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Keith's Macro Notebook 2/13: USD | Oil | Europe

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


Elevating Some Shorts

We’ve been hesitant to add to our list of shorts due to the significant uptick in industry sales trends.  We have a long list of stocks we don’t like but, in this environment, timing is critical and we wanted to get past 4Q earnings prints given the easy comparisons.

 

However, after hearing from PNRA and CAKE, we feel it is prudent to short companies that we believe have broken business models.  It’s become evident that the improvement in sales trends will not be enough to mask the structural issues that some companies face.  In addition, labor costs are increasing across the industry and we believe CAKE made it very clear that this will be a significant headwind for the entire restaurant industry.

 

With that being said, we are adding PNRA, DFRG, CHUY, and NDLS to our Investment Ideas list as shorts.

 

Elevating Some Shorts - 1

 

PNRA: This may look like a reactive move but, given the release and subsequent earnings call, we still believe there is considerable downside to the name.  After testing Panera 2.0 for nearly two years, it’s unclear that this is the right strategic move for the company to make.  Importantly, they are not putting all of their resources behind the effort, as they’ve accelerated new unit openings over the same time.  The accelerated growth rate and accompanying inefficiency is adding pressure to the P&L.  We believe Panera will earn $6.00 at best in 2015 and not much more in 2016.

 

DFRG: Del Frisco’s found itself on our Short List for a stint in mid-2014 as we found street estimates to be far too aggressive and refused to credit the Grille as being a viable growth concept.  Since that time, it’s become increasingly clear to us that 1) Sullivan’s can’t grow 2) the Grille isn’t ready to grow (and may never be a viable growth vehicle) and 3) the Double Eagle Steakhouse can only grow at a rate of one restaurant per year.  Consensus is looking for 17% and 26% earnings growth in 2015 and 2016, respectively, after a flattish 2014.  There’s no way this happens – and hopefully the street will realize this sooner rather than later.  This stock could get cut in half this year and, for that, it’s found its way back onto the Short List.

 

Black Book: CLICK HERE 

 

CHUY: Akin to Del Frisco’s, Chuy’s spent some time on our Short List last year and is moving back to this familiar spot for 2015.  If you recall, Chuy’s scaled back expectations for new unit economics at the ICR conference in January, as it decreased AUV and cash-on-cash return targets for its restaurants (down from $4.2mm and 40%, respectively, to $3.75mm and 30%).  Coincidentally, this comes at a time when the company is attempting to grow outside of its core market.  Chuy’s classes of 2012-2014 stores in immature markets have been ~50% less profitable than those in its mature market, but management insists this is a short-term phenomenon and will be corrected by its backfilling strategy.

 

Chuy’s development strategy, in which it is targeting long-term annual restaurant growth of 20%, calls for 1) the identification and pursuit of development in major markets and 2) “backfilling” smaller existing markets to build brand awareness.  If you are long this stock, you are essentially betting that this expansion plan into new markets will go smoothly and that immature markets will mature well.  That’s not a bet we’re willing to make and the street’s estimates, particularly for 2016 seem unconscionably high.

 

Black Book: CLICK HERE

 

NDLS: While Noodles is an intriguing, proven concept with an experienced management team, its first full-year as a publicly traded company was one to forget.  Management’s 2014 guidance was miserably off-target and this year’s guidance is similarly unsettling.  In 2015, Noodle’s expects to deliver:

  • 12-14% unit growth
  • 2.5-4% same-store sales
  • ~25% earnings growth (consensus at 27%)

To be clear, the chances of this happening are slim-to-none.  Yes, industry sales are currently strong, but we’d be foolish to expect this trend to continue throughout all of 2015.  And, if our memory serves us correctly, the company is coming off a year in which it delivered 0% earnings growth.  For the street to assume the company will grow earnings 27% and 30% in 2015 and 2016, respectively, is disconcerting.  Trading at 56x an inflated forward earnings number, management has no room for error.  Since this is a relatively new name, we’ll have more details out on this call early next week.


Momentum Chasers Get Pounded, says Keith McCullough

 

On today’s Morning Macro Call, Hedgeye CEO Keith McCullough emphasizes the difference between the market and the economy, explains the new setup for Gold, and takes questions from viewers. 

 

 

This is a complimentary peek behind-the-macro-scenes of our daily Morning Macro Call for institutional subscribers.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

Keith's Daily Trading Ranges, Unlocked

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. It was originally published February 13, 2015 at 07:48  at 07:49. Click here to learn more and subscribe.

Keith's Daily Trading Ranges, Unlocked - Slide1

BULLISH TRENDS

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BEARISH TRENDS

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Down USD, Up Oil

Client Talking Points

USD

Down Dollar has wicked correlation whip around the world, and it’s not just taking WTI +5% in an hour – Australian stocks +2.3% overnight to +8.7% year-to-date (they also cut rates earlier in the year), Russian stocks +3.3% this morning to the top-end of their immediate-term range; CRB Index up 2x the SPX yesterday (in % terms) on the day.

OIL

WTI is up another +1.1% this morning to $51.79 (USD is down on Euro up to $1.14) and the risk ranges for both Oil and the USD are now narrowing ($47.42-53.45) so you can look at that in more ways than one. Short term-top in OVX (Oil volatility), higher-lows of support, but also lower-highs of resistance.

EUROPE

All things considered a good GDP print out of Germany of +1.6% year-over-year (vs. +1.2%) so mainstream media will roll with that today, as Italy prints a recessionary GDP of -0.3% year-over-year and France says 0.2% year-over-year (vs. 0.4% – all Q4 numbers, and the JAN economic data in Europe this morning was #deflation101 (Swiss PPI -2.7% year-over-year, Spain CPI -1.3% year-over-year).

Asset Allocation

CASH 45% US EQUITIES 9%
INTL EQUITIES 7% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

HOLX

Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter 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. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road

TWEET OF THE DAY

***Game on at 8:30am ET Hedgeye CEO @KeithMcCullough hosting Morning Macro Call LIVE (Click below. It's free) https://www.youtube.com/watch?v=lFlc01Z5qWM

@Hedgeye

QUOTE OF THE DAY

You earn your reputation by the things you do every day.

-Dave Thomas

STAT OF THE DAY

Total U.S. Equity Market Volume, including dark pool, was down -17% yesterday vs. its 1 year average.


February 13, 2015

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BULLISH TRENDS

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BEARISH TRENDS

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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.

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