The Real Question Isn't $100/Share for Restoration Hardware, It's Whether We See $200 or $300 | $RH

Takeaway: We think that people are missing the boat on Restoration Hardware.

Editor's note: This is an excerpt from our retail sector team led by Brian McGough.

The Real Question Isn't $100/Share for Restoration Hardware, It's Whether We See $200 or $300 | $RH - 45

Restoration Hardware - 2Q14 Earnings Preview


Takeaway: We think that people are missing the magnitude of earnings growth at RH, the sustainability of that trajectory over a long period of time, and ultimately the degree to which that will accrue to equity holders.


The question is not whether the stock will go to $90 vs $100 (where we see most price targets), but whether it will get to $200 vs $300.


Even the best stories, however, are not linear. There will be bumps along the road. But this print should not be one of them.  We’re well above the Street in Sales, Margins and EPS, and we flush out in this note where we could be wrong. 

HEDGEYETV Flashback | 10.17.13


Takeaway: We expect EM assets to continue outperforming their DM counterparts over the intermediate term.

Not much has changed with respect to our thematic views on emerging market assets. After having been the bears throughout 2013 and into 2014, we’ve been extremely bullish on the EM space since MAR of this year and see no reason to alter that stance.


Specifically, both our top-down quantitative signals and bottom-up GIP fundamentals augur for continued outperformance of EM assets over the intermediate term.


TACRM Quant Signals (CLICK HERE to download the expository white paper):


  • The 29% Optimal Asset Allocation to EM Equities is +6ppts and +12ppts above its trailing 3M and TTM averages, respectively. These deltas suggest the presence of rotation based capital flows (i.e. marginal investor interest). Moreover, 29% is as high a Optimal Asset Allocation to EM Equities we’ve seen on both a TTM and trailing 5Y basis. This effectively means global equity investors with flexible mandates that aren’t overweight EM have likely underperformed and are likely to continue to underperform.
  • Across the six primary liquid asset classes (Fixed Income & Yield Chasing Instruments, DM Equities, EM Equities, FX, Commodities and Cash), EM Equities is currently the only asset class with a “high-conviction BUY” rating according to TACRM.
  • 14 of the top 20 most bullish ETFs (roughly ~200 in aggregate) from the perspective of TACRM’s Volatility-Adjusted Multi-Duration Momentum Indicator readings are EM Equity exposures.












GIP Fundamentals: Core to our bullish bias on EM assets is an deep understanding of the role DM monetary conditions has historically played in determining valuations for EM assets. Specifically, as those conditions ease – especially US dollar liquidity – EM assets tend to benefit from a tailwind of marginal investor interest. We’ve discussed this carry trade at length over the course of our thematic work on emerging markets (CLICK HERE for the most recent example… refer to slides 17, 19 and 20).







Looking to the scoreboard, EM has certainly been the place to be since we introduced the thesis (performance since 3/26):


  • MSCI EM Index: +13.3%
  • MSCI US Index: +8.4%, or -490bps  of underperformance
  • MSCI Europe Index: +5.4%, or -790bps of underperformance


This outperformance makes perfect sense in the context of the outperformance of the slow-growth, yield-chasing style factor domestically. Specifically, the performance of REITs, MBS and stocks with high dividend yields have explained anywhere from 60-78% of the MSCI EM Index’s price movements across the trailing intermediate-term duration, per the table below which shows the average of trailing 1M, 3M, 6M and 1Y correlations.




All told, until the outlook for domestic and European economic growth ticks up (it won’t in our models through at least year-end), we think investors will have adequate fundamental cover to remain overweight EM. That call is certainly not without risk in the context of #VolatilityAsymmetry across every major asset class, but that remains a bridge we’re happy to cross when we get to it. Calling stock market tops on a prospective basis tends to amount to little more than a fool’s errand.


Our current best ideas across the EM space are highlighted in the table below. A couple of changes to note:


  • We are swapping out the iShares MSCI Emerging Markets ETF (EEM) for the Vanguard FTSE Emerging Markets ETF (VWO) to maximize our exposure to China (17.4% VWO vs. 14.7% of EEM) and India (10.8% of VWO vs. 6.7% of EEM) and to minimize our exposure to South Korea (0% of VWO vs. 14.7% of EEM), which is suffering from both deteriorating GIP fundamentals and idiosyncratic risks (Samsung lawsuit and ownership transfer). The +14.1% advance for the EEM since MAR 26 compares to a +6.2% advance for the MSCI All-Country World Index, effectively generating +789bps of research alpha.
  • We are booking the gain in both the WisdomTree Emerging Currency Fund (CEW) and the Market Vectors Emerging Markets Local Currency Bond ETF (EMLC). While a net +141bps of alpha between the two exposures is nothing to scoff at, both ideas have become stale in light of the recent quantitative breakout in the US Dollar Index.






Best of luck out there and feel free to email us with any questions.




Darius Dale

Associate: Macro Team

Buy Pound Sterling on Scottish Independence NOT Happening

  • Adding in on our bullish GBP/USD (via the etf FXB) position as we believe that the Scots vote down independence when the country votes next Thursday, September 18th
  • We expect the currency to retrace its move alongside strong fundamentals underpinning the cross

We did not see the Scottish Independence threat manifesting like it has. In fact, UK high frequency data has shown a strong positive divergence over continental Europe in recent weeks, which we believe is supportive to our thesis. 


That said, the GBP/USD (etf FXB) has clearly been battered down:  -5.8% since a high on 7/2; -2.6% month-to-date; and over -1% intraday (the weakest levels since late November 2013). It has moved in step over the last two weeks as the spread between “No” versus “”Yes” votes for Scottish independence has come in considerably to the Yes side - to a 2% advantage according to a YouGov poll released over the weekend.

Buy Pound Sterling on Scottish Independence NOT Happening - z. yougovb

Buy Pound Sterling on Scottish Independence NOT Happening - z. gbp anno

Ultimately we think the myriad of economic risks presented by a "Yes" vote (listed below) will outweigh the more popular sentiment shift over recent weeks – which has been driven alongside a campaign by Scotland’s First Minister Alex Salmond to appease fears presented by secession – however be prepared for a close vote.  Also note, betting markets are not buying into Scottish independence, with No = 71%; Yes = 29%.


Secession Risks:

  • Currency –  UK politicians have stated that Scotland could not use Sterling. The country would have to issue its own currency
  • Central Bank – until the formation of a central bank there is no backstop for sovereign debt
  • Massive Capital Flight –investors could pull money out of Scottish banks en masse that would destabilize the financial system 
  • EU Membership – it’s unclear if an independent Scotland would be granted EU membership, which could have huge trade implications
  • Regulation – uncertainty if banks would remain regulated under the UK regulatory authority? Tax and trade regulations also uncertain
  • Economic Drag – prominent financial firms likely to move to London
  • Budget –  the Institute for Fiscal Studies pointsout that Scotland's Deficit could be 4.6% if independent. Low credit quality could negatively impact debt raises, and push the country's debt and deficit levels higher, a vicious cycle

While Salmond’s "Yes" campaign has been driven on the promise that an independent vote will allow the country to capitalize on oil wealth and enable the government to improve its system of social welfare, we size up his campaign rhetoric as over-promising and under-delivering. 


The myriad of economic risks (presented above) may in fact leave the average citizen at a disadvantage as the economy grows at a slower rate with less jobs. Add on the uncertainty around the promise of “oil wealth”:  while more than 80% of Britain’s oil lies in reserves with Scotland’s maritime borders, how the reserves would be divided is uncertain, with no certainty that an independent Scotland would get the long end of the stick.


Matthew Hedrick


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Cartoon of the Day: Smells Like 2007

Takeaway: "I haven’t been this bearish since the fall of 2007," Hedgeye CEO Keith McCullough wrote in today's Morning Newsletter.

Cartoon of the Day: Smells Like 2007 - smells like 2007 09.08.2014

Q&A | McCullough: I Haven’t Been This Bearish Since 2007

Short EWI – Italy Has Yet To Find A Bottom

Last Friday Keith added a short signal in Italy (via the etf EWI) to our Real-Time Alerts. We were tactically afforded the opportunity to short EWI as Italian stocks have bounced to lower-highs but remain bearish TREND (21,525 in the FTSE MIB Index).

Short EWI – Italy Has Yet To Find A Bottom - w. italy mib


Getting Short Persistent Italian Underperformance


Our thesis on Italy is relatively simple:

  • GDP Underperformance – a 2H deceleration should lead to 2014 Italian GDP flat to -0.3% versus +0.6% to +0.8% in the Eurozone. 
  • Sticky Unemployment – we expect the unemployment rate to be grounded at 12-13% for the remainder of the year, versus Eurozone average of low to mid 11%.  Italy’s monster Youth Unemployment of 42.9% will continue to present a real drag on confidence and extend the length of a “recovery” over the medium term TREND and pose a generational drag over the long term TAIL.
  • Fiscal/Budget Squabbles – we continue to get mixed signals from the Renzi government. More fiscal consolidation or less?  The lack of a definitive voice should only provide further uncertainty to the populous and dampen consumer confidence around an inflection: late last week undersecretary at the economy ministry Enrico Zanetti said that Italy may seek to delay bringing its structural budget deficit into balance until 2016 (versus the previous guidance of 2015).
  • ECB is No Savior – despite cutting the main interest rates to near zero and deposit rates to negative first in June, the policy move to further cut last week will not lead to increased lending to businesses that are willing to invest in and grow the European economy. We expect investment to the region, and Italy in particular, to remain severely challenged over the medium term.  
  • Regional Partners Also Weak – we have monitored weeks and months of declining data across the region and our propriety GIP model (growth, inflation and policy) for assessing economies suggests the Eurozone economy will land in the ugly quads #3 and #4 in 2H, representing growth slowing as inflation decelerates/accelerates. With 54% of Italy’s exports heading to EU countries, we suspect that weaker demand from the EU in 2H will continue to put downward pressure on growth. 

Short EWI – Italy Has Yet To Find A Bottom - EUROZONE


Just Charts

Below we show 4 charts that are representative of Italy’s underperformance.

  • Italy’s PMI Services for the August reading ticked below the 50 line, indicating contraction
  • Italy’s Unemployment Rate is poised to remain above the Eurozone average
  • Italian Retail Sales have inflected back to the downside
  • Italian Economic Sentiment inflected downward in the August reading – we expect further declines in 2H

Short EWI – Italy Has Yet To Find A Bottom - W. Italy PMI

Short EWI – Italy Has Yet To Find A Bottom - w. ITALY UNEMPLOY

Short EWI – Italy Has Yet To Find A Bottom - w. ITALY RETAIL SALES

Short EWI – Italy Has Yet To Find A Bottom - W. ITALY SENTIMENT


Matthew Hedrick


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.