The Economic Data calendar for the week of the 23rd of February through the 27th of February is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.
Click to enlarge.
Takeaway: Current Investing Ideas: TLT, EDV, MUB, XLU, HOLX, MDSO, YUM and RH.
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.
Shares of Yum! Brands are up ~7.5% over the past month and have plenty of room to run.
The street’s reset earnings estimates are calling for 12% EPS growth in ’15 after 4% EPS growth in ’14. China continues to be the wild card in the name, as a strong 2H15 would propel shares higher. Any negative development would be viewed quite unfavorably. If China recovers in ‘15, the stock will work. If China doesn’t recover, management will be forced to de-risk the business – an event that the public market would immediately reward. Remember, China has been a huge drag on the stock, making YUM a perennial underperformer over the past five years.
Here’s why it would make sense for management to de-risk the business from China:
YUM remains one of our favorite longs in space.
Medidata Solutions is the eClinical market leader with an estimated 40% share. MDSO has been successful in gaining share due to a superior product offering and Oracle’s botched acquisition of Phase Forward (major competitor) in 2010. Those short the stock argue that Oracle is beginning to compete more effectively on price, and more broadly, that EDC is a commoditized business. However, anecdotes from the field suggest otherwise:
Clinical Trial Data Manager (Top CRO)
VP of Business Development (Major Competitor)
Former Medidata Salesperson
The U.S. Supreme Court will hear the case King v Burwell to decide the fate of of subsidies for individuals buying insurance through federally run exchanges. According to the Urban Institute, upwards of 10M people will lose their insurance, or a reduction of 69%, should SCOTUS rule that subsidies must flow through a state run exchange.
Hologic has certainly benefited from the ACA. The OB/GYN patient mix is primarily under the age of 65, commercially insured (70%), with a significant Medicaid population (15%), and lines up well with the ACA population. However, quantifying the impact is an indirect measure at best.
Using our survey data we compared the Patient Volume Index (>50 is expanding) across Medicaid expansion states, non-expansion states, and practices with a high percentage of commercially insured volume. Exchange based volume had a modest impact overall while the Medicaid expansion drove much of the patient volume benefit, particularly in the middle part of 2014.
Bottom line: Most of HOLX's benefit from the ACA has come through Medicaid expansion. SCOTUS can hurt, but impact looks modest.
In this granular, deep dive report written late last night, Hedgeye macro analyst Darius Dale details our intermediate-term scenario analysis for rates and rate-sensitive equities. We remain bullish despite rising volatility.
Click here to read the note in its entirety.
The chart below shows Restoration Hardware's stock price and score on our sentiment monitor. Our sentiment monitor triangulates short interest, Sell Side ratings, and Insider activity. The lower the sentiment score, the more bullish it is for the stock, the higher the sentiment, the more bearish. Over the past few months, sentiment on RH has been treading water at or near all-time lows (which we think is extremely Bullish for the name).
We think that’s the case for a couple of reasons.
1) RH is a name that investors love to hate. Short interest as a percent of the float is sitting at 29%, off slightly from the 34% peaks heading into the 3Q print.
2) That would concern us if we didn’t see the type of raw earnings power locked in the model which will add 1mm sq. ft., $3bil in revenue, while taking margins from high single digits to the mid-teens. Add all that up and you get to $11 in earnings power.
3) Valuation – The stock is currently trading at 24x our ’15 Earnings number and 28x the Consensus number. That may look expensive, but if we adjust it for growth it’s among the cheapest names in the consumer space.
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ADDITIONAL RESEARCH CONTENT BELOW
Our macro team was on the road in sunny California earlier this week meeting with myriad funds. Here are the key notes from some of the key meetings (fund names removed).
Despite strong industry trends, restaurant stocks are not immune to looming cost pressures.
Takeaway: Below we detail our intermediate-term scenario analysis for rates and rate-sensitive equities. We remain bullish despite rising volatility.
What a difference one month makes. Recall that rates and rate-sensitive equities were all the rage in January (returns through the JAN 30th YTD trough in the 10yr Treasury note yield):
Compare those YTD returns to that of the SPY over that same duration: down -3%.
Returns since JAN 30th:
Compare those returns to that of the SPY since JAN 30th: up +5.9%.
We think two factors have combined to perpetuate this dramatic reversal:
Regarding point #1:
Source: Bloomberg L.P.
Regarding point #2:
All told, a flurry of #Quad1 data has left us clearly on the wrong side of this gigantic counter-TREND move in rates and rate-sensitive equities for the month of February. We won’t apologize for it; instead, we’ll focus our efforts on how to best position ourselves from here.
While our intermediate-term TREND view that long-term interest rates test their all-time lows (likely sometime in 2H15) remains unchanged, we do think the next 1-2 months could continue to provide intermittent and/or violent headaches for bond bulls if the economic data continues to be reported in line with our GIP Model’s forecast of a #Quad1 setup in 1Q15:
As such, appropriate risk management – be it reducing one’s gross and/or net exposure to this trade, actively trading in/around positions, etc. – is undoubtedly required to stay afloat amid rising volatility in the fixed income markets; on a trailing 3-week basis, the MOVE Index is now trending at its highest level since SEP ’13.
Source: Bloomberg L.P.
Will the FOMC proceed with a rate hike in 2015? Who knows. It is worth noting, however, that both the market and the preponderance of data would seem to suggest the probability of a rate hike is low and falling.
That said, however, their insistence on being hawkish almost seems token/politicized at this point. They might just do it if for no other reason than to create some semblance of a policy buffer before the next recession. It’s trivial to state that there will be a “next recession” at some point in the not-too-too-distant future.
At any rate, while an explicitly hawkish Federal Reserve is clearly not good for Treasury bond bulls like ourselves, we think such a gesture might present investors with the buying opportunity of a lifetime:
Source: Bloomberg L.P.
Source: Bloomberg L.P.
Best of luck out there risk-managing this duration mismatch.
Have a great weekend,
Associate: Macro Team
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Our Macro team was on the road in California this week and met with a myriad of funds. Below are some notes from some of the key meetings (with fund names removed). Not surprisingly, the Fed, deflation, and employment were key topics of focus.
Enjoy the weekend,
Long/Short Hedge Fund with Sector Managers of $4BN+
- Deflation main topic of conversation
- They think Fed raises rates and ignores deflation data
- Of the mindset that the Fed raises to create a buffer to cut down the road if necessary
- They aren’t as concerned with the jobs report as we are
- They are having a tough month, confused where to go from here, had a good Jan, bad Feb. They think the reversal in Feb continues vs. our view that this is an aberration and what happened in January (deflation) perpetuates throughout the yr.
Long Only Fund of $5BN+
- In tune w/ the model, he’s trying to figure out if we’re in Quad 1 or Quad 4
- Thinks vol is cheap and uncorrelated assets are expensive
- Lots of policy discussion, what does the Fed do on the Feb jobs report
- Thinks there is the potential they hike rates once and then potentially cut
- Next three months are risky in vol terms
- Consumption growth slowing long term on demographic headwinds, longer duration, so a focus
- Next five yrs, wants to buy equities with free cash flow and good balance sheets
- His clients (long duration guys) want to own hard assets
- They underwrite $80 WTI based on project economics
- Late cycle demand looks worse to them
Large Multi-Strat Hedge Fund of $3BN+
- They like US fixed income, think it’s a safe harbor in global deflation environment
- They agree on global deflation
- QE slows the entire global economy, people hoard money, it slows consumption growth and inflates asset prices
- In a global deflation environment, USD rises, compresses margins as top lines come down when you see FX headwinds
- Asked on cost of education, what does that do to avg American as costs continue to rise?
Very Large Mutual Fund Complex of $100s of BNs
- Had a good January, they pay attention and like our call, tough Feb
- UST, JGB, Bonds, Copper, all reversed since January, what’s going on and what’s the pervasiveness
- USD is going to go up, at 40 yr low, now arresting its decline, want to know if this move is an aberration
- Concerned with the currency impact on the S&P 500
- USD strength starts to take out deflations dominoes
- We need a negative jobs report
- Jobless claims on a % basis of available jobs, lower than it was the last cycle and the cycle before, etc
- Consensus thinks rates rise
- Discussed GDP comp
- Bad demographic trends long term
- Always curious on flows in to and out of their competition – specifically asked our thoughts on what PIMCO is doing
Long / Short U.S. Equity focused fund - $2BN+
- They have on a similar trade to our call, they want the market to go down, think they need to wipe out crappy companies and crappy hedge funds
- Some of their shorts are popping up on this Feb reversal
- Think this part of the economic cycle is important
- Very concerned about the rate move in Feb, not positioned for it
- Discussed binary effect of the jobless claims report
- Discussed Greece leaving EU, good/bad, we think bad, they seem to be on our side here
- Global recession more likely than US recession
- Discussed which companies to buy vs. sell – good balance sheets and good free cash flow
Large Mutual Fund - $10BN+
- Most of the discussion focused on policy decisions of the Fed
- Jobs report very important
- Could the Fed issue treasuries at the long end of the curve as a surprise?
- Focused on the rate of change in the Fed’s balance sheet & credit spreads
- Thinks the Fed is price targeting
- They are going to do everything in their power to reduce vol, which causes people to take risk
- Corporates stopped hedging currencies
- Understands there is always a period of volatility in any regime change
- Thinks the only reset is for bond market volatility to go to where oil just went
Large RIA $5BN+
- Credit & equity L/S, HY & EM
- Bearish low quality HY & EM debt
- In tune with the deflation theme, agree with us
- They are focused on the divergence in the equity and credit market
- Volatility caused by Fed uncertainty
- Don’t think Greece gets kicked out of the EU
Also Very Large Mutual Fund Complex $100s of BNs
- Serious concern in USD, what to do on strength
- Big time concern in deflation
- Euro and Yen devaluation a concern
- Jobless claims and demographic headwinds are a concern for these guys
- Concerned about liquidity
- Interested in labor effect relative to housing
Special situations hedge fund with macro bent $5BN+
- Are policy hikes a mistake?
- They are pretty in tune with our view and feel the same
- Pressing the deflation trade, don’t care about near term pain
- Discussed the Greek exit from the EU, don’t think it happens
- Think the Fed will raise rates
- Hyper focused on consensus’ view
- Fed language a focus
- Like growth in this environment
Takeaway: Removing JWN from our long bench with the company guiding flat earnings in 2015 and the stock at 20x P/E.
JWN - 4Q14 Earnings: Removing From Long Bench
Takeaway: We added JWN to our long bench on 10/16 following our Department Store Black Book. There are a lot of things to like about the name: e-commerce proficiency, brand portfolio, and square footage growth. But, we couldn’t get comfortable with the fact that it was operating in a space that has grown at a -2% CAGR over the past 20 years and needs to see 93mm square feet not just close, but exit the industry all together over the next 5 years. Since that time, the stock is up about 11%, in-line with the S&P. Now the company is guiding the mid-point of the earnings range to flat on 8% revenue growth. Either the company is sandbagging or this name is uninvestable trading up here at 20x next year's earnings. We're removing it from the long bench.
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