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.
Have a great Labor Day weekend!
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
CARTOON OF THE WEEK
IDEAS UPDATES
BOBE: As it turns out, activist investor Sandell was only able to secure four seats on Bob Evans’ board. This is after reports surfaced that the investor had successfully secured five. An incremental seat always helps, but four is still a significant number and should be enough to influence change within the company. Considering that three other nominees joined the Bob Evans’ board in April 2014, we’d argue that majority of the board (7 out of 12 members) is new.
BOBE reported another uninspiring quarter on Wednesday when they released 1QF15 results. To be blunt, the call was rather painful to listen to. But not all is lost. We continue to believe there is significant upside in BOBE, but it is likely this upside will not be realized until we see several changes at the senior level. We do find solace, however, in the fact that we are one step closer to this becoming a reality.
It’s difficult to get excited about this company until the new board members complete their “initiation” to every aspect of the business. Shortly thereafter, we would expect to see material changes to the operating structure of the company in order to unlock significant underlying value. We knew this would be a bumpy ride, but we’re in it for the long haul. Buckle up.
FXB: Down ~ -3.5% since early July, we believe the GBP/USD (via the etf FXB) has found support above its long-term TAIL line of $1.65.
Our positioning in the currency cross remains based on what we see as relatively healthy underlying fundamentals for the country into 2H (to drive strong UK = strong Pound), versus our forecast for decelerating growth trends in the U.S. and Eurozone, combined with dovish policy expectations from central bank heads Janet Yellen and Mario Draghi.
In contrast, recent Bank of England Minutes revealed that for the first time in over three years, there were 2 votes to increase interest rates (by 25 basis points). We expect this bullish tone (on the margin) coupled with the outperformance of UK growth over the US and Eurozone in 2014 to push the GBP/USD higher.
GLD: With continuing monetary policy uncertainty in the coming weeks, we have no reason not to have an allocation to Gold. Until the market confirms that 1) Gold is not a hedge to USD exposure 2) the outlook for forward-looking monetary policy is more definitive, we’ll continue to treat it in currency-like fashion:
USD +1.8% m/m
CRB -2.4% m/m
Gold -1.6% m/m
EUR/USD -1.9% m/m
For the record, Janet Yellen’s ideology gives us no reason to believe she’ll be pulling back the dots, but the market has clearly heightened the expectation for a further devaluation in the Euro from Mario Draghi in the near future.
The next important catalyst is the September 4th ECB meeting. We find no reason to take a position in front of the meeting without market confirmation, but we expect:
- updated ECB staff projections --> downward revisions to growth and inflation
- A “pushing” of the growth and inflation prospects from TLTROs and QE-lite (ABS buying)
- Emphasis that QE is still a viable option
Bottom line: We are sticking with our year-to-date call on the long-side for a 7% winner.
HCA & HOLX: Our monthly OB/GYN survey will deploy next Tuesday as physicians get back to work just like the rest of the country. Our survey will ask OB/GYNs what trends they are seeing in patient visits, pregnancy, deliveries, and Pap testing. The survey results will be important for our outlook for both companies.
For HCA, the delivery trend should continue to accelerate this month, as we compare to the extreme weakness this time in 2013. In recent months the trend in pregnancy has been improving, which should lead to deliveries increasing in upcoming months.
For Hologic, the trend in Pap testing, which continues its expected decline, is key. We’re looking for an unsurprising result and continued declines in the low double digits or better.
For both HCA and HOLX, patient volume is the most important metric. As we’ve seen some retail companies struggle with customer traffic, housing trends weaken, and broader measures of economic activity slow in 3Q13, we’re interested in how consumers have changed medical consumption patterns, if at all.
OC: Industrials analyst Jay Van Sciver has no update on Owens Corning.
OZM: Please click here to access the research note financials analyst Jonathan Casteleyn's sent out on Och Ziff earlier this week.
RH: Williams-Sonoma's (WSM) print earlier this week which sent shares southbound is a factor we won’t ignore as it relates to Restoration Hardware. Even though the customer mix is very different, WSM is RH’s closest publicly-traded comp. The reality is that this is an environment where a poor quality retailer (M, KSS, TGT) could hit numbers with horrible quality earnings and the stock trades up, where great (and higher multiple) companies smoke estimates but say one word wrong and the stock is down 10-20% (KATE). That’s our greatest concern near-term.
But for many reasons, after taking in this data point we don’t think this WSM print can be extrapolated to RH.
We think RH will beat the quarter in two weeks, and more importantly will ultimately print $2.70 this year versus the Street at $2.30. We’re still at $11 in 2018, and think that this stock will be well in excess of $200. We still think RH is perhaps the most powerful story in retail. A bad quarter at WSM does not change that.
Some key points to consider…
1) The WSM concept that overlaps most with RH is West Elm. Though it is only 12% of sales, it comped 16.7%, and accelerated by 140bp on a 2-year basis.
2) WSM called out ‘seasonal’ product as being weak. That’s little concern for RH. Less than 10% of the RH assortment is considered ‘seasonal’. WSM is more tied to seasonal promotions in the first nine months of the year. That’s not an issue for RH.
3) Let’s not confuse ‘seasonal’ for ‘outdoor’. People familiar with the RH story know that so-called ‘outdoor space’ is critical to the economic model of its new design galleries. Yes, that’s where they sell outdoor furniture – but it’s not what WSM is referring to as ‘seasonal’. A $3,000 teak outdoor dining table isn’t exactly what WSM was referring to as being promotional. It simply does not compete much with RH’s core.
4) Weakness that WSM might be seeing in kitchen and tabletop is nothing compared to what it will see when RH launches its Kitchen business in the Spring of 2015.
5) To put these stories in context, RH square footage growth is accelerating from -5% to over 40% in just two years. WSM, on the flip side, is shrinking its US store base in the Pottery Barn and Williams-Sonoma concepts. And with the exception of West Elm, its only new sq. ft. is coming outside of the US. In total WSM has 1.5% unit growth and 3.7% sq. ft. growth for the year. There’s very little leverage left to the model from unit growth.
TLT: CEO Keith McCullough summed it up well on Friday morning:
Score: Long Bond (TLT) +17.2% vs. Russell 2000 0.0% YTD #timestamped (10yr yield = 2.34%)
*that’s pre-reinvesting dividends if you are long the 30yr UST Bond, the absolute return is even better
But you won’t hear that on Old Wall TV. You probably won’t read that in the paper either (I certainly haven’t – mainly because I don’t read newspapers!). Instead, you’ll hear something from the cheap seats like, “look at the Dow – its above its 50-day moving avg.”
The Dow, btw, is up less than 3% for 2014.
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We’ve been waiting for an entry point on European equities, with major indices broken TREND for nearly two months in our model. We were afforded the opportunity this week with ~ 50bp bounce in the EWQ as the CAC remains broken TREND and fundamentals support economic weakness ahead.
M&A Trends Remain Hot, Semis Want to Run Higher
This week was another busy week in the Semiconductor space for Merger & Acquisition activity, with two deals both priced at a greater than 70% enterprise value premium to prior day's closing price...wow!!
ICI Fund Flows: 2-To-1 Demand for Fixed Income Over Equities
Despite a slight rebound in equity fund flow trends last week, fixed income demand still outpaced stocks by a 2-1 ratio.
