Takeaway: Current Investing Ideas: BOBE, FXB, GLD, HCA, HOLX, 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.
- "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: This week Bob Evans Restaurants (BOBE) released an investor presentation providing their take on a series of (what they characterized as) "misleading" statements made by Sandell Asset Management, an activist investor in the restaurant company.
The level of activism in the restaurant industry has never been more rampant.
In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers. Fortunately, its poor operating performance presents a tremendous opportunity.
Our analyst team believes activist investor Sandell has correctly identified significant and largely feasible opportunities to enhance shareholder value. Particularly, we see tremendous upside value in selling the foods business, transitioning to an asset light model and refocusing capital allocation.
FXB: We added the British Pound to Investing Ideas earlier this week. Click here to read the full report.
GLD: Gold continues holding its range in the face of expectations for a more dovish Mario Draghi as European economic data continues to decelerate and surprise to the downside. From a quantitative perspective, we are looking for:
- a breakout ABOVE @Hedgeye Long-Term TAIL line of resistance at $1321= bullish signal
- a breakdown BELOW @Hedgeye Intermediate-term TREND support at $1271 = bearish signal
European economic data continues its deceleration and European equities are broken down in our model from a TREND perspective. Equity indices got a bounce Friday but a weaker Euro and record-low sovereign yields are likely front-running a marginally more dovish move from Draghi:
- EUR/USD: -1.4%
- German 10-year Bund Yields: -19 bps to 1.0%
- French 10-year yields: -23bps to 1.39%
- Italian 10-year yields: -21 bps to 2.61%
- Gold: +55bps
In the face of a breakdown in European equities and a sharp decline in Eurozone economic strength (Q2 sequential GDP comped a goose egg yesterdayà 0.0%!), the market believes in a similar response from Yellen. The 10-year hit new YTD lows this week (2.39%) as the centrally-planned currency war heats up. Both the United states and European growth has not slowed simultaneously since Q3 2011. The outlook for the USD will continue to be the driving force.
The Euro has devalued 1.4% against the USD over the last month.
HCA: The high yield debt market was hit hard recently as signs of slowing global economic growth accelerated and military hot spots appeared to deteriorate. At least, that was the narrative put to actual negative fund flows (client withdrawals) from high yield bond funds.
So, what does this have to do with HCA? If we wind the clock back to 2009, high yield markets were the single most important factor to hospital stock prices.
In 2009, yields spiked, the HYG price collapsed, and doubt set in about the ability for highly indebted hospital companies to refinance or add new debt for acquisitions. What we have witnessed in the last few weeks has been the complete opposite of 2009. In other words, as high yield was getting hit, HCA and other hospital stocks rose.
We think this potentially means a few things:
- The high yield debt market prefers domestic US consumption over global exposure
- The Affordable Care Act is a bigger driver than the potential yield headwinds
- Medical consumption is recovering in the US, again offsetting concerns over yield pressure.
The Hedgeye Macro Team has us vigilant for signs of stress and slowing growth, so we’ll stay vigilant. But for now, it appears good fundamentals are taking a back seat to bad market trends.
HOLX: Healthcare sector head Tom Tobin has no update on Hologic this week.
OC: Last month, the largest competitor, GAF/ELK, announced a price increase of 4% to 7% for its roofing products beginning in September. Owens Corning followed with a price increase of 6% to 9%. These price increases signal a more stable environment for the remainder of 2014. A price increase in its roofing segment may help margins, while improving roofing capacity utilization may help OC’s roofing sales (see chart below). OC’s management expects to take back market share it lost in 1H 2014 for 3Q and 4Q as a result of these price increases and a more favorable industry environment.
OZM: Shares of Och Ziff were down marginally this week on misplaced fears about insider selling. Dubai International, one of the original investors in the company, along with publishing magnates the Ziff brothers, filed a new institutional 13F filing showing a slightly reduced position in the leading hedge fund manager. Essentially over the course of last quarter Dubai International sold 3 million of OZM or just a 10% reduction of its original position of 33 million shares.
The Street and several media outlets viewed this as projecting a negative outlook for OZM because of Dubai potentially cooling on its forecasts for its holding. However, we view the modest reduction of the OZM holding as a reasonable way for a large institutional holder to diversify and that it lowers the future potential of a large amount of OZM stock to come to market with this dribble out selling strategy in effect.
Over time, we expect that a more diversified shareholder base and less concentrated large holders of OZM shares to be a more healthy aspect for the company.
RH: Market share trumps store productivity. For the most part, people are underestimating the ramp in Restoration Hardware’s addressable market as the company continues to expand into new categories. Over the next five years, there should be $45bn upside in market opportunity for RH simply by expanding its presence into new categories at retail, including kitchens.
An important note: we analyzed every market of the US, and isolated only consumers making over $100k annually. The government’s aggregate numbers include every income level. But the fact of the matter is that the average American spends $857 annually on home furnishings, while those making over $100k spend $1,779.
This bodes well for our favorite name in retail.
TLT: It was a great week to be long the Long Bond. The 10-year US Treasury yield slid to another fresh 2014 low, slipping six basis points to 2.34%.The TLT (iShares 20+ Year Treasury Bond ETF) which we added to our high conviction list last week is up 2%.
Our bullish view remains counter to macro consensus expectations. Incidentally, on January 1, the consensus forecast of the 66 most senior economists for the year end 10-year US Treasury yield was (drumroll...) 3.44%.
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Click on each title below to unlock the content.
Botched communication ≠ a broken story. This story is fundamentally on track. Could be dicey for a qtr. But the roadmap to $70 is there.
All told, we remain the bears on US interest rates/bulls on long-term Treasuries as growth is likely to slow throughout 2H14.
In the most recent ICI survey, taxable bond funds experienced a substantial snap outflow joining domestic stock funds with dour trends
Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
Why We're Still Bearish on European Equities and the Euro
Hedgeye macro analyst Matt Hedrick explains why we remain bearish on European equities (via EZU) and the Euro (via FXE) and tells us that today’s weak economic data from Europe remains consistent with our bearish take on the region.
Steiner: Why We Remain Bearish on Housing
Hedgeye managing director Josh Steiner highlights why we remain bearish on the U.S. housing market.
At The Beach
Is the bull in danger of getting burned?
Muscle vs. Russell
The 2014 Macro Score: Long Bond $TLT +14% vs Russell 2000 -2%.
Take The Fed's Growth Forecasts At Your Own Risk
“Year after year we have had to explain why the global growth rate has been lower than predicted.” -Fed vice chairman Stanley Fischer
Is Long High-Yield A Strong Hand?
In Thursday's Chart of the Day, we highlight a point that many asset allocators have been focused on over the past few weeks, which is that high yield bonds, even despite the recent rally, have sold off sharply from the highs of the year. As a result, the spread between high yield and comparable duration treasuries is literally at its widest of the year.
Tension and turmoil around the globe. Which do you think is the bigger market threat right now?
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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
High frequency housing data continues to corroborate the sea of red currently blanketing our housing compendium. As we’ve highlighted repeatedly, we’re inclined to remain bearish on the housing complex until the slope of HPI deceleration inflects.
Tickers: MGM, MPEL, BYD, MTN, CHH, RCL
- Aug 19-21:
- Hedgeye Cruise Pricing Update
- Aug 19:
- Galaxy Entertainment Group 2Q results 5 am
MGM & 2282:HK – In a change of tone regarding the current state of the gaming business in Macau, Grant Bowie, CEO of MGM China said that China's moves to strengthen capital controls represent "a significant policy shift" that has made Chinese visitors to Macau "more circumspect." He noted the two channels for getting cash out in Macau are being squeezed. First UnionPay tightened checks on suspicious transactions in the territory to combat money laundering. Second, junkets are facing pressure from casinos and regulators to disclose the names of their customers.
Takeaway: comments that could've been made last month.
MPEL & MCP:PM – Melco Crown (Philippines) Resorts Corp said the company and its subsidiaries had a total manpower of 2,480 employees as of June 30, 2014, up from 340 employees at the end of March. The company also expects to increase its work force by 107% at the end of the third quarter and an additional 3% by year end as it readies the property for opening.
Takeaway: The hiring process is in full swing for a late 2014 opening.
AYA:TSX Amaya Gaming Group – in its earning release disclosed it completed the acquisition of of Oldford Group Limited, parent company of the Rational Group, one of the world's largest online gaming companies and owner and operator of the PokerStars and Full Tilt brands on August 1, 2014, approximately two months ahead of the anticipated timeline. And subsequent to the quarter, Amaya completed the integration of its Casino Gaming System for websites of several major online casino operators including bwin.party's websites in Europe, Cherry AB's websites, Ultimate Gaming in New Jersey, and Rational Group's Full Tilt Poker. Amaya also launched new online and mobile casino games for its customers and completed the integration of new games from multiple third-party suppliers onto Amaya's Casino Gaming System including IGT, Bally Technologies and SHFL, and Leander.
Takeaway: The new big kid on the online gaming block.
GENM:MK – Police found skimming devices fitted to four automated teller machines (ATM) to steal bank card data of users in Genting Highlands since February. The most recent case was detected at 4pm on Aug 7, while the other three cases were detected in February, May and June. The initial investigation found the syndicate fitted the skimming devices and installed wireless CCTV cameras to the machines to steal users' pin numbers and card data before making fake ATM cards to withdraw money.
880:HK SJM – (GGRAsia & Macau Business) SJM is the latest casino operator targeted by casino labor group Forefront of the Macao Gaming after hundreds gathered on Thursday outside of the firm’s human resources offices to protest against the company’s pay and promotion policies. Approximately 1,000 people attended the protest - an unconfirmed headcount as police did not comment. Many of the protesters had their faces covered. It is not clear how many were workers from SJM Holdings. The labor group demanded SJM Holdings increase by approximately 10% across the board the pay of casino floor staff.
Takeaway: Interesting because Forefront previously indicated it would not protest against local (non-American) operators.
MTN – Utah Third District Court Judge Ryan Harris is expected to receive arguments today from Park City Mountain Resort and Vail Resorts on how to calculate the value (amount) of the bond which would serve as security and allow Park City to continue using Talisker’s acreage while PCMR pursues its appeal. Talisker and Vail (which control the litigation on behalf of Talisker) will argue they are entitled to at least the amount of money Park City has been earning by using its land. Utah law provides for treble damages in such landlord-tenant disputes as a spur for tenants to leave property they no longer have the right to occupy. Judge Harris is expected to set the amount after an Aug. 27 hearing.
Takeaway: Despite the ongoing litigation, the real question is who will operate The Canyons this winter.
RCL – Celebrity gives instant credit in onboard booking program (Seatrade Insider)
Celebrity Cruises' on-board booking program is now giving an instant on-board credit of $50 to $500. When passengers book a future cruise while on board, they can immediately receive the credit or they have the option to use it on a future cruise. The offer is combinable with one of the benefits from the year-round 'Evergreen 123Go!' promotion—a choice of a free Classic Beverage Package, free gratuities or up to an additional $300 in on-board credit.
Takeaway: Another driver for Celebrity's strong onboard performance.
CHH – CEO Stephen P. Joyce sold 44,463 shares of stock in a two step sales with 17,811 shares sold on August 11 at an average $48.58/share and 26,652 shares sold on August 12 at an average $49.12/share. The 44,463 shares were an exercise of employee stock options granted on May 1, 2008 at $26.55/share with a May 1, 2015 expiration date. Mr. Joyce now directly owns 110,704 shares of the company’s stock as well as a beneficial interest in 269,279 options.
BYD – Director William Boyd sold 5,000 shares at $10.20 each. He now owns 24,960 shares directly and 2.087 million shares through various trusts.
Takeaway: More insider selling by lodging executives and Boyd
Cosmopolitan Las Vegas Results – grew revenue almost 17 percent in the second quarter and trimmed its quarterly loss. Overall revenue was $200.1 million, highlighted by a 67.6% increase in gaming revenue. Hotel revenue grew 13.5%, food and beverage revenue was up 2.5% and other revenue increased 12%.
Takeaway: Another operator with stellar Strip revenues in 2Q
Upstate New York Gaming Expansion – Applicants for four state casino licenses in upstate New York will make public presentations before the New York Gaming Facility Location Board Sept. 8-9. The Location Board will also host three public comment events in September to allow the public in each eligible region to comment in support of or in opposition to any proposal within their respective region. The public comment events will be:
EASTERN SOUTHERN TIER
• 8 a.m. to 8 p.m. Wednesday, Sept. 24, at the Hotel Ithaca, 222 S. Cayuga St., Ithaca.
• 8 a.m. to 8 p.m. Monday, Sept. 22, Albany Holiday Inn Turf, 205 Wolf Road, Albany.
• 8 a.m. to 8 p.m. Tuesday, Sept. 23, in The Grandview, 176 Rinaldi Blvd., Poughkeepsie.
Takeaway: The award process gets into full swing.
JW Marriott Ihilani Ko Olina (Oahu) Resort & Spa – (Pacific Business News) is scheduled to temporarily close early next year and undergo an extensive renovation which is likely to reopen under Four Season Hotels. The Resort Group is repurchasing the Ihilani from Cornerstone Real Estate Advisors after the agreement with Marriott International is up at the end of this year. The hotel management company recently registered a new business in Hawaii under "FS Ko Olina Inc."
Takeaway: A loss for the Marriott system and significant win for Four Seasons.
Germans favor shorter cruises, ocean pricing holds while river pricing drops (Seatrade Insider)
According to e-hoi, a German booking portal, Germans are choosing shorter ocean and river cruises, and are becoming increasingly price sensitive when booking a river cruise. The Baltic, Northern Europe, the Caribbean and the Canary Islands all gained market share among the top destinations while the Mediterranean—although still the favorite—lost share. In the ocean segment, the average cruise price remained stable at €1,266 (1H 2014), compared to €1,261 in 2013. The average cruise duration dropped from 10.1 days to 9.8 days, resulting in a 2% increase in the daily rate, from €115 to €117. The age of river cruisers remains older than that of ocean cruisers: 61.6 years compared to 53.6 years.
Takeaway: German ocean pricing has been stable but underperforming the rest of Europe this year.
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.
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