Below are Hedgeye analysts’ latest updates on our eight current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.
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.
- "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
IDEAS UPDATES
holx
Hologic reports next Wednesday and we’ll be listening for comments about the substance of their positive pre-announced results. We suspect there was better growth in 3D placements and related revenue than the total Breast Health revenue number suggests, but we’ll have to wait to hear what they say on the call (MRI Divestiture, 2D Declines) and what they disclose in their 10-K filing with the SEC, to have a complete view.
We spoke to an institutional investor earlier this week after pitching HOLX to them last quarter. He was reluctant to “buy it up here” which means buy HOLX after a rally, which we agree is an emotionally difficult thing to do. There are lots of easy things that make a good stock decision, but worrying about where the stock was 3 months ago, should not be one of them.
Looking ahead, the fundamental turn in the company is indeed getting priced into the shares near $30 and yes that is a long way from $20 where we started with HOLX in April 2014. But we don’t think “up here” reflects silly optimism. For example, the sellside (who typically chases HOLX after the price has risen) 45% of them still rate the stock a HOLD and 9% think it’s a SELL(SHORT), only modestly better than sentiment lows we saw in mid-2014. The sellside rating doesn’t seem to be in the area code of “up here” and has a long way to go before it gets there.
MDSO
Medidata Solutions announced they will report Q4 2014 earnings before the market open on Thursday, February 5th, 2015. We are tracking several key drivers that say they beat estimates and the stock goes higher as a result. Short interest has been increasing, and is near a multi-year high of 12% heading into earnings.
After taking down guidance last quarter (Q3 2014) and missing expectations for several quarters before that, this upcoming earnings event is critical, particularly for management’s credibility. Historically, high short interest has had a positive correlation to the next 12-month excess return of the stock. In other words, shorts are typically wrong.
TLT | EDV | XLP | MUB
Bonds Rally Strong to Conclude a Volatile Week
From an intra-day low of 1.7642% on Tuesday to an intra-day high of 1.9398% on Thursday to today’s close of 1.7840%, the 10yr U.S. Treasury yield has had a volatile week.
Obviously key event of the week was the ECB announcing QE (CLICK HERE for our detailed recap). Perversely, Mario Draghi’s Sisyphean fight to produce inflation in the Eurozone is actually perpetuating global deflationary forces that continue to support weigh on U.S. interest rates.
We can explain this dynamic in three simple tweets:
- https://twitter.com/HedgeyeDDale/status/558272104605708288
- https://twitter.com/HedgeyeDDale/status/558272498383736832
- https://twitter.com/HedgeyeDDale/status/558273095312891904
Rarely is ex post market behavior so tightly correlated with an ex ante hypothesis, but that continues to be the case as we outlined back in early August.
Refer to slides 28-33 of the following presentation for the crux of our short thesis on the Euro, which is continues to be core to our bullish bias on the U.S. dollar and our bearish bias on commodity prices: http://docs.hedgeye.com/HE_GlobalFinancialMarkets_8.5.14.pdf. From that same presentation:
All told, we thank you for sticking with us and believing in our research and risk management processes, which continue to show positive divergence amid the universe of investment advisors. That decision has certainly gotten you paid on the long side of TLT, EDV, MUB and XLP.
Refreshed YTD performance:
- TLT: +7.0%
- EDV: +9.8%
- MUB: +1.2%
- XLP: +2.4%
Contrast that with the -0.3% YTD return for the S&P 500.
RH
An astute Investing Ideas subscriber tweeted us earlier this week with the following question: "How can you be comfortable with the fact there is no free cash flow generation at RH?"
Good question. And simple answer.
Restoration Hardware is the growthiest of retailers. As much as the landlords are funding up to 75% of construction costs, the fact is that growing its store base costs money. So does expanding into new categories, such as kitchens, which launched this Spring.
Thus far, RH has proven to be an extremely good steward of shareholder capital. New stores have a payoff period as short as six months. That's unheard of for most retailers -- and most capital projects for any company in any industry.
With that as a backdrop, we think that RH has earned the right to spend. We'll monitor them every step of the way. But from where we sit, we'd be worried if the company STOPPED spending on all these capital projects, as that would jeopardize our model which gets RH at $5bn in sales by 2018 vs. $1.8 Bn today on top of a 700bp increase in ebit margins.
Thanks for the question. If you tweet them (and identify yourself as an Investing Idea subscriber) we'll be happy to address your questions every time, without fail.
YUM
There are no material updates to our high-conviction bullish thesis on Yum! Brands. For the record, YUM is up ~7.5% over the past three months, outperforming both the S&P 500 index and Consumer Discretionary (XLY) indices. A few quick-service companies have pre-announced strong 4Q14 results, which should bode well for YUM’s domestic business.
However, we’re taking a more cautious stance on China, which could suffer from a slower than expected recovery. We’ll have more detail on each region when the company reports in two weeks.
We remain attracted to the intrinsic value of the company and continue to believe it offers a compelling investment for long-term oriented investors.
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ADDITIONAL RESEARCH CONTENT BELOW
builder confidence still high despite recent weakness
Builder confidence remains high in spite of the new home market being the one laggard in the broader housing mosaic.
ici fund flow survey: the best offense is a good defense
Defensive categories including taxable bonds, fixed income ETFs, and the Healthcare Sector SPDR did best in the 2nd week of the year.
