prev

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EDV, HOLX, MUB, RH, TLT, XLP and YUM.

Below are Hedgeye analysts’ latest updates on our seven current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.

 

Please note we added Hologic (HOLX) on Friday.

 

We feature two additional pieces of content at the bottom.

Investing Ideas Newsletter - levels1 

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

Investing Ideas Newsletter - Ball drop cartoon 12.31.2014

IDEAS UPDATES

TLT | EDV | XLP | MUB

 

Sticking With the Long Bond to Start 2015

 

Consistent with our intermediate-term view on the most probable trajectory of both rates and the reported inflation – i.e. lower – we remain bullish on the long bond (in TLT, EDV and MUB terms), as well as on equities with bond-like characteristics (in XLP, XLV and VNQ terms).

 

As most recently reiterated by today’s Markit and ISM Manufacturing PMI data, domestic economic growth slowed on the margin in 4Q14 and we will continue to receive such #GrowthSlowing data points throughout the month of January:

 

Investing Ideas Newsletter - dd1

 

Investing Ideas Newsletter - dd2

 

Additionally, there remains a 3-SIGMA net SHORT position in 10Y Treasury futures and options contracts; to the extent long-term Treasuries continue to rally, we think there is ample room for mass capitulation in the coming weeks on long-term.

 

Investing Ideas Newsletter - dd3

 

In summary, we continue to see ample risk of Consensus Macro having to cover [higher] securities that you already own.

RH 

Shares of Restoration Hardware closed 2014 up 43% and we think this name still has legs in the New Year.

 

We are modeling $2.40 in EPS for the 2014 fiscal year with a 45% EPS CAGR through 2018. At a mid-twenty multiple, that gets us to an RH stock price well over $250 by 2018.

 

It remains our favorite name in retail.

 

Investing Ideas Newsletter - rh

yum

We’ve previously mentioned that we believe YUM is vulnerable to activism, but in this week’s addition we seek to provide more detail on why now is an optimal time for change. YUM currently has both internal and external factors working for it. We believe the company is a change, or two, away from unlocking significant shareholder value.

 

Internal Changes are a Catalyst for Change

  • New CEO beginning in 2015
  • We believe the current CFO is likely more open to changes than the previous CFO
  • In 1Q15, YUM changed its reporting structure to align global operations outside of China and India by brand
  • This change in reporting structure allows for a clean sale or spinoff of brands
  • The new reporting structure also suggests little internal friction to a potential spinoff or sale of brands
  • YUM has been paying down debt and is now underleveraged relative to peers

 

External Environment Creates Possibilities


  • Restaurant multiples are at all-time highs
  • Restaurant IPOs are being very well-received by investors
  • Global asset-light business models are trading at a premium to the group
  • Significant liquidity in the fixed income markets
  • Significant liquidity in the franchisee finance market
  • It is a great time to be a seller of restaurant assets, especially of strong brands like YUM’s
  • The board needs to address the issue of increased volatility in the Chinese business
  • Gaming companies have successfully issued tracking on their Chinese assets
  • YUM China could be the largest consumer company in China and investor interest would be strong

 

Regardless of any major changes, upside to YUM shares in 2015 could also be driven by a recovery in China. The street is modeling a turnaround that is, in our view, rather tempered compared to expectations of past recoveries. If China recovers, the stock will take off. If not, we expect an internal or external force to effect change.

 

There are multiple ways to win here, which is why we continue to like YUM heading into 2015.

 

Investing Ideas Newsletter - yum

holx

We added Hologic on Friday. Here is the note which accompanied the addition.


 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

ici fund flows: heavy inflow to passive funds

Investors have favored passive over active this year. Passive equity put up its largest inflow in the 52-week period.

 

Investing Ideas Newsletter - p7

podcast: morning macro call (Friday 1/2)

Hedgeye CEO Keith McCullough walks through the most important macro data on his radar screen and answers key questions from institutional subscribers.

Investing Ideas Newsletter - 5p


Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 divergences

Commodities: Weekly Quant - chart2 deltas

Commodities: Weekly Quant - chart3 usd correls

Commodities: Weekly Quant - chart4 volume

Commodities: Weekly Quant - chart5 open interest

Commodities: Weekly Quant - chart6 volatility

Commodities: Weekly Quant - chart7 sentiment

 

Ben Ryan

Analyst

 


The Best of This Week From Hedgeye

Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.

HEDGEYE TV

IS UA THE NEXT NKE?

On December 18, the Hedgeye Retail Team hosted a Black Book call on the athletic apparel and footwear space.  On Wednesday we released this excerpt, in which Sector Head Brian McGough explains how his opinion of athlete endorsements has evolved (which is particularly relevant given $UA's recent signing of Andy Murray) and reveals what Under Armour needs in order to become the next Nike.

This institutional conference call focused on Athletic footwear and apparel space. Specific names included Nike (NKE), Adidas (ADDYY), UnderArmour (UA), Foot Locker (FL), Hibbett (HIBB), Dick's Sporting Goods (DKS), and Finish Line (FINL) - which collectively offer up a good mix of LONGS and SHORTS.

 

 

HEDGEYE CEO KEITH MCCULLOUGH SHARES THE TOP THREE THINGS IN HIS MACRO NOTEBOOK MONDAY MORNING.

 

 

DETECTING DECEPTION 

In December our Restaurants Team held a conference call for institutional investors Statement Analysis - Putting Companies Through a Linguistic Polygraph Test with former U.S. Deputy Marshall Mark McClish.

 

Mark McClish is the author of I Know You Are Lying and the creator of the Statement Analysis method. In this brief excerpt Mark explains how to identify signs of deception and dissects an excerpt from HAIN’s Q1 earnings call as an example.

Reading conference call and analyst meeting transcripts is a key part of the analyst’s job. We all use words to define our reality, and our choice of words can be revealing. The premise of Statement Analysis is that a person’s choice of specific words can reveal when there might be an attempt at deception. This Statement Analysis exercise looks exclusively at a company’s written and verbal statements. Using these hidden clues, we can dig deeper into a company’s public pronouncements for signals of potential concerns in a company’s reporting.

 

CARTOON

Oil Plunge!

The Best of This Week From Hedgeye - Oil plunge 12.31.14

Oil prices slumped almost 50% in 2014, set for the biggest annual decline since 2008. "It's flat out ugly for whoever is long inflation expectations in Energy terms," says Hedgeye CEO Keith McCullough.

 

 

The Sound of Deflation

The Best of This Week From Hedgeye - Deflation balloon 12.29.14

That sound you're hearing around the globe? Deflation.

 

CHART

Real- Time Alerts: Historical Closed Position Return Distribution 

The Best of This Week From Hedgeye - COD RTA 12.30.14

 

The brief excerpt below is from Tuesday's Morning Newsletter written by Hedgeye U.S. macro analyst Christian Drake.

 

We’ve #TimeStamped 2,969 signals in Real-Time Alerts since 2008.  The historical data is there to see and download on our website and in the Chart of the Day below we show the return distribution across RTA’s 6+ year history.  In our attempt to further the evolution towards an investing meritocracy, we feel we’ve built a better Risk Management mousetrap. 

 

As always, you are free to disagree.  We happily accept and consider all (thoughtful) criticism as we work to continually evolve the process.  

 

 

2014 Outperformance in Low Beta: #PAIN

The Best of This Week From Hedgeye - COD low beta 1.2.15

 

This is a brief excerpt from Friday's Morning Newsletter by Hedgeye CEO Keith McCullough.

 

*  *  *  *  *  *  *

If you’re a U.S. equity only investor, the lower-volatility + higher-absolute-and-relative returns came in mostly slow-growth, lower-beta, #YieldChasing sectors:

  1. Number 1 (within the Top 9 S&P Sectors) for 2014 was Utilities (XLU) at +24.3% YTD
  2. Number 2 for 2014 was Healthcare (XLV) at +23.3% YTD

Yep, instead of being long #deflation (Energy stocks, XLE, DOWN -10.6% YTD), these slower-growth, lower-volatility sectors had similar returns to what? Yep – the Long Bond.

 

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Cartoon of the Day: Ode to Mario

Cartoon of the Day: Ode to Mario - Draghi cartoon 01 02 2015

Mario, Mario, Quite Contrary-O

How Does Your QE Go?


HOLX: Adding Hologic to Investing Ideas

Takeaway: We are adding Hologic to Investing Ideas.

Note: The excerpt below was written earlier this morning by Hedgeye CEO Keith McCullough. Stay tuned for further updates from our Healthcare sector head Tom Tobin.

HOLX: Adding Hologic to Investing Ideas - Hologic Logo RGB

Looking for names that my Research Team likes that are:

 

1. Bullish intermediate-term TREND duration

2. Immediate-term TRADE oversold within their bullish TREND

 

Hologic is a name Tom Tobin has liked for a while, but he's also becoming the axe in the name with regards to monitoring the company's key revenue factors using his proprietary process.

 

In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of US facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November.

 

We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015.

 

KM


THE HEDGEYE MACRO PLAYBOOK

Takeaway: You can't afford to miss our summary of consensus across the investment community as it relates to formulating your big macro bets in 2015.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. Health Care Select Sector SPDR Fund (XLV)
  2. Consumer Staples Select Sector SPDR Fund (XLP)
  3. iShares National AMT-Free Muni Bond ETF (MUB)
  4. Vanguard Extended Duration Treasury ETF (EDV)
  5. iShares 20+ Year Treasury Bond ETF (TLT)

Short Ideas/Underweight Recommendations

  1. iShares Russell 2000 ETF (IWM)
  2. SPDR S&P Regional Banking ETF (KRE)
  3. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
  4. iShares MSCI European Monetary Union ETF (EZU)
  5. iShares MSCI France ETF (EWQ)

 

QUANT SIGNALS & RESEARCH CONTEXT

What Will the Big Macro Surprises Be in 2015?: In our 12/31 Early Look note, which was penned by my colleague Daryl Jones, we discussed how investors tend to overweight the recent past in their predictions of outcomes over longer durations. We’re all guilty of it and, quite frankly, it would be nearly impossible not to based on how our brains are wired to interpret and analyze signals, according to Dr. Daniel Kahneman, the world’s foremost authority on behavioral heuristics.

 

So what does Bloomberg consensus think will happen in 2015?

 

Looking to the U.S. economy:

 

  • GROWTH: real GDP growth will accelerate to +3% from an estimated +2.3% in 2014
  • INFLATION: headline CPI will decelerate to +1.5% from an estimated +1.7% in 2014
  • POLICY: the target Fed Funds Rate will back up to ~1% by EOY ’15 from 0-0.25% currently; the federal budget deficit will narrow further to 2.6% of GDP from an estimated 2.9% in 2014
  • CURRENCY: the U.S. Dollar Index will end the year at 92.42 from 90.99 currently
  • RATES: the 10Y U.S. Treasury yield will the year at 3.06% from 2.12% currently

 

Looking to the global economy:

 

  • GROWTH: world real GDP growth will accelerate to +2.8% from an estimated +2.4% in 2014
  • INFLATION: world headline CPI will decelerate to +2.4% from an estimated +2.3% in 2014
  • POLICY: the aggregated global sovereign budget deficit will narrow slightly to 2.6% of GDP from an estimated 2.7% in 2014

 

Looking to the Eurozone economy:

 

  • GROWTH: real GDP growth will accelerate to +1.1% from an estimated +0.8% in 2014
  • INFLATION: headline CPI will accelerate to +0.6% from an estimated +0.5% in 2014
  • POLICY: the ECB’s benchmark interest rate will remain on hold and the aggregated sovereign budget deficit will narrow slightly to 2.4% of GDP from an estimated 2.6% in 2014
  • CURRENCY: the Euro will end the year at 1.18 per USD from 1.20 currently
  • RATES: the 10Y German bund yield will end the year at 1.09% from 0.50% currently

 

Looking to the Japanese economy:

 

  • GROWTH: real GDP growth will accelerate to +1% from an estimated +0.3% in 2014
  • INFLATION: headline CPI will decelerate to +1.5% from an estimated +2.8% in 2014
  • POLICY: the BoJ’s benchmark interest rate will remain on hold and the federal budget deficit will narrow materially to 6.8% of GDP from an estimated 8.3% in 2014
  • CURRENCY: the Japanese yen will end the year at 125 per USD from 120.21 currently
  • RATES: the 10Y JGB yield will end the year at 0.55% from 0.33% currently

 

Looking to the Chinese economy:

 

  • GROWTH: real GDP growth will decelerate to +7% from an estimated +7.4% in 2014
  • INFLATION: headline CPI will decelerate to +2% from an estimated +2.1% in 2014
  • POLICY: the PBoC will lower its benchmark 1Y lending rate to 5.2% from 5.6% currently and the central government budget deficit will widen to 2.4% of GDP from an estimated 2.1% in 2014
  • CURRENCY: the Chinese yuan will end the year at 6.09 per USD from 6.21 currently
  • RATES: the 10Y MoF yield will end the year at 3.61% from 3.65% currently

 

Key takeaways from current sell-side consensus:

 

  1. Consensus is forecasting yet another year of “escape velocity” growth expectations for the U.S. economy, which will prompt the Fed to finally begin hiking interest rates.
  2. The Eurozone economy will fare marginally better than last year.
  3. The Japanese economy will fare meaningfully better than last year, prompting/perpetuating fiscal tightening.
  4. The Chinese economy will fare meaningfully worse than last year, prompting continued easing out of the PBoC and State Council.
  5. Interest rates will back up materially across the developed world.
  6. The U.S. dollar will end the year marginally higher vs. the EUR and JPY.

 

We don’t do wire-to-wire annual predictions, but here’s how we currently stand with respect to the aforementioned takeaways (we can and will change our minds throughout the year, as we did nailing the move from #InflationAccelerating in 1H15 to #Quad4 deflation in 2H15):

 

  1. We disagree, sort of. While the U.S. consumer will certainly benefit from #Quad4 deflation over the intermediate-term, we think the U.S. economy is clearly in the latter stages of the business cycle, so projecting any strength beyond 2015 VERY dangerous. The Fed probably stays in “wait-and-see mode” throughout the year. The Fed is likely to appear hawkish alluding to economic growth and the labor market in official FOMC statements and dovish alluding to disinflation in the commentary of regional Fed presidents.
  2. We disagree. ECB QE is a inevitable as it is contentious among European bureaucrats.
  3. We disagree. Bring on QQE expansion and continued fiscal easing in Japan.
  4. We agree wholeheartedly and see material risk of another bubble in the A-Shares.
  5. We disagree wholeheartedly, as long-term Treasury bonds remain one of our top macro bets.
  6. Consensus is not Bullish Enough on the U.S. dollar, as we believe a material move higher is an increasingly probable outcome.

 

Obviously the sell-side forms only one part of the Consensus Macro equation. Consensus on the buy-side, which, as an industry, is becoming increasingly less differentiated from a positioning perspective, can be roughly tracked via the speculative net length of futures and options contracts, which is reported weekly by the CFTC.

 

A positive reading indicates a net LONG position, while a negative reading indicates a net SHORT position. Perhaps more important than the absolute positioning is how the position is tracking over time, as such deltas can indicate the presence of marginal investors crowding into or blowing out of positions. To that tune, the following chart shows the net length of 20 key macro markets, ranking them according to their TTM Z-Scores:

 

THE HEDGEYE MACRO PLAYBOOK - EXTREME SENTIMENT MONITOR

 

Key takeaways from current buy-side consensus:

 

  • The buy-side is heavily net SHORT of long-term Treasuries.
  • The Mexican peso is nearing oversold territory.
  • Large-cap U.S. equities are nearing overbought territory.
  • Recent strength in the USD and Japanese equities should continue over the immediate-term, as neither the yen nor euro are particularly crowded from a net SHORT perspective.

 

From a process perspective, it’s worth noting that we typically begin to fade the Consensus Macro lean whenever a particular index or market’s speculative net length reaches +/- 2 SIGMA. That’s not to say we will automatically adopt a variant view with respect to the intermediate-to-long term, but the immediate-term counter-trend reversals tend to be epic when the market is leaning too heavily in one direction or the other. Fading Beta in our Real-Time Alerts product is one of the things we do best @Hedgeye.

 

All told, we hope this snapshot of consensus is helpful in formulating your opinions on where the best places to source your non-consensus macro bets are in 2015. Consensus is right more often than any of us are paid to admit, but we all know the big money is typically made on the other side of the trade.

 

From the only macro team whose non-consensus forecasts got the direction of interest rates right in both 2013 and 2014, best of luck to you in 2015!

 

***CLICK HERE to download the full TACRM presentation.***

 

TRACKING OUR ACTIVE MACRO THEMES

#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.

 

Early Look: 2015 Predictions (1/2)

 

#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.

 

Moscow, We Have a Problem (12/16)

 

#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.

 

#Bubbles: “Hedge Fund Hotel” Edition (Part II) (12/8)

 

Best of luck out there,

 

DD

 

Darius Dale

Associate: Macro Team

 

About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.          


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.

next