prev

Investing Ideas Newsletter

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

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 that we added Gold (GLD) this week and removed Yum! Brands (YUM).

 

We also feature two additional pieces of content at the bottom.

Investing Ideas Newsletter      - 34 

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      - GDP cartoon 01.30.2015

2014 full year GDP growth was +2.4%, not 5%. Our call was y/y growth peaked in Q4 of 2013, and it did.

IDEAS UPDATES

GLD

Gold completed its BEARISH to BULLISH TREND REVERSAL and we’re adding it back on the long side for 2015. We sent out our first buy signal in GLD on Tuesday. Keith added to that position in Real-Time Alerts on Thursday ahead of Friday’s GDP print (which missed expectations).

 

TREND DURATION = 3-Months or More

 

*Our real-time alerts product notifies subscribers of the exact time and price we are managing our exposure to our top investing ideas. 

------

Dollar Down, Rates Down = #StrongGold

 

Bad economic data warrants an easier Fed, and Friday’s GDP print did in fact miss q/q annualized:

  • Sequential (q/q) GDP annualized printed +2.6% for Q4 vs. consensus expectations of +3.0%
  • Synching Friday’s print with our internal GROWTH, INFLATION, POLICY model, full-year 2014 GDP printed +2.5% vs. Hedgeye, Central Bank, and consensus forecasts of +2.4%.

March 18th is the next Fed catalyst, and we expect that they’ll announce a reversion from the plan to raise rates in June. The depreciation of the EURO and YEN against the dollar have already moved on their respective catalysts. The Fed has the next move, and we are front-running the foreseeable shift in policy.

 

We like an allocation to gold against our other macro positions and will look to buy on short-term pullbacks within the BULLISH TREND set-up. 

Investing Ideas Newsletter      - 444

HOLX

Hologic finished the week up +3.8% versus down -2.4% for the S&P 500.

 

It's up approximately 14% since we added it to Investing Ideas at the beginning of the year, while the S&P 500 is down -3% year-to-date.

 

HOLX pre-announced a positive F1Q15 during the JPM Healthcare conference earlier this month, but did not update their guidance at the time. This week, the company officially reported earnings and raised guidance above consensus expectations. With this recent guidance raise and positive management commentary, HOLX is very likely heading above $40 sometime in the next 6 to 9 months, with $50 just around the corner. Accelerating revenue and earnings growth, a higher multiple, and earnings power above $2.00 gets us there.

 

We think this will be the first of several beat and raise quarters.

Investing Ideas Newsletter      - c5

Earnings Call Highlights

 

Diagnostics:  The most significant change from the quarter was stability in ThinPrep. Thanks to incremental disclosures the company is providing (positive trends tend to make companies more open) it's now possible to actually see the company's Cytology results, which while down in the US, managed to grow modestly year over year. Our OB/GYN survey has been flagging stability in US Pap trends and we will have the January update next week.  Our model previously anticipated -10% declines over the next 2 years which will now improve to 0%, a massive acceleration and very accretive for the model.

Investing Ideas Newsletter      - c6

M&A: When Hologic bought Cytec and Gen-Probe, they were plugging major holes in their businesses.  In the first case, slowing/declining 2D mammography, in the second, declines in ThinPrep.   While they still have to execute, looking out past peak 3D growth rates likely to occur in 2016/2017 and acting proactively, should be a significant tailwind to the multiple.  In prior work we have found topline growth drives their EV/EBITDA and P/E multiples while debt metrics are largely irrelevent.

 

3D Mammography:  Our estimate for Breast Health was too high coming into the quarter.  We'll be running our update for US facility counts for January this weekend and reviewing the 10K.  We'll refine our estimate and publish the results and update next week.  We still believe consensus Breast Health numbers are too low.  It was clear from the call that HOLX is taking share from GE, which will increase our out year estimates, and placement rates are accelerating, which we should capture in our survey.  How that translates into revenue will be increasingly accurate in our model.  Anecdotes regarding aggressive pricing from GE suggest they are acting out of a position of weakness.  

 

Key to our thesis is 3D adoption, which continues to progress into the fast part of the adoption curve.

Investing Ideas Newsletter      - c7

Transparency:  It's always easier to deliver good news than disappointment, and we welcomed the increased details in HOLX's earnings presentation which provided greater detail.  In this case a clear narrative supported by data will will go a long way to improving investor confidence and the multiple.

Investing Ideas Newsletter      - c8

Debt Leverage:  We hear the complaint, but think its misguided, that HOLX is over-levered.  For such a stable business, with accelerating fundamentals, we think the concern is misguided.  Regardless leverage is heading lower, which should allay those concerns.

Investing Ideas Newsletter      - c9

MDSO

The Hedgeye Healthcare team has no material update this week ahead of Medidata Solutions earnings on Thursday (2/5 pre-market). We reiterate our expectations for the company to beat expectations on both the top and bottom line.

Investing Ideas Newsletter      - mdso

TLT | EDV | XLP | MUB

Editor's note: Our longstanding, non-consensus call on bonds remains the gift that keeps on giving. This January, TLT was up +10% versus the S&P 500 which was down -3%.

 

Per Hedgeye senior macro analyst Darius Dale:

 

Our #Quad414 theme is picking up steam with the deluge of this week's U.S. economic data and remains core to alpha generation in 1H15.

 

Click here to read the full report. 

RH 

Hedgeye's retail sector analysts have no material update on Restoration Hardware this week.

 

 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

Mcdonald's: a new beginning

The first email we received from a client following the news of Thompson’s departure yesterday posed a simple question: “Should I chase MCD tomorrow?”

Investing Ideas Newsletter      - 70

Riding Strong Through the Actual and arithmetic blizzard of crummy macro data

Whether housing can remain an insular island of intermediate term strength against the burgeoning blizzard of global disinflationary pressure and decelerating domestic Macro data for December is the relevant question.

Investing Ideas Newsletter      - bz


The Week Ahead

The Economic Data calendar for the week of the 2nd of February through the 6th of February is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.


Click on image to enlarge.

 

The Week Ahead - Week Ahead


Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 divergences

Commodities: Weekly Quant - chart2 deltas

Commodities: Weekly Quant - chart3 correls

Commodities: Weekly Quant - chart4 volume

Commodities: Weekly Quant - chart5 open interest

Commodities: Weekly Quant - chart6 implied volatility

Commodities: Weekly Quant - chart7 sentiment

 

Ben Ryan 

Analyst


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

The Week Ahead

The Economic Data calendar for the week of the 2nd of February through the 6th of February is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.

 

The Week Ahead - 01.30.15 Week Ahead


OIL RIG COUNT: MORE DAMAGE

Since moving into #QUAD 4 in September, we’ve tried to keep our audience on top of the deflationary headwinds that exist when growth and inflation are decelerating at the same time. Riding our shorts in the energy (and the commodity space) from both a company specific and asset class perspective was one of our bigger calls in Q4.

 

To be clear, we believe the side effects of this trade will continue to play-out (#QUAD4 Confirmation from Darius Dale) .  Included below are links to previous notes throughout Q4 in chronological order as we navigated through the sell-off:

 

October 16th: OIL HAS FURTHER DOWNSIDE BEFORE THE BOTTOM

 

October 23rd: OPEC's NEXT MOVE

 

October 28th: REAL COST OF SHALE PRODUCTION

 

November 26th: OPEC CUT? NOPE.    

 

With our call being what it is currently, a sharp decline in rig count, major cap-ex cuts, and a blowout in high-yield energy spreads will all have a meaningful impact on the domestic production outlook. The next big opportunity in the energy space is logically on the long-side, but it may not be until:

 

1) Oil prices get cut by another 10-20% under the weight of #QUAD4 deflation

 

2) Realized and thus the price of forward looking volatility (the two are very tightly correlated. What has happened in the recent past will certainly happen moving forward!) compresses. 

 

Regarding the second point above, this afternoon’s weekly release of the Baker Hughes Rig count provided another incremental data point that would logically provide price support. The number was largely expected, aggregate production has not yet peaked, and global demand is showing tangible signs of slowing even with the existence of stockpiling at the commercial and government (China) level.

Inventory data from the DOE on Wednesday showed that commercial inventories reached the 400MM barrel mark for the first time since 1982:

  • DOE U.S. Crude Inventories +8874K vs. +10071K prior (+4000K est.)

 

OIL RIG COUNT: MORE DAMAGE - chart1 levels

 

We yield to the fact that the modern oil market may be more positioned to deal with supply demand shocks than it was in the past. An increase in storage and inventory capacity globally creates a cushion should supply begin to come off-line. This versatility implies a “U-shaped recovery” as many sell-side analysts have pinned now that prices have retreated. While this may be true, our process is top-down oriented and anchors on daily changes in market signals and economic data. As a macro team, we try to get in front of the price news with the belief that fundamental supply/demand dynamics will complement what the market and economic data is signaling.      

Whether the market expected the sharp decline in rig count today or not, the behavioral, volatility-inducing ripple effects encompassing this huge move in oil pushed WTI crude oil up as much as +8% this afternoon. We reference volatility constantly in our risk management process, and getting the market’s expectation right is key to pegging real exhaustion signals on both the long and short side of intraday moves. When this input is higher when volatility is higher, today’s intraday moved needed to be higher for the “short-oil” signal.  

 

Our key upside risk management levels in WTI remain intact post-rig report:

  • Immediate-term TRADE resistance: $50.35
  • Intermediate-Term TREND resistance: $64.69

With that being said, the decline in rig count is meaningful for the domestic production outlook, (REAL SUPPLY/DEMAND) and the decline in rigs has been drastic in January. This is BULLISH for prices fundamentally, but as mentioned above we believe big macro has more to say about global deflation near-term.  

 

OIL RIG COUNT: MORE DAMAGE - chart2 rig table

 

As outlined in a note after the release, OIL RIG COUNT: EARLY LOOK AT THE DAMAGE, the timeline between oil’s rout and the ensuing rig count reduction looks very similar to 2008:

 

“While the world was much different in 2008, E&P companies are very sensitive to oil prices under any circumstance. WTI declined 77% from July 3rd , 2008 to December 19th 2008. The oil rig count topped almost exactly 4-months after the July highs on November 7th , 2008 before being cut in half by June of 2009 (6-months after oil bottomed in December).”

 

We recognize that oil prices are now pressuring producers CURRENTLY, but we will continue to yield to our-top down contextualization of daily data to front-run the big macro turns. WE REMAIN BEARISH ON THE ENERGY SPACE as an asset class.

 

Please reach out with any comments or questions.

 

Ben Ryan

Analyst


#Quad414 Confirmation

Takeaway: Our #Quad414 theme is picking up steam with the deluge of this week's U.S. economic data and remains core to alpha generation in 1H15.

Per our 1Q14 Macro Themes presentation:

 

After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.”

 

Focusing on the first part of that outlook, this week we received a fair amount of data that confirmed our forecasted #Quad4 setup in the fourth quarter of 2014, none larger than today’s Q4 GDP release. Key highlights:

 

  • Real GDP growth decelerated -20bps to +2.5% YoY
  • The GDP deflator decelerated -40bps to +1.2% YoY
  • “C” accelerated +10bps to +2.8% YoY, though this preliminary estimate is likely to get revised down if/when DEC PCE data is reported, assuming the DEC data tracks the deceleration in Retail Sales growth
  • “I” was mixed with Nonresidential Fixed Investment growth decelerating -100bps to +4.9% YoY as Residential Fixed Investment growth accelerated +330bps to +2.6% YoY
  • Inventories contributed a sizeable +80bps to the headline QoQ SAAR growth rate of +2.6%, which itself decelerated from +5% in 3Q14
  • “G” accelerated +40bps to +0.7% YoY
  • “Ex” decelerated -180bps to +2% YoY
  • “Im” accelerated +190bps to +5.3% YoY

 

#Quad414 Confirmation - UNITED STATES

 

#Quad414 Confirmation - RETAIL SALES

 

#Quad414 Confirmation - REAL PCE

 

Second derivative trends across a variety of key high-frequency economic indicators imply much more weakness in the domestic economy than the preliminary -20bps deceleration in Real GDP growth suggests:

 

For example, Industrial Production growth is slowing on a sequential basis while CapEx growth is slowing on a trending basis:

 

#Quad414 Confirmation - INDUSTRIAL PRODUCTION

 

#Quad414 Confirmation - CAPITAL GOODS

 

Export growth slowing on both a sequential and trending basis is clearly weighing on both reported and prospective Corporate Earnings growth:

 

#Quad414 Confirmation - EXPORTS

 

#Quad414 Confirmation - Russell 3000 Earnings Season

 

Slowing Corporate Earnings growth on both a reported and prospective basis is perpetuating a deceleration in Employment growth:

 

#Quad414 Confirmation - PAYROLLS

 

#Quad414 Confirmation - Energy State Claims

 

Lastly, Import growth slowing on both a sequential and trending basis and is continuing to weigh on reported and prospective Inflation:

 

#Quad414 Confirmation - IMPORTS

 

#Quad414 Confirmation - CPI

 

#Quad414 Confirmation - CORE CPI

 

Net-net-net, the U.S. remains a +/- 2% economy. All of the conjecture surrounding "+3-5% growth" is horribly misguided -- at least according to the data.

 

Moreover, everywhere you look across the compendium of high and low-frequency economic data, #Quad4 is ringing true. According to our empirical studies, this is precisely why interest rates continue to make new lows and bond proxies continue to outperform within the domestic equity market.

 

All it not dour, however. Specifically, the probability of a #Quad1 setup in the first quarter of 2015 is high and rising with the release of the first batch of JAN high-frequency economic data.

 

While late-cycle manufacturing continued to show weakness per the Markit PMI data, services sector growth posted a solid sequential acceleration, which led the composite index higher:

 

#Quad414 Confirmation - MANUFACTURING PMI

 

#Quad414 Confirmation - SERVICES PMI

 

#Quad414 Confirmation - COMPOSITE PMI

 

This dynamic is supported by meaningful sequential and trending accelerations in the Conference Board’s Consumer Confidence Index and in the NFIB Small Business Confidence Index:

 

#Quad414 Confirmation - CONSUMER CONFIDENCE

 

#Quad414 Confirmation - BUSINESS CONFIDENCE

 

It’s clear that “Main Street” America favors the trend of reported disinflation and layering their confidence and activity on top of an extremely easy base effect for Q1 GDP is likely to produce a 2-4 month trend of #GrowthAccelerating data in the U.S.

 

#Quad414 Confirmation - CONSUMER SQUEEZE INDEX

 

#Quad414 Confirmation - GDP COMPS

 

That said, however, the probability that we tip right back into #Quad4 for the Q2 and potentially for Q3 (depending on how the U.S. dollar trades from here) is equally elevated.

 

Worst of all, by then the domestic labor market could be showing a clear trend of deterioration that may not inflect until we’re the other side of the next U.S. recession.

 

#Quad414 Confirmation - JOBLESS CLAIMS

 

Good luck risk managing this likely turn in the domestic macro narrative. We genuinely mean that – it won’t be easy! Let us know how we can help.

 

Enjoy your weekend and Go Hawks!

 

DD

 

Darius Dale

Associate: Macro Team


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.

next