Takeaway: Current Investing Ideas: EDV, HOLX, MDSO, MUB, RH, TLT, XLP and YUM.
Below are Hedgeye analysts’ latest updates on our eight current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.
Please note we added Medidata Solutions MDSO earlier this week. Our Healthcare sector team presents a granular, deep-dive distillation into our bullish thesis below.
We also feature two additional pieces of content at the bottom.
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.
Down from its peak in March 2014 when all things cloud were working, MDSO's stock price has been cut in half and the short interest has doubled. When they report in early February we think they beat numbers and the shorts get squeezed.
Click to enlarge.
Business Model: Cloud-based clinical trial software
History: Rise and Fall
Consensus: Sellside bullish, shorts tend to be wrong
1. Currently the stock screens long based on performance, earnings revisions and short interest. 50% peak-to-trough stock price decline driven by missed expectations (deal timing), guidance adjustment and fraudulent wire transfer*. We view recent weakness as buying opportunity given strength in leading indicators.
2. Macro Monitor identified the following series as two quarter leading indicators of y/y ROC in Application Services Revenue:
3. $1.5 bill annual revenue opportunity based on current product mix ($409 mill ’15 Consensus Sales). Long-term model utilizing s-curve methodology tracking 50% market share based on 4,000 potential customers. Significant cross-sell opportunity with 12 products available, average product per customer (intensity) 2.4.
Combined, these key drivers point to a material acceleration in application services revenue through 1Q15 at a time when consensus sales and earnings estimates have been reduced.
*Fraud targeted certain mid-level employees in their finance department resulting in the transfer of $4.8 mill to a rogue overseas account. No customer data was involved in the matter and the company’s systems were not impacted or compromised. Management has reviewed internal controls and processes and implemented additional procedures to prevent future incidents. (Source: Q3 Prepared Remarks)
Figure 1: NTM EV/Sales Valuation Table
Bonds, Bonds, Bonds, Bonds, Bonds!
Amid a mixed week of domestic economic data, our slow-growth, yield-chasing trade of long TLT, EDV, MUB and XLP latched on the trend of #GrowthSlowing data throughout the fourth quarter:
If the DEC Markit and ISM Composite PMI data are any indication, the preponderance of DEC high-frequency growth data will continue to slow as we progress throughout the month of January:
If the DEC Average Hourly Earnings data from Friday’s Jobs Report is any indication, the trend of reported disinflation will continue when we get the DEC CPI data next Friday:
When the 2nd derivatives of real GDP and headline CPI are concurrently negative, the marginal investor is predisposed to allocate assets to the long bond and to equities with defensive, bond-like characteristics.
Fortuitously for you, you’re already positioned that way!
Here’s a look at the growth algorithm for Restoration Hardware going forward.
1) Square Footage Growth: The company is in the beginning stages of transforming its existing 10,000 square foot Legacy Store portfolio to the 45,000+ square foot Design Gallery concepts. Currently the company has 7 of these properties in LA, Houston, Scottsdale, Indianapolis, Boston, Atlanta, and Greenwich. Over the next 5 years an incremental 20+ locations will be added and square footage will grow from 550K at the end of FY2013 to 1550K at the end on 2018.
2) Revenue: Our model calls for mid-20’s sales growth over the next 4 years as the company finally has the real estate to showcase its diversified category portfolio. The current Legacy stores show about 10%, but the new Full Line Design Galleries (Atlanta) houses closer to 70%. The proof of concept from the existing 7 design gallery doors have shown that new categories when presented at retail experience a 50%-150% lift across channels (both retail and DTC). That’s a big opportunity for RH as it builds out its real estate portfolio.
3) Margins: Over the duration of our model we have operating margins going from high single digits to mid-teens. The main driver of that is occupancy leverage. As the company builds these new bigger stores it is taking square footage up in each market by 6x to 8x, but rent expense only increases by 30%-50%. Meaning that on average new square footage comes in at about 25% of the cost of Legacy Store square footage. Perhaps the best example of that is the Denver market where selling square footage will go from 7,500 sq. ft. to 45,500, with rent expense going from $1.3mm to $2.0mm. And this deal isn’t a one off. Over time occupancy will come down from low double digits to mid-single digits. That will be a big tailwind to margins.
YUM is a stock that continues to trade at a significant discount to its intrinsic value, making it one of our favorite long-term buys in the restaurant space. The China recovery may be slightly slower than anticipated as management works hard to regain consumer trust there, but the recent industry-wide acceleration in U.S. sales should be enough to offset any concerns. If the recovery fails to materialize at all, management will be pressured to de-risk the business by spinning off a piece of China.
We wouldn’t be surprised to wake up one day to news of a prominent activist buying up shares of YUM. There’s too much value here to ignore and the stock’s multi-year underperformance is not going unnoticed. Sell-side sentiment is bombed out enough to provoke several upgrades on the slightest hint of good news, and the buy-side knows better than to short a company with such upside. Learn to ignore the day-to-day volatility and prepare yourselves to own this stock for the long haul.
3D TRACKER UPDATE DECEMBER 21, 2014
Our Healthcare team updated our count (proprietary process) of US facilities currently offering 3D Tomosynthesis. December placements are signalling a break-outquarter 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.
The number of new facilities is accelerating and coming up against an easy comparison (December 2013). The key data in the table below is the 146 new facilities during F1Q15 versus 49 a year ago, or a ~+300% increase. Consensus is modelling 4.7% growth for Breast Health in F1Q15 while our model is producing segment growth well into the teens.
Results of our December OB/GYN show rate of decline in PAP volume continues to moderate. 48% of survey respondents indicate pap testing on a 3-year basis, with an annual expected rate of decline of -12% to reach 100% compliance. This rate of decline translates into 2.6 years before total compliance is reached.
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ADDITIONAL RESEARCH CONTENT BELOW
A rig today isn’t quite the same as a rig in the late 1970s, but the trend should be clear.
2014 was best for international stock funds and domestic equity ETFs. Money funds also rallied late with +$124 billion in the last 11 weeks
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.
Takeaway: An earlier Wave may signal a longer period of promotional activity
CALL TO ACTION
Wave Season promotions began earlier than usual for many of the operators. Given the difficult 2014 environment in the Caribbean, we’re not surprised. The early promoters seem to be the relatively struggling brands. 2015 bookings curve could be pushed out a little bit at the expense of lower pricing and promos.
Please see our detailed note:
Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
Gabelli Unplugged: Finding Hidden Value, Secrets to Long-Term Success and Why the Knicks Will Win
Billionaire value investor Mario Gabelli of Gamco Investors sat down with Hedgeye CEO Keith McCullough in a granular, wide-ranging “Real Conversations” interview to discuss his investment strategy, process and where he sees opportunity right now.
Hedgeye Morning Macro Call with CEO Keith McCullough: Crystal Ballers
On Tuesday’s institutional Macro Call, Keith discusses the importance of having a daily process rather than relying on a crystal ball or moving "monkey" averages.
Keith highlights the great run in bonds, how ugly things really are in Europe and the epic down move in commodities.
***This is a complimentary peek behind-the-macro-scenes of our daily Morning Macro Call for institutional subscribers.***
"Draghi Has No Plan": McCullough Talks Europe, Japan, and U.S. Dollar
In this excerpt from Wednesday’s Morning Macro Call, Keith answers questions about today’s $SPX trading ranges and describes the different durations.
Keith also discusses the likelihood of a dovish Fed and what impact that will have on the three main currency players (Yen, USD and Euro).
Subscribe to Hedgeye's Daily Trading Ranges product to receive Keith's proprietary ranges for the S&P 500, U.S. Dollar, Euro, and more every morning before the market opens.
McCullough: One Thing That Could Trigger a Recession
In this excerpt from Monday’s Real-Time Alerts Live show, Hedgeye CEO Keith McCullough responds to a subscriber’s question about whether a U.S. recession is coming.
CLICK HERE to subscribe to Real-Time Alerts. With your subscription you'll receive all of Keith's #timestamped signals sent right to your inbox, as well as full access to this and all other RTA Live episodes.
IT'S ALL GREEK TO ME
Greece's crumbling economy and its potential impact on the EU is roiling global markets. Again.
HITTING THE SLOPE
The yield on the 10-year U.S. Treasury fell under 2% to its lowest level since May 2013. On a related note, yes... Hedgeye's macro team remains long TLT.
RIDING #QUAD4 (UNTIL THE DATA CHANGES)
It’s been years since we’ve seen so many great long and short ideas across the Global Macro universe. At 1PM EST Thursday, our macro team led by CEO Keith McCullough reviewed our Global Macro Themes for Q1 of 2015.
WHAT MY MACRO CRYSTAL BALL SAYS ABOUT THE RUSSELL | $IWM
Editor's note: This is an excerpt from Tuesday's Morning Newsletter by CEO Keith McCullough.
The other thing crystal ball is telling me this AM is don’t short the Russell 2000 today. #Pardon? Yes. You heard it from whatever this transparent ball is that I am rubbing this morning first! Do not short the IWM because:
WILL THE 10-YEAR TREASURY YIELD GO BELOW 1.75% AT ANY POINT THIS YEAR?
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.