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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.
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.
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:
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:
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
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
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:
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.
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.
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.
Our Financials team looks at the latest trends in fund flows for both stocks and bonds.
Hedgeye Technology sector head Craig Berger dives deep into stocks in the semiconductor sector.
Our Gaming, Lodging and Leisure team tells us why the mass gaming business is pressuring casinos in Macau.
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.
Volume accelerates on DOWN days, and decelerates on UP ones for the Russell 2000.
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:
We have no love lost for those who think that they can centrally plan things.
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