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Investing Ideas Newsletter

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

 

*Note: Please keep an eye on your inbox as we will send out CEO Keith McCullough’s updated levels for each idea at the beginning of this coming week.

Cartoon of the Week

Investing Ideas Newsletter     - Crazy bull cartoon 08.19.2014

IDEAS UPDATES

 

BOBEGreat news this week…After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Earlier this week, Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.We will go into more granular detail next week on what Sandell's victory portends for shareholders.

 

FXB: We continue to believe that a more dovish monetary policy from the European Central Bank and Federal Reserve versus the Bank of England should be supportive of the British Pound versus the US Dollar and Euro. 

 

As we wrote in our original research note, essential to our thesis on FXB is expectations on economic growth and the policy stance of central bankers. If and when these expectations shift, so will we. Under the current set-up, we expect the Pound to be a relative winner, especially versus the USD and EUR and will remain on the long side here.

 

GLD: Janet Yellen’s comments on Wednesday were either taken as 1) marginally more hawkish all else being equal or 2) RELATIVELY less dovish than the forward-looking anticipation of the ECB’s next chess move. Taken in isolation, we definitely did not interpret her comments as suggesting any change to what we’ve believed all year.

 

Her follow-up in Jackson Hole on Friday provided confirmation. Frustrated that her comments on Wednesday were received as more hawkish, she emphasized that the unemployment rate was not a good indicator for the health of the labor market. While this tone doesn’t deviate drastically from what she has said previously, she emphasized the committee’s need to “remain cautious” about raising rates:

 

· Gold bounced +38 bps Friday (not attributing any causality here) down -2.0% on the week

· The ten-year yield ticked up 6 bps on the week after selling off from the post-speech Wednesday highs

· The dollar moved higher up 1.11% on the week

 

Monetary policy from the Fed, and globally for that matter, is predictable and easily anticipated. One of the components in our internal GIP Model (Growth, Inflation, Policy) has been pretty accurate in just front-running this predictability. With both the United States and Europe entering the scenario where growth and inflation are slowing simultaneously, which central bank president will bring more #cowbell? We’re not sure.

 

All else being equal, we expect Yellen to be more dovish than the market currently expects. On this confirming event we would expect the interaction between Gold, Treasuries, and the U.S. dollar to remain the same. The move in the EUR/USD down below 1.33 and the sell-off in gold suggest consensus expects some kind of easing measure from the ECB's Mario Draghi. We’ll stick long of gold here until we receive more confirmation on the outlook for the dollar in the next several weeks.

 

HCA & HOLX: We continue to monitor the impact of the Affordable Care Act on HCA and Hologic.  One of the biggest drivers has been the expansion of Medicaid.  Not all states have expanded coverage, but the list keeps getting longer. 

 

Here is a good briefing on the topic from Kaiser Family Foundation. 

 

For Hologic, approximately 15% of patients in an OB/GYN office are covered through Medicaid.  For those newly covered by the Affordable Care Act and a state expansion of Medicaid we would expect to see increased patient volume and consumption Hologic diagnostic tests including HPV and Pap, as well as Hologic surgical equipment, both of which performed well in the most recent quarter.  For HCA and other hospitals we have witnessed even more significant gains.  

 

But how much more improvement is still in front of us?  Could it already be over?  So far, we don’t think so, and we have a high frequency data series to track to tell us if we’re wrong. 

 

We think we are beginning to see the impact from these Medicaid expansions on a monthly data series we follow, a sub-component of the  Producer Price Index for Hospitals among for Medicaid patients.  The index itself is created from receipts collected from hospitals each month. What are data analysis shows is the very close relationship between a measure of pricing (PPI) and admissions volume at HCA.  As the pace of patient volume quickens it has typically coincided with an increase in the Medicaid pricing metrics.

 

Click to enlarge image. 

Investing Ideas Newsletter     - HCA Medicaid PPI

 

OC: As we have mentioned in previous notes, a more favorable environment stemming from economic indicators and an industry-wide roofing price increase may be a tailwind in the back half of 2014 for Owens Corning. We are now seeing some encouraging signs from some recent economic data. Demand indices are pointing to increasing momentum within the nonresidential construction industry. The Architecture Billings Index (ABI) Index for July hit 55.8, a 5% increase year-over-year. The July number ranks in the 93rd percentile. The Dodge Index recorded a 9 month high in July, increasing ~23% year-over-year to 125. The ABI and Dodge Construction indices are reinforced by strong ISM and Industrial Production prints for the summer – a more favorable environment compared to 1H 2014. 

Investing Ideas Newsletter     - oc7

 

OZM:  Shares of Och Ziff succumbed to some panic selling on Friday on issues that have been in the market for some time. Shares were down over 6% on the last day of trading on a Business Week article released the night prior on a topic that had already been disclosed by management in its financials and already released into the public domain by the Wall Street Journal in April.

 

The topic surrounds investments made by OZM in Africa in 2001 whereby Och invested in several mining loans. These loans made by OZM have become news fodder because they were invested in the African region during the time of an unpopular regime. Several other major Financial Services firms also made these loans and despite the unpopular timing and parties associated with these investments, OZM and their fund holders were completely paid back with appropriate interest.

 

The market fears that there may be reputational risk for OZM and other firms if regulators actually charge these companies with formal infractions. While it is tough at this juncture to decipher this impact, we point to the fact that outside this issue that Och has the fastest growth in the asset management industry and also a sector leading dividend, which allows for shareholders to gather returns while this discount burns off.

 

OZM shares are now again trading with no multiple on its incentive fees which are 40% of its annual net income. The last time OZM shares traded at no incentive fee multiple was 2011, when the stock was a $7 per share. So with the stock up over 70% since that time and a current dividend over 5% (with an opportunity for an additional 4% yield in the 4th quarter), we see a compelling entry point currently.

 

RH: We have spent a lot of time on the road discussing Restoration Hardware over the past four weeks, in particular, our recent 45-page deep dive on RH’s real estate. The distillation of our analysis is as follows:

  1. RH stores could (and probably should) get far bigger than even the RH bulls seem to think. 
  2. Aside from reconfiguring 66 existing markets, there are another 19 markets we have identified where the spending rate on home furnishings by people making over $100,000 in income suggests that RH should expand to these markets with Design Galleries.
  3. The availability and economics on large properties for all these markets are far better than people think.

This analysis supports our $11 earnings power in five years (double the consensus), as well as our view that that this stock is headed well above $200.

 

TLT: Staying Long the Long Bond...In an holiday shortened week (at least as far as investor participation was concerned) which saw a decent pop in domestic high-frequency growth data, hawkish FOMC minutes, a huge move in the DXY (+1.1%) and gold (-1.9%), we were delighted to see that our #1 investment idea of 2014 (i.e. long-term Treasuries) did, well, nothing.

 

Okay, well a -34 basis point week-over-week pullback might not feel like “nothing” if you’re long the TLT in size, but it’s got to feel like a victory in the context the aforementioned hawkish signals. That the long bond did not sell-off in what was arguably the most conducive week for that occurrence since early-JUN is telling in and of itself.

 

In fact, we’d argue the +1.2% two-day rally to close out the week into and through what we foresaw as dovish testimony out of Janet Yellen at Jackson Hole is a decent come-from-behind “win” for the home team.

 

Be it #GrowthSlowing on a prospective basis domestically or concurrently in the Eurozone – which weighs on rates across the region and increases the relative attractiveness of US Treasuries (see: a 3M chart of the EUR/USD) – we continue to see favorable catalysts for long-term Treasuries, at the margins.

 

As such, we are staying long the long bond!

 

* * * * * * * * * * 

 

Click on each title below to unlock the content.

 

Dick's (DKS): Uninvestable

Hedgeye retail analyst Brian McGough writes that "bigger picture," there is more bad news to come for the sporting goods retailer.

 Investing Ideas Newsletter     - dicks

 

Chip Stack Times: HPQ Tidbits and M&A Activity Heating Up Again

Hedgeye semiconductor analyst Craig Berger writes that M&A activities are heating up the chip sector as IFX goes shopping and buys IRF and explores the implications for other chip firms.

Investing Ideas Newsletter     - semis

 

ICI Fund Flows: U.S. Stock Funds Just Can't Get a Bid

Domestic stock funds put up their 16th consecutive week of outflow and are now entering the seasonally weakest period of the year.

Investing Ideas Newsletter     - bid


Commodities: Weekly Quant

Commodities: Weekly Quant - chart 1 divergences

Commodities: Weekly Quant - chart 2 deltas

Commodities: Weekly Quant - chart 3 USD Correls

Commodities: Weekly Quant - chart 4 S P correls

Commodities: Weekly Quant - chart 5 volume metrics

Commodities: Weekly Quant - chart 6 volatility

Commodities: Weekly Quant - chart 7 cftc sentiment

Commodities: Weekly Quant - chart 8 1 month correls

Commodities: Weekly Quant - chart 9 3 month correls

Commodities: Weekly Quant - chart 10 6 month correls

Commodities: Weekly Quant - chart 11 1 year correls

Commodities: Weekly Quant - chart 12 3 year correls

 


The Week Ahead

The Economic Data calendar for the week of the 25th of August through the 29th of August is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.

 

The Week Ahead - 08.22.14 Week Ahead


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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 TV

Q&A: Keith Answers Questions From Subscribers

In this Q&A portion of Tuesday's Morning Macro Call, Hedgeye CEO Keith McCullough discusses the Fed's next move, the U.S. housing market, and his continued bullishness on bonds.

Two Chip Stocks Feeding on the Apple iPhone 6 Frenzy

Hedgeye semi analyst Craig Berger highlights two new chip suppliers riding the coattails of Apple’s highly anticipated iPhone 6. 

CARTOON

Sitting Ducks?

The Best of This Week From Hedgeye - SittingDuck

 

Ain't No Hawk!

The Best of This Week From Hedgeye - JacksonHole cartoon

Think the Fed's going to suddenly strike a hawkish tone? Don't hold your breath.

CHART

$SPY Up 150% Since 3/09 Lows

The Best of This Week From Hedgeye - COD 8.22.14

POLL

Buying the iPhone 6?

Shares of Apple are hitting record highs, fueled largely on investor optimism that iPhone 6 sales are going to be blockbuster. 


Cartoon of the Day: Hindenbull

Takeaway: Risk happens slowly at first...

Cartoon of the Day: Hindenbull - Hindenburg


Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS

Takeaway: SIGMA review for the 16 retailers reporting this week. TGT, DKS, URBN, FL, HIBB, TJX, HD, LOW, DLTR, SPLS, AEO, BONT, GPS, GME, SHLD, PETM

COMPANY HIGHLIGHTS

 

Here's a SIGMA review of every retailer that reported earnings this week. As a reminder, the analysis triangulates sales, inventories and margins. The vertical axis is the spread between sales and inventories -- the higher on the scale, the better.  The horizontal axis is the y/y change in EBIT margin. In effect, you want to be either in the upper right hand quadrant, or headed there. The opposite holds true for the lower left.

 

There are 16 charts in total. The group overall carried on the trends we started to see with department stores last week, where inventory positions are improving across the board.  The exception report had been made up of the winners that stood out amongst the list of dogs. But this time, we're seeing the opposite. Target, Dollar Tree ,Sears, Staples and Hibbett are leading the charge for those that are tuning the wrong way. No major surprises there.  URBN and GPS are two of the more notable positive turns to us.

 

TARGET

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 22 chart1 tgt

 

DICK'S SPORTING GOODS

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 22 chart2 DKS

 

URBAN OUTFITTERS

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 22 chart3 URBN

 

FOOT LOCKER

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 22 chart4 FL

 

HIBBETT

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 22 chart16 HIBB

 

TJX

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 22 chart5 TJX

 

HOME DEPOT

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 22 chart6 HD

 

LOWES

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 22 chart8 LOW

 

DOLLAR TREE

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 22 chart7 DLTR

 

PETSMART

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 22 chart9 PETM

 

STAPLES

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 22 chart10 SPLS

 

AMERICAN EAGLE

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 21 chart11 AEO

 

 BON TON

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 21 chart12 BONT

 

GAP

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 22 chart13 GPS

 

GAMESTOP

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 22 chart14 GME

 

SEARS

Retail Callouts (8/22): 16 SIGMAs for The Week’s EPS - 8 22 chart15 SHLD

 

 

OTHER NEWS

 

HD - The Home Depot Names Craig Menear CEO, Effective November 1, 2014

(http://ir.homedepot.com/phoenix.zhtml?c=63646&p=irol-newsArticle&ID=1960265&highlight=)

 

  • "The Home Depot®, the world's largest home improvement retailer, announced that Craig Menear, currently president, U.S. retail, has been named CEO and president, effective November 1, 2014, and has been elected to the company's board of directors, effectively immediately. Current chairman and CEO Frank Blake will remain chairman."

 

 

DG, FDO, DLTR - Family Dollar Board of Directors Rejects Proposal from Dollar General Based on Antitrust Issues

 

(http://investor.familydollar.com/investors-relations/news-releases/Press-Release-Details/2014/Family-Dollar-Board-of-Directors-Rejects-Proposal-from-Dollar-General-Based-on-Antitrust-Issues/default.aspx)

 

  • "Family Dollar Stores, Inc. announced today that its Board of Directors has unanimously rejected the non-binding proposal made by Dollar General Corporation on the basis of antitrust regulatory considerations. In addition, the Family Dollar Board unanimously reaffirmed its recommendation in support of the merger agreement with Dollar Tree, Inc."

 

UPS - UPS confirms malware breach at 51 stores

(http://www.chainstoreage.com/article/ups-confirms-malware-breach-51-stores)

 

  • "UPS Stores, a subsidiary of United Parcel Service, said that a security breach may have led to the theft of customer credit and debit data at 51 UPS stores in the United States."
  • "In a statement, the company said that customers who had used their debit or credit cards at affected locations (which are listed on the UPS site) from Jan. 20 to Aug. 11 may have been exposed to the malware. However, the company noted, exposure began after March 26 in most cases."

 

LUX - Luxottica to Discuss CEO's Possible Departure at Next Board Meeting

(http://online.wsj.com/articles/luxottica-to-discuss-ceos-departure-at-next-board-meeting-1408621030)

 

  • "The world's largest eyewear maker, Luxottica Group SpA, said Thursday that it will discuss the possible departure of Chief Executive Andrea Guerra at its next board meeting."

BRBY - Burberry chief executive sells more than £5m of luxury brand's shares

(http://www.theguardian.com/business/2014/aug/21/burberry-chief-executive-christopher-bailey-sells-shares)

 

  • "Burberry chief executive Christopher Bailey has sold £5.2m of shares in the luxury fashion company, four months after taking over from predecessor Angela Ahrendts."
  • "Bailey has offloaded 68,667 shares and nearly three quarters of two sets of performance related shares granted in 2011 and 2009 when he was the company's chief creative officer and which recently vested. It is understood that nearly half of the shares granted under the performance related schemes were sold to cover taxes. Of the remainder, half were retained and half were cashed out."

 

DDS - Dillard's Announces CFO Departure

(http://www.sec.gov/Archives/edgar/data/28917/000002891714000136/dds-08222014x8k.htm)

 

  • "On August 22, 2014, Dillard’s, Inc.  announced that James I. Freeman, Senior Vice President and Chief Financial Officer of the Company and a director, informed the Board of Directors of his intent to retire as an executive officer of the Company effective February 1, 2015. Mr. Freeman will remain on the Board of Directors."

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