Short interest data released yesterday, in conjunction with sell-side sentiment data, shows that for the two weeks ended 3/15 the majority of restaurant stocks have seen sentiment either improve or hold steady. BJRI saw the greatest uptick in sentiment while DPZ, BWLD, and KKD saw the greatest declines in sentiment.
Sentiment Scorecard Callouts
MCD/YUM/SBUX: The gap that previously existed between MCD versus YUM and SBUX has closed from a sentiment perspective. Disappointing February sales results, along with the impact of austerity on MCD’s Europe business, has brought sentiment lower recently. We believe that Taco Bell is a key driver of improving sentiment around YUM’s stock. Despite softness in China’s stock market during March amid growth concerns, a factor that would usually be expected to weigh on the company’s stock price, YUM’s stock has gone straight up during the past month. SBUX continues to win in new categories and investors are heightening their expectations for what SBUX can achieve within the food and beverage industries.
DNKN: Sentiment in Dunkin’ softened in the two weeks ending 3/15. Subsequently, we learned from a regulatory filing that 1Q trends at Dunkin’ Donuts softened sequentially from 4Q despite the weather benefit. While we do not think that same-store sales trends are important for DNKN, given that it is a franchise business, it is important from a sentiment perspective and we expect the next sentiment reading to show a further decline in DNKN’s reading. The backlog of new unit openings, a metric of paramount importance for investors in Dunkin’s growth story, continues to be shrouded in mystery.
BWLD: Buffalo Wild Wings’ stock continues to soar, with the exception of a minor correction today on the back of what we see as a very prescient downgrade from Deutsche Bank today. The sell-side is becoming more bearish on it, and sell-side sentiment has been the primary driver of the reduction in the sentiment around the name over the past two months.
EAT: Investors remain skeptical on this turnaround story. In terms of the upcoming EPS release, the question is whether or not the company was able to successfully lap the introduction of the $6.95 lunch combo in January 2011.
PFCB: P.F. Chang’s still languishes near the bottom of the list from an investor sentiment perspective but sentiment has been improving slightly recently. Investors will be eager to learn how the Bistro’s “Triple Dragon” promotion has fared recently either during the AGM on 4/18 or during the 1Q12 EPS call on 4/27.
POSITIONS: Long Utilities (XLU), Short SPY and Industrials (XLI)
My fundamental research view that Growth Slows As Inflation Accelerates has not changed. Market prices have. This is the same fundamental Growth/Inflation model I have used to call Growth Slowing turns in 2008, 2010, and 2011.
In the attached chart you can see that A) Q1 Tops (lower long-term highs) are frequent and B) unless you truly think it’s different this time (hearing some people call it the 1990s!) both VOLUME and VOLATILITY signals here are much more bearish than the ones we were flagging in Feb-Apr of last year.
Across my core risk management durations, here are the lines that matter most:
- Immediate-term TRADE overbought = 1420
- Immediate-term TRADE support = 1405
- Intermediate-term TREND support = 1312
In other words, the top end of this very tight range has every opportunity to hold into quarter end. There’s also a rising probability of a collapse to the mean reversion level of 1312 (ie a -7.5% correction, which would be approximately only half of the lightest mean reversion we’ve seen since the May 2010 top (15% draw-down from there to Jackson Hole Bailout bottom).
When volume signals are as bad as I have ever seen, and the VIX is at 14, I don’t think the high probability outcome is going to be different this time.
Keith R. McCullough
Chief Executive Officer
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Hedgeye’s Retail Sentiment Monitor, comprised of short interest stats & sell-side sentiment, supports our bullish view on URBN and LIZ, as well as our bearish view on HBI, GIL and JNY. It suggests our view on JCP, PVH, TJX and ROST are closer to consensus.
As for retail overall, there were some meaningful changes in short interest since the prior release on March 11th. We saw the greatest changes out of Large cap retail (+3.19% PoP) with less meaningful changes out of the small (+1.75% PoP) and mid cap names (-2.46% PoP). The 3.19% increase in large cap short interest was driven primarily by growing bearish sentiment at AZO (+75.4%), LOW (+48.1%) & TIF (+31.9%). PVH experienced the greatest short covering in large cap retail period over period with shares selling short down ~33%; there were also notable reductions in GPS (-24.4%) and JWN (-22.7%) short interest on the margin.
Here are some thoughts on changes we’re seeing in our sentiment monitor:
URBN: Sentiment has leveled out and has begun to improve after a simply massive 40-point hit over the past year. We like URBN here- these problems are identifiable and although it will take several quarters to fix, URBN has some of the cleanest inventories in retail with improving topline/margin compares headed into 2H. For additional detail on our URBN thesis, please see URBN: A Winner in 2012 (3/22/12).
ROST/TJX: Sentiment remains overwhelmingly positive -- near two year highs in sentiment for both names. We expect the off-price space to continue to benefit as the pricing battle at the mid-tier heats up and creates a domino effect on both margins and inventories for the industry. Excess inventory = better buys for the off-price channel. We wouldn’t chase them here. But the fundamental call is a tough one to bet against.
HBI/GIL: Sentiment scores remain elevated with HBI improving 3 points on the margin despite our expectation that both companies will underperform expectations in 2012.
JNY: Sentiment remains in the 20-25 range, the lowest score amongst low/mid tier apparel brands. JNY’s score might come across as overly bearish, but keep in mind that it is still 2.5x more positive than LIZ, which is a better company in every way. We don’t like JNY here. Sales are rolling organically, and JNY continues to cut SG&A to mitigate margin hit setting the company up for a miss later this year. We don’t believe JNY’s brands have a loyal customer base which creates a dangerous environment when competitive pressures are about to heat up at JCP, KSS, M, TGT, and SHLD. See our JNY note following the quarter; JNY: 9W & Other (2/9/12).
PVH: Per our note out yesterday, PVH is one of our favorite large cap longs in 2012 headed into and out of this afternoons print- PVH: Still Positive Pre & Post Qtr (3/26/12) but we need to stay mindful of the fact that its sentiment score is near historical peak.
JCP: Continues to decline on the margin. We still think that Johnson’s execution on his reinvigorated department store concept remains akin to the biggest retail Hail Mary in 25 years, and will be extraordinarily disruptive to the supply beginning yesterday.
SCVL: now has the highest sentiment score in retail (NKE in 2nd at 85), thought only up 1 point period over period, the score has improved 16 points over the past 3 months. Short interest as a % of float remains below 2% and 6/6 of the ratings on the stock are BUY. Yes, it’s micro cap ($450mm) with tight borrow. But it is a significant divergence nonetheless.
JWN/M: The spread between M & JWN sentiment is currently at 31 points vs an average of 10 points throughout 2011. Fundamentally, we like JWN better than M.
Sentiment Framework Methodology
Our updated Hedgeye Retail Sentiment scorecard is published in conjunction with last night’s short interest release. As a reminder, we use our Scoreboard as a piece of our TRADE (Trade=3 week or less duration) framework. The sentiment scores combines buy-side and sell-side conviction measures (Including Buy/Sell Ratings & Short Interest as a percent of float); we standardize those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. The idea is that a contrarian strategy can be employed at the extremes (positive extreme >90, negative extreme <20) to screen for names that provide the opportunity for the greatest upside relative to the consensus view. A sentiment score above 90 (overly bullish) has proven to be a good historical ‘sell’ signal, while a signal below 20 has proven to be better to Buy. We recognize that some names may break into the 90+ or 20/below thresholds and won’t immediately trade contrary to consensus. In fact, companies like Nike & LIZ have remained in the high/low bands over extended period of times. While our sentiment monitor acts as an excellent screening tool at major inflection points, we incorporate additional tools/analysis (SIGMA, Management Scorecard, etc.) to properly contextualize fundamental opportunities across all durations. Some stocks will never break out of their band, but marginal directional changes matter. We have back tested these levels for our group and the result can be seen below. Note that the analysis below was performed using the ~100 companies included in the monitor when the framework was initially created.
In an effort to provide additional context and compliment a company’s sentiment score, we also focus on insider transactions in conjunction with shifts in buy/sell side sentiment to gauge the overall conviction on a particular name. For additional detail on the methodology behind our proprietary sentiment measures or historical detail for a specific company, please contact the team. Below, we have included HIBB as an example as well as the historical trends in sentiment by retail subsector.
THE HEDGEYE BREAKFAST MONITOR
Restaurant Industry Starting to Simmer
The restaurant industry is in good health, according to GE Capital. As sales trends improve, according to the company, operators are translating those positive feelings into a greater willingness to invest in their businesses. The article also notes that for 21 consecutive months, consumers have spent more at restaurants than grocery stores, and the trend is expected to continue.
MCD: McDonald’s filed a document with the SEC yesterday with additional details regarding its CEO transition. As part of his promotion, Thompson will receive a 26% increase in base pay, to $1.1 million. The hike, no doubt, is to compensate for the pressure he is coming under to maintain the momentum of the Skinner years.
MCD: McDonald’s was rated new “Neutral” at Atlantic Equities. The target price is $102 per share.
NOTABLE PERFORMANCE ON ACCELERATING VOLUME:
TAST: Carrols Restaurant Group gained 12.5% on accelerating volume as news emerged that the company has agreed to acquire 278 company-owned Burger King restaurants through an asset purchase agreement with Burger King Corp.
BWLD: Buffalo Wild Wings was downgraded to “Hold” from “Buy” at Deutsche Bank. The PT is $100 per share.
NOTABLE PERFORMANCE ON ACCELERATING VOLUME:
BWLD: Buffalo Wild Wings ripped higher yesterday on new analyst optimism. Sales desks on the Street cited Ohio State’s progress to the final four of the NCAA basketball tournament, 2011 executive compensation, and even the progress of Louisville and Kentucky to the final four, as being indicative of strong fundamentals in BWLD’s business. Louisville was cited as the city where BWLD is based which, of course, is incorrect. Besides that chatter, Stephens Inc. upped its price target on expectations of a strong 1Q.
BJRI: BJ’s restaurants gained 6.7% on accelerating volume.
RT: Ruby Tuesday is trading well into earnings next week.
This note was originally published at 8am on March 13, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Resist the crowd: cherish numbers only.”
Doesn’t that sound hard core? We all aspire to know all of the numbers. We all want to sell every top, and buy every bottom. This is easy, right?
Whether I’m looking at rising US Equity futures this morning or whether I was looking at them in either March of 2008 or 2011, it’s the same old grind. In the last 4 years, literally every time US Stock Market Volatility (VIX) has tested the 14-15 zone, you’ve been paid to Resist The Crowd.
This time, despite the lowest trading volumes in US stock market history – oh, and the highest monthly US government deficit in US history (FEB = -$237.7B US Deficit) – is going to be different. Right?
Back to the Global Macro Grind…
Flying back from California last week, I had the opportunity to crush my reading pile. Long-time readers of my rants know that from a process perspective, I just love digging into my pile.
Here are the 3 market views that jumped out of the required reading:
- “Your Grandchildren Have No Value” - Grantham’s Quarterly Letter
- “Defense” – Bill Gross Monthly
- “S&P 1,700” – Birinyi Associates
Addressing these in the reverse order that they appear (not suggesting causality), the big round number from Laszlo Birinyi was backed up by the least impressive risk management process. If I recall his market views correctly from right around this time last year (pre 30% crashes in everything small cap, cyclicals, and commodities), they haven’t really changed.
After seeing his newly minted academic CEO, Mohamed El-Erian, get roughed up by Doubleline’s lynx-eyed Jeff Gundlach last year, Bill Gross’ title explains exactly how he feels after calling for US Credit Risk and a melt-down in US Treasuries (again, right around this time last year) – he’s playing defense. The most obvious defense for PIMCO is probably firing Mohamed.
Finally, back to Grantham, his longest Quarterly Letter ever was highlighted by the following 3 risk management thoughts:
- “Recognize your advantages over the professionals… the individual is far better positioned to wait patiently…”
- “Try to contain natural optimism… not easy, but easier…”
- “We can agree that in real life, as opposed to theoretical life… the enthusiasm of the crowd is hard to resist.”
Accuse me of having a confirmation bias towards Grantham – I’ll take that as a compliment. Like me, he’s had his own performance issues in this game. Unlike most, he’s self effacing in addressing our innate weaknesses as human beings. Markets humble the “smart.”
I personally do not think that calling for big round numbers and “year-end targets” in major indices requires any risk management process whatsoever. Neither does writing Op-Eds to support theoretical views that have no actual precedent.
The only thing I am certain of in this business is that the more I know about what it is that my competition thinks they know, the less I know about what is going to happen next.
Can Global Equities go a lot higher? Evidently yes. After that, can they go a lot lower (May-Aug of 2008, 2010, 2011)? Evidently yes.
So what do you do now? For me, the answer is always changing:
- Last Tuesday at 1129AM EST with the SP500 30 points lower, I was buying
- This Tuesday at some point in/around 10AM EST, I’ll probably be selling
That definitely doesn’t mean I nailed it. It just means that in the immediate-term, I am proactively managing the risk of the price range as both volume and volatility signals instruct me to front-run people staring at single factor-model moving averages.
Why “cherish the numbers” in our Global Macro Research (Growth, Inflation, Policy) model? Because over the intermediate to long-term (2007-2012), Resisting The Crowd’s career risk management decisions to ignore those numbers has worked.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, US Equity Volatility (VIX), and the SP500 are now $1691-1711, $123.87-126.79, $79.34-80.24, 15.23-17.98, and 1363-1382, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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