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.
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
2014 full year GDP growth was +2.4%, not 5%. Our call was y/y growth peaked in Q4 of 2013, and it did.
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.
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.
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.
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.
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.
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.
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.
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.
Hedgeye's retail sector analysts have no material update on Restoration Hardware this week.
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ADDITIONAL RESEARCH CONTENT BELOW
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?”
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.
Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.
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.)
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.
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.
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