level over time, we stand by our belief in the company’s earnings power on its advantaged tobacco and e-cigarette portfolio.
Bottom line: we do not think LO will be imminently purchased and are staying long the stock that we added to Investing Ideas on 3/7/14.
OC – While Owens Corning quietly approaches the end of 2Q, its sector is becoming louder about the upcoming quarter and the rest of 2014. Here are a couple of quick notes:
- AWI, a floor and ceiling maker, called 2014 an inflection point for the commercial market at their Investor Day last week citing improving nonresidential data.
- AWI expects the remodel and repair spending to grow in the mid-single digits.
- Other building product names, Saint-Gobain and USG, expect a rebound in 2Q in both commercial and residential activity.
- U.S. roofing volumes should snap back for 2Q according to Saint Gobain, a top 4 player in the U.S. roofing market
- Headwaters and AWI both note the construction recovery is still in the early stages with sales bottoming in 2010 and volume bottoming in 2013.
- In a recent Investor Presentation, Terex sees the repair and remodeling market increasing FY 2014.
- The NAHB Remodeling Market Index improved ~10% YoY for April.
*Special note from Hedgeye Retail team on RH and ZQK:
Below we take a detailed look at sentiment for our two retail investing ideas. The primary tool we use is our Hedgeye Sentiment Monitor. What it does is uses a quantitative scale to combine Sell-Side Ratings, Buy Side Short Interest, and Insider Trading activity. We pretty much catch all angles.
We use this tool in two different ways; 1) First, we look at directional changes in sentiment for each stock. 2) Second, we analyze the absolute level for each security. A reading above 90 has statistically proven to signal that the market is overly bearish on a name, and that it’s often advantageous to go the other way. Conversely, a reading below 10 suggests that the market is overly bearish, at which time it is usually prudent to go long.
RH – Restoration Hardware is near an all time low sentiment score. With short iterest accounting for 12.8% of the float. 2014 marks the first year of square footage growth in the past six. That coupled with new categories to fill the bigger footprint Design Galleries are the key pillars in our thesis that calls for a $200+ stock in 2018. It continues to be our favorite name in the retail space.
ZQK – Quiksilver’s sentiment reading has held steady since the announcement that Andy Mooney would be replace founder Bob McKnight as CEO in January of 2013. The company reports earnings Monday (6/2) after the close and we are expecting an inline quarter. The company is still cycling through product discontinuations and brand divestitures this quarter, but the comps get much easier in the back half of the year. Plus, we continue to expect revenue reacceleration in 2H as the company’s new product design, sourcing, and marketing initiatives begin to take hold. That sets up 2015 for outsized revenue and earnings growth.
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