Investing Ideas Newsletter

Takeaway: Current Investing Ideas: BOBE, GLD, HCA, HOLX, LM, OC, OZM, RH and TLT.

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


We also feature three recent institutional research notes that offer valuable insight into the markets and the global economy.


Investing Ideas Newsletter - ranges1

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




BOBE: More of the same at Bob Evans Restaurants.  The company and activist Sandell Asset Management continue to trade blows through the likes of presentations and letters to shareholders.  While both sides have made credible points, we’d argue that Sandell has the upper hand.  The reality is, Bob Evans’ Board, as it stands, doesn’t appear open to any of the suggestions Sandell has made to improve shareholder value.  It is precisely this stubbornness, and inflexibility, that has led to the current disastrous state of the company. 


To be clear, Sandell’s “economic agenda” is not unsustainable, as there are vast operational improvements to be made.  In our view, the Board nominees put forth by the activist have more experience in the restaurant industry and are far better equipped to lead a turnaround at the company.  For this reason, among others, we’re willing to bet they successfully get majority control of the Board.  Bob Evans’ will hold its Annual General Meeting on August 20. 


GLD: After a pullback last week, we are sticking with Gold on the long-side. As of now it remains in a bullish @Hedgeye intermediate-term TREND with support at $1271. The long-term TAIL Line remains $1323. You guessed it. The narrative remains the same:


  1. Growth expectations slow
  2. US interest rates will fall
  3. Both Gold and Long-term Treasury Bonds will rise (holding the monetary policy of other reserve currencies constantà a very important factor to our gold thesis that we are watching intently right now).



Ten-year yields touched YTD lows Friday reflecting skepticism around a real recovery despite an initial +4.1% Q2 GDP bounce off the -2.1% Q1 print. After breaking @Hedgeye long-term TAIL support, there is no support for the ten-year yield to 1.70%. Our risk management signals suggest the momentum embedded in this trend makes further downside to 1.70% a more probable scenario than the consensus 3%+ expectation.


Although this narrative for the USD outlook works both for and against the price of gold under certain scenarios, we continue to believe real growth expectations in the U.S. for the second half of 2014 remain too high. Right now there are two big headwinds to our theme regardless of how domestic growth materializes:  


  1. The quant signals suggest upside for the dollar and downside for the Euro (Gold is bought with, and priced in dollars): The @Hedgeye quantitative breakout in the dollar to the upside coupled with an incrementally more dovish Draghi is a headwind for Gold. The Euro is at nine month lows currently after topping in March of this year. Also the USD is breaking out, European data is slowing, and a majority of European equity indices are breaking down.


  1. Weak Europe, Dovish Draghi: European economic data has slowed. This expectation from the market has been somewhat priced-in with expectations that some form of easing from the ECB is right around the corner. The outlook in the U.S. is more uncertain. If growth does miss in the U.S., the fed may get more dovish but so may the ECB. There were two comments in particular that caught our attention yesterday in Draghi’s address:   


  • Readiness to pull the trigger on an asset purchase program. Mario Draghi’s tone this week reflected his willingness to stand ready for an ABS purchase program. In fact, he more or less said that he would implement an asset-backed purchase program (QE without the government bond and public asset purchase program). Not a single economist surveyed by Bloomberg expected a change in interest rates from Draghi this week, but the Gold bounce this week suggests the market may have expected some kind of easing out of Draghi Thursday.
  • Allusion to divergent policies in the U.K. and U.S. moving forward: by more or less saying the ECB cannot be outdone with regards to implementing easy-money policy. We interpreted his comments as a confident gesture that the Euro will continue to weaken against the USD and Pound over the intermediate to long-term.  


HCA: HCA strength continues on the heels of an excellent quarter despite the recent market decline and increase in volatility.  HCA is up approximately +5% over the last two weeks versus the S&P 500 which has declined by approximately -3% as we write this note on Friday afternoon.  We continue to believe that stock has upside into $71-81 range as 2015 consensus estimates move higher and more in line with our model.


July results of our monthly Physician survey are in, and the results show that maternity trends appear to be in a sustainable recovery.  Over the last several months, both deliveries and pregnancies are accelerating among our surveyed physicians. Commercially insured, higher income, as well as Western states show the greatest improvement while low income and the Northeast remain weak.  The Current Population Survey (US Census) supports the survey work through data supplied through June with the next update arriving for July by the end of the month. 


Improving birth trends is a major tailwind for HCA.


Sustainable Recovery in Birth Trends

Investing Ideas Newsletter - hca




Our 3D Tomo Facility Tracker update shows that placements accelerated in July 2014 (35) versus a soft June (22).  Prior to seeing the July Tomo Facility count, we were having trouble modelling revenue much above the low end of Hologic’s F4Q14 guidance range of $ million using only data from the 10-Q and from the earnings call.  However, if July pace holds throughout the rest of the quarter, it will be a new placement record, providing adequate 3D system revenue to drive total revenue toward the high end of the guidance range, or better.


Hedgeye PAP Survey Results

Investing Ideas Newsletter - hols


Our monthly physician survey results indicate a pickup in Patient volume in July after a weak May-June period.  There appears to have been a spike among Medicaid practices during 1H14 associated with the rollout of the ACA.  At least through July, the upswing has abated somewhat.  Commercial volume is running flat after a very weak Q1 and subsequent rebound.  As it relates more specifically to HOLX, pap trends continued to improve in July.  The forecasted decline PAP volume to reach compliance slowed to a CAGR of -7.5% in July from -10.0% in June.


LM: We have no specific update this week on our long recommendation of Legg Mason stock. That said, the largely institutional fixed income manager is a defensive investment in the current volatile, geopolitical sensitive environment and shares should continue to be more steady than the rest of the asset management sector.


OC: This past Thursday we hosted our expert call with Bill Carlin. Bill spent decades in Owens Corning’s roofing division and now is an industry consultant. The pie chart below is from Bill’s presentation outlining the North American roofing market share by company. Here are a couple of quick takeaways from the call:


  • Volumes are hovering around historical lows in part due to lack of storm activity and a weak economic environment.
  • Owens Corning has an advantage in controlling its raw material costs. Due to the volatile nature of oil prices, asphalt prices are a significant focus for the roofing industry. Unlike the other competitors, Owens Corning has asphalt plants to buy asphalt volume in advance to help anticipate and control its asphalt costs.
  • The industry is intact and has seen the industry leader, GAF/ELK, announce a recent price increase for September. This suggests that a) there is no price war in the industry as the rest of companies will follow and increase prices in response and b) industry margins receive a tailwind from these price increases.


The bottom line is that the roofing industry is cyclically depressed mainly due to volumes versus a dynamic shift in the roofing industry, as we have noted in previous notes. We reiterate the best time to buy cyclicals is when they are depressed and sell when they are high and loved by consensus.

Investing Ideas Newsletter - Capture



OZM: Och Ziff Capital Management reported in line earnings this week producing $0.18 per share in distributable cash earnings (in line with the Street) and declaring a $0.17 per share dividend (they dividend out over 90% of their distributable cash flow). This distribution alone creates a dividend yield of 4.9% which is partly why we like OZM stock with a much higher yield relative to market averages.


In addition, if Och Ziff ends the year with any performance related gains on the $45.7 billion it manages for clients, 20% of those gains will source another earnings stream which could total up to $0.50 in distributable earnings per share, or another dividend distribution of over 4.0%.


Hence OZM shareholders have the opportunity to collect total annual dividends of up to 9.0% of the current stock price which also has the chance of appreciating with industry leading organic growth rate and very strong performance.


The Barclays Hedge Index is up just 0.60% year-to-date in 2014 versus OZM’s main Multi-Strat fund which is up over 2.0%, displaying the company’s ability to assist investors and shareholders with strong investment management performance.


RH: The prevailing viewpoint with RH is that the company is already in all of the markets it can possibly penetrate, but simply has an opportunity to build larger-format stores. We think that’s wrong. Our analysis suggests that there are 19 new markets in the US and Canada where RH can not only build stores, but build over half of them in the 50,000 square foot range (compared to 9,000 on average today). The bottom line – there’s more square footage growth opportunity here than most people think.

Investing Ideas Newsletter - rh


TLT: We added TLT (iShares 20+ Year Treasury Bond ETF) to our high conviction list earlier this week. In conjunction with Hedgeye’s overall #Q3Slowing theme, we think that the slope of domestic economic growth is set to roll over here in the third quarter.


In the context of what might be flat-to-decelerating reported inflation, we think the performance divergences between Treasuries, stocks and commodities may actually be set to widen over the next two to three months.


The view remains counter to consensus expectations, which is additive to our already high conviction in this position.


Click on each title below to unlock the content.


ICI Fund Flow Survey  

Our Financials team looks at the latest  trends in fund flows for both stocks and bonds.

Investing Ideas Newsletter - stock


Frothiness in the Semiconductor Sector

Hedgeye Technology sector head Craig Berger dives deep into stocks in the semiconductor sector.

 Investing Ideas Newsletter - semiconductors


Macau: Under the Hood

Our Gaming, Lodging and Leisure team tells us why the mass gaming business is pressuring casinos in Macau.

Investing Ideas Newsletter - macau



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.


Hedgeye CEO Keith McCullough sits down with author and historian Neil Howe, Historian and Author of "The Fourth Turning", in our latest edition of Real Conversations. 

Hedgeye CEO Keith McCullough and Technology sector head Craig Berger discuss why now is the time to short AMD.



It’s a delicate balancing act right now for this bull market.

The Best of This Week From Hedgeye - Balancing bull 08.08.2014




Volume accelerates on DOWN days, and decelerates on UP ones for the Russell 2000.

The Best of This Week From Hedgeye - CHART3



Our analysts has been diving into companies that are in the organic food space, which is really the only place to find growth in the food industry right now.  So, our question was:

Cartoon of the Day: Boxed In

Cartoon of the Day: Boxed In - Yellen This Side Up cartoon


We have no love lost for those who think that they can centrally plan things.




real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


Monday (Here) we profiled the special QM related questions included in the Fed’s 3Q14 Senior Loan officer Survey and the negative impact on housing demand.  


Yesterday (HERE) we highlighted the G.19 consumer credit data and the continued acceleration in revolving credit growth.


Below we summarily highlight the balance of the 3Q Senior Loan Officer Survey data and a selection of domestic credit metrics. 


CREDIT INTUITION:  Credit is typically pro-cyclical with banks loosening standards and extending credit in response to rising demand and improved credit risk.   


The reason for the pro-cyclicality is rather straightforward - Household capacity for credit increases as incomes rise alongside positive employment growth and as net wealth rises alongside the rise in real and financial assets that typically accompanies an expansionary economic phase. 


Cash flows to service debt and the collateral values backing the debt both support incremental capacity for credit and serve to drive an upswing in the credit cycle.


Thus, credit sits as the Sangre Vital of modern macroeconomies in expansion, serving to jumpstart and/or amplify the economic cycle. 


Of course, leverage works both ways and amplifies the impacts of a contractionary phase as well.



3Q14 Senior Loan Officer Survey:  Rising Demand, Stable-to-Easing Standards 

  • Demand:  Loan demand was broadly higher across C&I, CRE, and Consumer Loan categories.
  • Credit Standards:  Loan spreads were largely static sequentially while Credit standards were flat-to-down

In short, loan demand continues to rise (particularly across the C&I category), on balance, while credit standards continue to trend favorably alongside that increase in demand and the moderate, ongoing improvement in the labor market.


The Senior Loan Officer Survey data mirror the broader trends in the high frequency H.8 data which currently shows a positive slope of improvement across all major loan categories. Unless the labor data inflects negatively, it’s probable both loan demand and ease of credit access continue to follow their current, pro-cyclical trend.  




SANGRE VITAL: A QUICK TOUR OF CREDIT TRENDS - Residential Loans Demand 3Q14 Fed Survey




SANGRE VITAL: A QUICK TOUR OF CREDIT TRENDS - Senior Loan Officer Survey 3414 Table


CREDIT FLOW:  The idea of the “Credit Impulse”, popularized by Biggs, Meyer & Pick (2010), centers on the idea that it’s the flow, not the stock, of credit that matters relative to economic growth


The first chart below illustrates the Credit Impulse (Household and Non-Financial Corporate Debt, Flow of Funds data) vs. the Y/Y change in consumer and business demand (represented by the y/y change for the Consumption and Investment components of GDP) along with the Y/Y change in total household and Non-financial corporate debt. 


As can be seen, the trend in private sector demand growth tracks the credit impulse closely and leads the positive inflection in y/y debt growth.  


The second chart shows the Credit impulse vs. the ‘Banks Willingness to Lend’ measure from the Senior Loan Officer Survey. 


Again, the Trend relationship is strong and with Willingness to Lend accelerating in 3Q14 the read through for credit catalyzed private consumption remains favorable


In short, the “credit impulse” tends to lead private demand for credit and “banks willingness to Lend” tends to front-run the credit impulse.  


SANGRE VITAL: A QUICK TOUR OF CREDIT TRENDS - Credit Impulst vs Private Demand 080814




HOUSEHOLD DEBT:  After running negative for 18 consecutive quarter beginning in 1Q09, household debt growth returned to positive YoY growth in 3Q13.


Given improving mortgage, auto, and consumer loan trends YTD, credit growth should remain positive thru 2Q/3Q as well when the official Fed data is released.  With rates largely static, the closing of the delta between income and debt growth represent the principal upside to credit driven consumption.   






The PCE data tells an expectedly similar story.  While disposable income grew at a premium to consumption during the acute deleveraging, peri-recession period, that trend has reversed over the TTM with nominal household spending running on par to slightly ahead of nominal aggregate income.   


After a 19-quarter, -18.1% decline from peak, Household debt-to-GDP troughed at 77% in 4Q13 and ticked up to 77.4% in 1Q14 alongside the worst post-war, expansionary period GDP print ever.      






BIG PICTURE/THE CYCLE: Credit trends are improving and, in a reflexive macroeconomy, can serve to drive incremental spending in the immediate/intermediate term. 


Bigger picture, we remain on the wrong end of a credit/interest rate and demographic cycle and haven’t delevered enough to allow debt growth (alongside a rising cost of debt) to run ahead of income growth for any sustainable LT period. 


Policy remains a blunt (and now exhausted) tool and exorbitant privilege and dollar hegemony can only defy the gravity of long-term budget constraints for so long. 





Christian B. Drake



McDonald's: Not Lovin' It

This note was originally published July 28, 2014 at 13:01 in Restaurants


MCD is under siege on three continents (America, Europe, Asia) and senior management's response to these crises will determine the future and the future profitability of this company.  Hopefully we don't see a pattern of missteps similar to those that created one of the biggest public relations nightmares in the history of McDonald's.


Students of McDonald's history know that the "McLibel" case was a very dark period for McDonald's Corporation.  This case was an English lawsuit for libel filed by McDonald's Corporation against environmental activists Helen Steel and David Morris over a pamphlet highly critical of the company.  The litigation, drawn out over a ten-year period, embarrassed McDonald's and caused the U.K. business to underperform for more than a decade.


McDonald's is currently under attack from different groups over varying issues in three key countries across three separate continents.  How management handles these issues will be critical to the future of the company.


  1. In the U.S., McDonald's (and other QSR chains) are under attack for poor wages and inferior food quality compared to other, more "fashion forward," restaurants.
  2. In Russia, the country's Consumer Protection Agency has filed a claim accusing the restaurant chain of violating government nutritional and safety codes in a number of its burger and ice cream products.
  3. In China, the meat supplier issue is creating serious issues in the form of availability and product quality concerns.


How management responds to these issues is critical to the future performance of the company, as they are not insignificant markets.  If the company's initial response to the meat supplier issue is any indication, we could be in for an extended period of underperformance.


China - Last Thursday, McDonald's said it is sticking with a Chinese meat provider, even after saying earlier in the week that it may have been misled regarding sales of allegedly expired meat.  The supplier is Shanghai Husi, which is owned by U.S. based OSI Group, a longtime supplier of McDonald's.  Clearly, the company's ties to its Chinese supplier run deep.  Today, however, news came out that McDonald's cannot sell its core menu items in China.  China is the last bastion of growth for McDonald's and, prior to today's news, the company was not able to meet its unit growth targets.


Russia - We haven't seen any official response to the Russian lawsuit from McDonald's, but how they respond will be critical.  Is McDonald's a pawn in the ever-increasing tension between the U.S. and Russia or did McDonald's bring on this pressure by shutting down its three restaurants in Crimea after Russia's annexation of the peninsula in March?  Either way, McDonald's is in a very difficult spot.  They need to settle this issue immediately and not let another legal case be played out in the press.


U.S. - Wages are headed higher for McDonald's in the U.S. and the company needs to get ahead of the curve.  Unfortunately, being a franchised system, the issue is in the control of the franchisees.  They won't want to pay higher wages with same-store sales and margins declining.


Turning back to the McLibel case, some of the leading allegations were that McDonald's:


  1. Wastes vast quantities of grain and water
  2. Sells unhealthy, addictive fast food
  3. Alters its food with artificial chemistry
  4. Exploits children with its advertising
  5. Is responsible for torture and murder of animals
  6. Poisons customers with contaminated meat
  7. Exploits its workers and bans unions
  8. Hides it malfeasance


McDonald's is a strong global brand that must protect itself against erroneous allegations.  It appears that any one of these could be made again today.  With that being said, how management proceeds with all the issues the company is currently facing will determine the financial performance of the company for the balance of the decade.

Retail Callouts (8/8): LULU, URBN, HIBB, TGT, AMZN, WMT

Takeaway: This Chip/Advent deal is money for LULU. URBN buying Lorna Jane makes sense from where we sit. HIBB goes from cult stock to show-me story.



LULU - lululemon athletica inc., lululemon founder chip wilson and advent international announce stock sale and support agreements



Takeaway: This is right in line with our thesis on LULU. With this announcement, we're taking LULU up a notch in our Best Ideas List to be #2 behind RH.  For our thoughts on the deal and its implications for the company and the stock, see the note we published last night. LULU: Chip Away (Link)


URBN, FL, LULU - Urban Outfitters Said Eyeing Lorna Jane



  • "Urban Outfitters Inc. is contemplating a more active future with Australia-based activewear retailer Lorna Jane."
  • "The Philadelphia-based retailer — which has been actively looking for deals — is taking part in the Credit Suisse-run auction for the chain, according to two financial sources."
  • "The auction is said to be in the 'late second round' with the price tag near $500 million. Foot Locker Inc. is also said to be vying for the retailer, which was founded by creative director and former fitness instructor Lorna Jane Clarkson in 1990."


Takeaway: URBN introduced its own active wear line (Without Walls) in April with limited distribution. Because everyone else was doing it - even Whole Foods. As with FL we can't justify $90 yoga pants on URBN shelves. But for URBN, the logic makes sense. It's a multi-brand concept with its namesake brand struggling. They'll fix it, but the best way to divert people's attention is to buy something else. Lorna has the added bonus of International exposure, and a call option on bringing the brand to the US. If anyone can do that right, it's URBN management. We're not advocating doing a deal to get out of a bind, but that does not mean it won't happen.  


HIBB - Hibbett Provides Business Update and Adjusts Full Year Guidance



  • "Net sales for the 13-week period ended August 2, 2014 are expected to increase 4.2% to $194.0 million compared with$186.2 million for the 13-week period ended August 3, 2013. Comparable store sales are expected to increase 0.1% for the second quarter."
  • "The Company anticipates that earnings per diluted share will be in the range of $2.63 to $2.73 for the 52 weeks ending January 31, 2015, with comparable store sales increasing in the low single-digit range for the year. This compares to previous guidance of earnings per diluted share in the range of $2.78 to $2.98, and comparable store sales increasing in the low-to-mid single-digit range."


Takeaway: Before this miss, the stock had already underperformed the market by 30% YTD. Its problems were already fairly well-telegraphed. This company has never been afraid to miss a quarter, nor has it been a stranger to blowing away numbers. But this stock traded down after nine of the past ten earnings prints. And now this? Mickey Newsome stepped away just in time. It has to get a lot cheaper for us to even consider getting involved here.




TGT - Target to sponsor ASP’s Maui Women’s Pro surfing contest



  • "Target Corp. along with the Association of Surfing Professionals (ASP), announced that the retailer will be the title sponsor of this season’s Maui Women’s Pro, November 22 through December 6, 2014 in Honolua Bay, Maui."





  • "Gap Inc. comparable sales for July 2014 were up 2 percent versus a 1 percent increase last year." 


GPS - Introducing ‘The New Look of Banana Republic’



  • "Starting today, Banana Republic is revealing a new look, anchored in the fresh styling point of view of the brand’s new Creative Director and EVP of Design, Marissa Webb. Fall signals a significant shift across the entire brand, from the product and styling of the collection, to the debut of the global marketing campaign, 'The New Look of Banana Republic.'"


Adibok - Adidas to Cut Jobs, Boost Marketing Spend



  • "Adidas is taking action following a weaker-than-expected first half of the year. "
  • "The Herzogenaurach, Germany-based sporting goods firm on Thursday revealed a restructuring of its ailing golf business, which will include job cuts. The group will also resort to bigger marketing spending for the remainder of the year and 2015, which will see 'the biggest campaign so far for the Adidas brand,' according to Herbert Hainer, the group’s chief executive officer."


BKS, AMZN - Barnes & Noble, Google partner on same-day book delivery



  • "Barnes & Noble Inc. and Google Inc. are reportedly teaming up on a pilot of same-day delivery of book orders from local Barnes & Noble stores in several U.S. cities. According to the New York Times, customers in Manhattan, West Los Angeles, and the San Francisco Bay area can have online book orders fulfilled from nearby Barnes & Noble locations via the Google Shopping service."
  • "The service is free for Google Shopping members and $4.99 per order for other consumers."


AMZN, WMT - Report: Twitter may be considering e-commerce



  • "Twitter is reportedly making moves that indicate it is considering launching e-commerce services. According to The Next Web, users of the Twitter Android app are reporting a dormant “Payment & Shipping” option appearing in the settings menu."


ANN - ANN INC. Updates Outlook For Second Quarter 2014



  • "Total Company net sales for the fiscal second quarter of 2014 are now expected to be $648 million, reflecting a comparable sales decline of 2.3."
  • "At the Ann Taylor brand, total comparable sales increased 0.7%, reflecting an increase of 2.0% at Ann Taylor partially offset by a decline of 1.9% in the Ann Taylor Factory channel."
  • "Kay Krill, President and Chief Executive Officer, said, 'Despite positive performance through mid-June, the remainder of the second quarter proved more challenging, with soft traffic across the industry and a highly promotional environment. While we delivered a positive comp for the quarter at Ann Taylor, we were disappointed in our performance at LOFT, which experienced continued softness in basic knit tops that represent a meaningful component of LOFT's summer assortment.'"



Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.