Can a horrendous economy be "printed" away? Abe seems to think so. We disagree.
Takeaway: Our 2 cents – This company is growing because it could, not bc it should. The financial model needs to change, but won’t. Still a short.
Nothing came from the numbers or the conference call that dissuades us from being short this stock. Yes, it was an in-line print, which is a slight victory for a company that has missed four of the past eight quarters. But 9% revenue growth deleveraging to 1% EBIT growth is anything but impressive. In fact, the two categories that are hurting the comp the most – guns and golf – are two of the categories where Dick’s Brick & Mortar stores should have the best competitive advantage (ie you don’t buy a Mossberg 12-guage or a $500 Taylor-Made driver on Amazon). Our point here is that DKS is adding new stores because it could – not because it should. Current store count is 691, and management will continue to march toward 1,100. That’s a bad idea. We think that the company should stop growing and change up its financial model to maintain its footprint and buy back stock. But that’s not what it will do.
We think that near-peak gross margins can’t co-exist for long with peak productivity and a trough SG&A ratio. In fact, the company leveraged SG&A this quarter by 40bps on only a 1% comp. That’s not sustainable. We understand that this is a ‘best in breed’ company, but so is Macy’s, and we wouldn’t touch that one either. We’ll see where consensus numbers shake out over the next few days to determine how loud we should get on the short side.
Takeaway: Homebuilder optimism continues to percolate as more signs of light at the end of housing's tunnel begin to emerge.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Today's Focus: November NAHB HMI (Builder Confidence Survey)
Home builder confidence rose to 58 on the NAHB HMI Index in November, a +4pt increase vs September and just under the 9-year high reading recorded in September.
It has taken the balance of the year but confidence has retraced back to the pre-polar vortex levels observed in the July to December period of 2013. What hasn’t rebounded - despite some intermittently solid reports out of a selection of the publicly traded homebuilders - is actual, aggregate new home sales which have done virtually nothing over the TTM.
Perhaps builder’s are co-opting our top down view and considering the implications of a 2nd derivative stabilization in HPI in conjunction with progressively easier volume comps and looser regulation but, given the ongoing divergence between confidence and construction YTD, we’re more inclined to view the November advance in sentiment as a simple continuation of trend.
We’ll get the housing starts/permits data for October tomorrow, but with SF starts up just 2.8% YoY on ave YTD and permits middling, we don't see much upside for single family construction to close out the year.
“Growing confidence among consumers is what’s fueling this optimism among builders,” said NAHB Chairman Kevin Kelly. “Members in many areas of the country continue to see increasing buyer traffic and signed contracts.”
“Low interest rates, affordable home prices and solid job creation are contributing to a steady housing recovery,” said NAHB Chief Economist David Crowe. “After a slow start to the year, the HMI has remained above the 50-point benchmark for five consecutive months, and we expect the momentum to continue into 2015.”
BOTTOM LINE - THE CALL HAS BEEN WORKING BUT THE DATA'S TURNING
Our bearish call on housing thus far in 2014 has been playing out as the XHB remains the worst performing sector YTD. That said, many of the negative dynamics that we flagged earlier this year have largely or completely played out and we're now seeing some signs of light at the end of the tunnel (see the volume of "green" in the compendium at the top of this note). We'll be hosting a call in early December to update our views on housing heading into 2015.
About the NAHB HMI:
The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.
Joshua Steiner, CFA
Christian B. Drake
Editor's note: This is an excerpt from Hedgeye morning research. Click here for more information on how you can subscribe.
The Russell 2000 is down almost -2% in the last 5 days, but the world’s consensus hedge (SPY) isn’t down (yet), so no worries.
From both a liquidity and volume perspective, this is simply a rewind of the movie you saw in late September (decelerating volume on UP days for SPX). For the record, total U.S. Equity market volume was down -26% vs. its 1-month average yesterday.
In other words, tread carefully. Mr. Market may be about to high-five your face.
POSITIONS: 5 LONGS, 7 SHORTS
One of the main reasons why I haven’t written you a “SELL (SPY) Levels” note in a while is that I wasn’t getting an immediate-term TRADE overbought signal. Now I am. Timing is part of the #process.
Rather than rehash my fundamental view on why the Russell 2000 (IWM) is #bubble (that already saw its 1st phase of popping during its July-Oct 15% draw-down), I think this is as good a spot as any to call the SP500 a #bubble.
#Bubble? Sure. What better spot to call it what it is, other than the all-time high?
To put the immediate-term short-covering capitulation in context, here are the levels that matter to me most:
In other words, whether you are a short or intermediate-term investor, there’s anywhere from -2.4-3.7% mean-reversion downside from 2050. Memories of the -10% draw-down (SEP to OCT) are short, so I’m thinking -3% could happen slowly, then all at once.
Both Volume (decelerating on UP days) and Volatility signals (my TREND signal for VIX remains bullish) within the US Equity market are more glaring now than they were at the end of September. My mistake then was not shorting SPY, and just staying with IWM.
To put this epic volume signal in perspective, at the all-time closing high of 2041 (SPX) yesterday, Total US Equity Market Volume crashed (down -26% and -46%, respectively, versus its 1-month and YTD averages).
To be balanced, if you think the word #bubble is too aggressive, just call this performance chasing level of the SP500 a Liquidity Trap.
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
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