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
IDEAS UPDATES
BOBE: Great 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.
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.
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:
- RH stores could (and probably should) get far bigger than even the RH bulls seem to think.
- 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.
- 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!
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