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.
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.
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.
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.
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:
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:
Contrast that with the -0.3% YTD return for the S&P 500.
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.
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 remains high in spite of the new home market being the one laggard in the broader housing mosaic.
Defensive categories including taxable bonds, fixed income ETFs, and the Healthcare Sector SPDR did best in the 2nd week of the year.
WATCH and INTERACT with Hedgeye CEO Keith McCullough and Hedgeye's team of award-winning analysts as they discuss the stock market, economy and more all in real-time on HedgeyeTV. They will answer your questions live via email, phone, Twitter and chat throughout the entire trading day.
Special appearances by market experts, including best-selling "Currency Wars" author James Rickards, money manager Michael Holland, Jones Trading chief market strategist Michael O'Rourke and many more.
WHY ARE WE DOING THIS?
We want you to have the opportunity to ask your questions directly to our team. There's simply nowhere else that you can get direct access like this.
Don't miss out on other surprises and giveaways (including a chance to win a one-year FREE subscription to one of our individual investment products)!
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.
"Get used to nothing," Hedgeye CEO Keith McCullough wrote in today's Morning Newsletter. "Unless it’s different this time, I don’t see Mario Draghi delivering inflation or real economic growth."
In today's edition of RTA Live, Hedgeye CEO Keith McCullough ran through the Real-Time Alerts positions as of 10:30AM ET and answers subscriber questions on housing, copper, the Canadian dollar, and more.
If you haven't done so already, sign up for Hedgeye's Market Marathon on January 27. Interact with Keith and his team of analysts as they discuss the stock market, economy and more all in real-time. They will answer your questions live via email, phone, Twitter and chat throughout the entire trading day. Plus, we’ll have special guests in our Stamford studio including best-selling “Currency Wars” author James Rickards, money manager Michael Holland, Jones Trading chief market strategist Michael O’Rourke and many others.
TICKERS: MPEL, GTECH, RCL, CCL, 0027.HK
Galaxy Phase 2 press release–
Takeaway: Rumors of a September opening debunked. How many tables will they receive remains the question?
LVS- Sheldon Adelson will replace Edward Tracy as Sands China's CEO on March 6. He will remain as chairman following the appointment.
Also, Sands China announced an interim dividend of HKD0.99 (US$0.13) per share, a 13.8% YoY.
Takeaway: Raising the dividend in a slumping demand environment is surprising.
SGMS – Peppermill announced that it has selected an array of Bally Systems solutions to replace existing slot systems at five Nevada properties. Included in the agreement is Bally’s new display management, and it’s promotional kiosk.
HST - Announces major transformational repositioning plan for the Denver Marriott Tech Center Hotel. Beginning in late 2015, the hotel will undergo an extensive multi-million dollar renovation to completely modernize every aspect of the hotel. This renovation includes all 628-rooms of the two towers and will reconfigure and enhance the entrance, lobby, restaurants, and 45,000 square feet of event space.
HOT- expects another year of accelerated growth in North America, where it will surpass the 600th hotel milestone in the next two months. In 2014, Starwood opened 23 new hotels and signed 64 new hotel deals in North America, a 23% signings increase over the previous year.
“North America remains one of Starwood’s most important global markets accounting for approximately 50% of our global portfolio and a third of our hotel openings in 2014, and we expect strong growth trends to continue this year,” said Simon Turner, President of Global Development for HOT. “The ongoing economic recovery and increased availability of financing are creating favorable conditions, contributing to strong growth across all three segments of our business and a notable surge in demand for new-build hotels, which comprised 81% of our North America signings in 2014.”
Takeaway: North America pipeline is strong for 2015.
Vietnam - Have benefited from Macau VIP market downturn. The Grand Ho Tram Strip’s Chris Wieners said that the majority of the resort’s customers are from mainland China and Korea. “They also see a major opportunity with the current downturn in the VIP market in Macau: the opportunity to start growing that market in Vietnam. So a big target for them is to start looking at China, as well as the junket organizations and the VIP market here in Macau, and attract them to Ho Tram,”
No smoking in New Orleans – city council has unanimously voted to ban smoking in Casinos, Bars and Restaurants. The ban will apply to Caesar’s Harrah’s New Orleans and Churchill Downs’ Fair Grounds racino. Pinnacle’s Boomtown New Orleans and Boyd’s Treasure Chest would be unaffected as they are in NOLA’s suburbs. Businesses will have 90 days to comply with the ban, which includes e-cigarettes.
Takeaway: Negative for New Orleans casinos (CZR/CHDN).
AC – Airlines are being offered financial incentives to fly into Atlantic City International Airport, the Press of Atlantic City reported. Airlines are being offered breaks on landing fees, fuel sales and airport rental fees and could also get up to $60,000 in marketing support for domestic flights, and $120,000 for international flights.
LV - First quarter air capacity is up about 4.2% from last year with international seats up 17.5% and domestic 3.2%
Powerball - Powerball lottery ticket sales collapsed by some 40% in the second half of 2014 from the same period a year earlier in the 44 states, plus the District of Columbia, which participate in the sweepstakes. There hasn’t been a Powerball jackpot higher than $257 million in almost a year. In the 15 months before February 2014, there were five jackpots of at least $400 million.
Takeaway: Evidence that the US lottery industry is maturing. These Powerball sales are awful.
Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.
Takeaway: European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.
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