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Housing: Price Increases Decelerating

Editor’s Note: Below is an excerpt of an institutional research note written earlier today by Josh Steiner and Christian Drake, who run our Housing coverage.

 

CoreLogic released its monthly home price report for May/June earlier this morning. Unlike S&P/Case-Shiller, which is a rolling three-month average repeat sales index,CoreLogic is a single month index released on almost no lag. Essentially, it gives you information three months more current than what you get from Case-Shiller. 

 

Housing: Price Increases Decelerating - Corelogic NSA YoY TTM

 

CoreLogic estimates that home prices rose +7.7% YoY in June, a deceleration vs the +8.8% in May and +10.0% in April. We show this in the first chart below.

 

Interestingly, in the past few months we've seen material upward revisions to the preliminary estimates for the most recent month-ended. This month, however, the revision was almost non-existent and actually was revised lower. The preliminary estimate for May was +8.9% and the final number came in at +8.8%.

 

Its also worth noting that while sales comps begin to ease through 2H14, price comps don’t really begin to ease until Feb 2015 (hardest near-term comp is Oct which was +11.8% YoY). As such, we think the next 8 months of worsening pricing data will weigh on the housing complex.



DEO – The Push to Change

We are adding LONG Diageo (DEO) to our Hedgeye Best Ideas list.

 

In July 2013, newly appointed CEO Ivan Menezes established a new vision for Diageo: “To create one of the best performing, most trusted and respected consumer product companies in the world.”  In our view, Diageo is a strong company that has the brands, margins and returns to achieve this.  However, we believe Mr. Menezes plan and timeline is inadequate.  Diageo is struggling to translate its industry leading position into shareholder value and, as a result, its stock has significantly lagged its consumer product peers.  DEO is up +6.5% over the past year, while its peer group is up +37%.

 

To get Diageo to the next level as a leading consumer product company, it will likely need to be 1) pushed by an activist or 2) taken out in the global M&A wave. 

 

We’ve been working on the Diageo story closely for a couple of months now and our timetable for launching on the name has been accelerated by current rumors.  This morning, speculation hit the tape that SABMiller may launch a defensive bid for Diageo in order to fend off Anheuser-Busch InBev.

 

Our thesis on Diageo is very straightforward – the company’s global beer business is not consistent or aligned with management’s aforementioned vision.  Diageo’s global spirits business is dominant and holds the number one market position in a number of key categories, but its beer business will never see this type of penetration.  We believe the current M&A environment in consumer staples, particularly in global alcohol, represents an ideal environment for Diageo to sell Guinness.  A divestiture of this nature would properly align DEO’s business and allow for a substantially stronger growth profile.

 

Currently, Diageo’s global beer business, which is primarily the Guinness brand, represented 16.3% of the company’s total volumes in 2013 and has a significant presence in Africa and the emerging markets.  Diageo’s business in these markets was initially jumpstarted by the acquisition of Meta Abo Brewery from the government of Ethiopia in late 2010.  It was therefore a key milestone in the company’s strategy to participate in each of the growth markets of Africa.  As good as the acquisition looked in 2010, the current performance of the beer business in this market is dragging down Diageo’s consolidated results.  Furthermore, beer is roughly 6% in Diageo’s most profitable market, North America, and will never see significant market share or organic growth.

 

There has recently been speculation that worldwide brewing M&A is poised to accelerate, centered largely on exposure to emerging markets.  Brewing assets in emerging markets (Africa, China and other markets in Southeast Asia) are in high demand as they are likely to offset the slower growing markets in the U.S. and Europe.  With that being said, we believe Diageo’s brewing assets in the emerging markets, particularly Africa, would be a nice addition to the SABMiller portfolio.

 

We will provide more details on Diageo and our long thesis in the coming weeks.

 

DEO – The Push to Change - deo

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


Cartoon of the Day: Happy Canada Day!

The Canadian dollar is enjoying the national holiday.

 

Cartoon of the Day: Happy Canada Day! - Oh  Canada cartoon

 

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Selling: Russell Levels, Refreshed

Takeaway: As you think about how painful it might be to short the domestic growth style factor right here, it probably felt the same in March too.

POSITION: 7 LONGS, 8 SHORTS

 

I #timestamped my most recent cover signal on the Russell 2000 on June 12th, so there’s been a lot of waiting and watching going on for the better part of the last 3 weeks. While not perfect, over the years I have had to teach myself to act on my signals, not my emotions.

 

Being bearish on US consumption growth (and the highest multiple growth stocks within the Russell that are tied to US demand) doesn’t have to be accepted at every time and price. Hedge fund consensus dog piled the short side of the market in May. I think June’s meltup had a lot to do with that.

 

Which brings us to today – Happy Canada Day! And a fresh SELL signal at 1208.

 

There are a few things to note about the 1208 line. Most importantly, it’s where you could have sold the Russell before its 10% draw-down. And maybe as importantly, now it’s easier to see all the reasons why you’d have sold growth in March (and bought inflation and slow-growth #YieldChasing).

 

For now, across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE overbought = 1208
  2. Intermediate-term TREND support = 1169

 

In other words, my risk management model considers a -3% correction from this level more than improbable. And as you think about how painful it might be to short the domestic equity style factor of the market right here and now, it probably felt the same way in March too.

 

From a fundamental research perspective, we still think #Q3Slowing will be the story Consensus Macro will have to re-adjust for from now until September. We’ll host our Q3 Macro Themes call on why next Friday.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Selling: Russell Levels, Refreshed - Slide1


Podcast: Keith Answers Questions from Institutional Subscribers


Retail Callouts (7/1): ICSC, NKE, WMT, KORS, CHS, Retail Losers

EVENTS TO WATCH

 

World Cup: USA(Nike) vs Belgium(Burrda) - Today 4PM

 

 

ECONOMIC DATA

 

ICSC - Chain Store Sales Index

 

Takeaway:  This was a massive week for sales growth -- the biggest in over four years. Then again, it's comping against a horrible week in 2012 and 2013. The two-year trend is worth looking at this week, which is decent-enough on the margin.  Less notable than the 3.25% 2-yr reading for this week is the steady climb since retail sales hit a trough around week 13. That's when the winter finally passed, and we got back to a normalized sales level -- perhaps with a bit of snap-back.  Not a major statement about the US consumer, but good-enough numbers for the retailers to be staring at  as they enter the last month of the retail quarter.

 

 

Retail Callouts (7/1): ICSC, NKE, WMT, KORS, CHS, Retail Losers - Chart1 7 1 2014

 

 

Retail Callouts (7/1): ICSC, NKE, WMT, KORS, CHS, Retail Losers - Chart3 7 1 2014

 

 

COMPANY NEWS

WMT - Walmart pushes healthy food agenda on Twitter

(http://www.retailingtoday.com/article/walmart-pushes-healthy-food-agenda-twitter)

 

"The Walmart Foundation has kicked off a summer-long initiative to help children and families gain access to nutritious meals and learn healthy-eating habits. Walmart is also collaborating with Chef Lorena Garcia, chef and author with TV appearances on Bravo’s “Top Chef Masters” and NBC’s “Biggest Loser,” to launch the Eat Healthy Together Challenge on Twitter."

"The family-focused initiative includes $15 million in grants that will provide meals and nutrition education to 1.4 million children and families in more than 1,500 communities."

 

Takeaway: Kudos to Walmart on this one -- even though $15mm is chump change to WMT.  The real commitment will come when WMT takes Cap'n Crunch, Capri-Sun, Mallomars, Pop-Tarts, and other foods packed with sugar and high-fructose corn syrup off its shelves. We understand that this would be devastating to the top line -- if WMT is unable to substitute it with the healthy food that it is hitting consumers with on Twitter. But look at CVS -- earlier this year, the company eliminated cigarettes from its shelves. Sales have been pressured, but the stock is up 19%. The market likes companies that make the tough decisions to help consumers lead healthier lives. If CVS can do it, why can't WMT?

 

NKE, ADS - Nike and Adidas Duke it Out Digitally

(http://www.wwd.com/footwear-news/markets/nike-and-adidas-duke-it-out-digitally-7777243?module=hp-fn)

 

"There is little correlation between World Cup sponsorship and social media success for the 2014 games..."

"So what does this mean for World Cup sponsor Adidas? The Herzogenaurach, Germany-based brand, which doesn’t appear to be sponsoring or promoting posts on Facebook, has a “limited overall reach,”"

"Meanwhile, Nike, based in Beaverton, Ore., has gone on the offensive, sponsoring posts that appear in its followers’ news feeds. These posts generate more conversations overall across Facebook and Twitter."

"By focusing on its key roster of players, including Cristiano Ronaldo and Zlatan Ibrahimovic, Nike took a creative approach with short and flashy — and sometimes humorous — videos on YouTube, upping its number of likes and comments 10 and seven times, respectively."

 

Takeaway: The number of times Nike used the word 'Digital' in its latest call = 15. Same statistic for Adidas = 2. Any surprise that Nike is winning?

 

10 biggest S&P 500 winners and losers for 2014 YTD

(http://www.marketwatch.com/story/10-biggest-sp-500-winners-and-losers-for-2014-2014-06-29?pagenumber=2)

Retail Callouts (7/1): ICSC, NKE, WMT, KORS, CHS, Retail Losers - Chart 2 7 1 2014

 

Takeaway: What does it tell you that 70% of the biggest losers YTD in the S&P 500 are retailers?

 

APP - Dov Charney builds American Apparel stake towards 50%

(http://www.ft.com/intl/cms/s/0/2181019e-00eb-11e4-b94d-00144feab7de.html?siteedition=intl#axzz36DL9vLjQ)

 

"Dov Charney, the controversial founder of US fashion chain American Apparel, has managed to increase his stake in the company towards 50 per cent, according to regulatory filings in New York."

"After the bell on Monday, it was revealed exactly how much common stock Standard General, a privately owned hedge fund, had acquired on Mr Charney’s behalf: 25m-30m shares – or a 17 per cent stake in the company."

"Combined with Mr Charney’s existing 27 per cent stake, he now has control of 44 per cent of American Apparel shares, edging him closer to 50 per cent – the critical benchmark at which he can potentially push for his own reinstatement to the board."

 

Takeaway: With an equity value of $153mm, this is not exactly a massive feat. Nonetheless, Charney is likely to get the majority stake he needs to get back in there and run the company he founded.  Unfortunately for the remaining shareholders, this means that there will be an eccentric, volatile, often inappropriate, usually incompetent person who is not only leading the company, but who also controls the Board.  Not exactly a great setup for a long.

 

 

OTHER NEWS

 

Contract Deadline Arrives for West Coast Port Workers

(http://www.wwd.com/business-news/government-trade/importers-rush-goods-ahead-of-contract-deadline-7777778?module=hp-business)

 

"The International Longshore and Warehouse Union and the Pacific Maritime Association are expected to continue negotiating a new contract today — and while the outlook is generally positive, importers are taking the better-safe-than-sorry route. A strike, were it to come, could take a toll of as much as $2.5 billion a day."

"The current six-year collective bargaining agreement is set to expire at 8 p.m. Eastern Daylight Time today"

 

KORS - Michael Kors names Stephane Lafay as President of Asia

(http://www.fibre2fashion.com/news/fashion-company-news/newsdetails.aspx?news_id=165263)

 

"Michael Kors, a global luxury lifestyle brand, announces that Stephane Lafay has been named to the newly created role of President of Asia. He will report to John D. Idol, the company’s Chairman and Chief Executive Officer."

"Mr. Lafay’s appointment, effective July 28th, 2014, reflects the brand’s powerful momentum in the region and its sustained focus on growth. “This is a pivotal moment for the brand as we continue to invest and work to build a strategic roadmap for the Asia region,” says Mr. Idol. “Stephane has a long history of building luxury businesses in Asia. His skills and experience will be a tremendous asset for us going forward.”"

 

CHS - Miki Berardelli to take over as Chico's FAS’s CMO

(http://www.fibre2fashion.com/news/garment-company-news/newsdetails.aspx?news_id=165286)

 

"Chico's FAS, Inc. announces that Miki Racine Berardelli will be joining the company as President, Digital Commerce, Chief Marketing Officer and Executive Vice President Chico's FAS, Inc."

"A dynamic industry leader, Ms. Berardelli is rich with experience and skills that span a spectrum of customer-based strategies and marketing initiatives. She joins Chicos FAS, Inc. from Tory Burch , where she held the position of Chief Marketing Officer. Prior to that, she was Senior Vice President of Marketing at Ralph Lauren."


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