Investing Ideas Newsletter

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.

Investing Ideas Newsletter      - levels 

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


Investing Ideas Newsletter      - Risk cartoon 02.19.2015



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 China is worth approximately $49 per share to YUM
  • YUM China represents a nasty mix for YUM – the business is under pressure and it makes up a significant part of YUM’s financial performance
  • The board must do something to evolve the business model and reduce its exposure to China in a meaningful way
  • The board can de-risk the business by selling off company-owned stores
  • The board should focus on selling assets in Shanghai and Beijing; operating stores in these regions is equivalent to operating stores in Manhattan (who would want to do that?)
  • It has recently been rumored that YUM is looking to sell its company-operated KFC business in India in order to avoid real estate costs that are corroding its profitability (why not in China?)
  • The board should create a Yum China tracking stock; we suspect there would be significant demand for the largest consumer company in China
  • Allowing the Chinese to own a part of KFC could help consumer perception of the brand and, ultimately, benefit same-store sales
  • The Chinese government may put less pressure on the company if Chinese nationals own it (it certainly wouldn’t make the situation any worse)


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)


  • Oracle is so large and they lack customer focus and support. Medidata is more customer friendly”
  • “It’s a 24-hour turnaround with Medidata, and with Phase Forward it is 48-72 hours”
  • “[EDC] not viewed as a commodity, absolutely critical


VP of Business Development (Major Competitor)


  • “…Medidata has made it difficult for new entrants to come in. EDC market is still going to be relevant and is still growing”            
  • “Both Medidata and Oracle are taking an aggressive stance in Asia and trying to cement their share


Former Medidata Salesperson


  • Customer not price sensitive for EDC – “I don’t want the cheapest brain surgeon”

Investing Ideas Newsletter      - mdso


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.

Investing Ideas Newsletter      - holx


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).


Investing Ideas Newsletter      - RH Sentiment


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.


Investing Ideas Newsletter      - rh PEG 


* * * * * * * * * * 


what are your competitors thinking?

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).

Investing Ideas Newsletter      - 221

cake: a troubled concept

Despite strong industry trends, restaurant stocks are not immune to looming cost pressures.

Investing Ideas Newsletter      - x4

#Quad414 Is Spanking Us Bond Bulls

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):


  • iShares 20+ Year Treasury Bond ETF (TLT): up +9.8%
  • Vanguard Extended Duration Treasury ETF (EDV): up +14.3%
  • iShares National AMT-Free Muni Bond ETF (MUB): up +1.6%
  • Utilities Select Sector SPDR Fund (XLU): up +2.3%
  • Vanguard REIT ETF (VNQ): up +6.9%


Compare those YTD returns to that of the SPY over that same duration: down -3%.


Returns since JAN 30th:


  • TLT: down -8.5%
  • EDV: down -12%
  • MUB: down -1.8%
  • XLU: down -5.4%
  • VNQ: down -2.2%


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:


  1. MASSIVE capitulation across the consensus Treasury bond bear community
  2. MEANINGFUL accelerations across the spate of Q1-to-date high-frequency growth data that actually matters (we don’t have enough time to waste your time flagging deviations in the Empire Manufacturing or Philly Fed Indexes)


Regarding point #1:


  • Recall that the 10yr Treasury note was the most shorted asset across the entire buy-side coming into the year.
  • The net short position of 277k futures and options contracts for the week ended DEC 23rd was over three standard deviations below its TTM average at the time.
  • In a nearly-straight line, that net short position was reduced to 83.8k by the week ended FEB 10th. That figure was roughly equivalent to its TTM average at the time.
  • This short-covering helped to perpetuate that 1.64% print on the 10yr Treasury yield we saw on JAN 30th.
  • The net short position has since widened to 125k though the week ended FEB 17th; prices have reacted violently to the downside amid what is now a less-crowded trade.


#Quad414 Is Spanking Us Bond Bulls - 1

Source: Bloomberg L.P.


Regarding point #2:


  • Just about every meaningful economic data point we’ve received in the quarter-to-date that corresponds to 1Q15 has shown either a positive inflection from a trend of deceleration or incremental acceleration throughout 4Q14/2H14.
  • Ironically, the one that showed sequential deceleration (JAN Nonfarm Payrolls) was arguably the one that perpetuated the most upside in Treasury bond yields.
  • This was due to MASSIVE revisions to NOV and DEC Nonfarm Payrolls growth, meaningful accelerations in income growth and increased labor force participation – all of which combined to make the JAN ’15 Jobs Report among the best we’ve seen throughout the recovery.
  • Moreover, in spite of the downtick from nearly “uncompable” growth rates, Nonfarm Payrolls themselves continue to accelerate on a trending basis. The revised NOV and DEC MoM growth rates of +423k and +329k, respectively, were in the 99th and 94th percentile of all readings over the trailing 10yrs.
  • The U.S. labor market is in the “sweet spot” of late-cycle strength. How long this lasts is beyond our ability to forecast, but historical trends would suggest that we have at least ~2 quarters left before it semi-permanently inflects. Nothing in the Jobs Report itself or in the Initial Jobless Claims series is suggesting the U.S. labor market of ~140 million employees will turn on a dime and negatively inflect in the near term. If it does, this time will, in fact, “be different”.
  • Specifically, the 2nd derivative of NSA Initial Jobless Claims is once again showing accelerated improvement in the labor market after more or less stalling for ~6 months.
  • Arguably the most misunderstood economic release in the quarter-to-date has been the JAN Retail Sales figure. While soft on a headline basis relative to consensus expectations, the YoY growth rate of the control group – which is easily the most important figure to watch if you model GDP on a YoY basis like we do – accelerated +100bps sequentially to +4.3% YoY.
  • Industrial Production showed acceleration on sequential and trending basis in JAN.
  • PMIs positively inflected from their trend of deceleration in JAN and FEB.
  • Consumer Confidence and Business Confidence each ticked down MoM (in FEB and JAN, respectively), but both indicators continue to accelerate on a trending basis.


#Quad414 Is Spanking Us Bond Bulls - PAYROLLS


#Quad414 Is Spanking Us Bond Bulls - JOBLESS CLAIMS


#Quad414 Is Spanking Us Bond Bulls - INITIAL JOBLESS CLAIMS


#Quad414 Is Spanking Us Bond Bulls - RETAIL SALES


#Quad414 Is Spanking Us Bond Bulls - INDUSTRIAL PRODUCTION


#Quad414 Is Spanking Us Bond Bulls - MANUFACTURING PMI


#Quad414 Is Spanking Us Bond Bulls - SERVICES PMI


#Quad414 Is Spanking Us Bond Bulls - COMPOSITE PMI


#Quad414 Is Spanking Us Bond Bulls - CONSUMER CONFIDENCE


#Quad414 Is Spanking Us Bond Bulls - BUSINESS CONFIDENCE


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:


#Quad414 Is Spanking Us Bond Bulls - UNITED STATES


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.


#Quad414 Is Spanking Us Bond Bulls - 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.


#Quad414 Is Spanking Us Bond Bulls - Fed Funds Futures Implied Rates


#Quad414 Is Spanking Us Bond Bulls - MONETARY POLICY MODEL


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:


  1. A stronger U.S. dollar will only exacerbate the global deflationary forces we’ve seen over the past ~6 months.
  2. Moreover, by the time the Fed gets around to actually hiking the Fed Funds Rate – if they even elect to do so – the peak of the economic cycle will almost assuredly be in spitting distance. The Fed hiking rates into an economic downturn is not exactly the best thesis for a sustained bear steepening of the yield curve.
  3. At the bare minimum, the ECB and BoJ will likely be forced expand their respective LSAP programs in order to combat another leg down in their respective inflation readings. That would likely put further pressure on German bund and JGB bond yields, which would likely perpetuate incremental fund flows into the Treasury bond market. Total inflows into U.S. Bond Mutual Funds and ETFs has averaged +$5.72B per week in the YTD, which is nearly triple the rate of +$1.96B per week in 2014.


#Quad414 Is Spanking Us Bond Bulls - DXY vs. Brent Crude Oil Line Chart


#Quad414 Is Spanking Us Bond Bulls - DXY vs. Brent Crude Oil


#Quad414 Is Spanking Us Bond Bulls - 18

Source: Bloomberg L.P.


#Quad414 Is Spanking Us Bond Bulls - 19

Source: Bloomberg L.P.


Best of luck out there risk-managing this duration mismatch.


Have a great weekend,




Darius Dale

Associate: Macro Team

What Are Your Competitors Thinking?

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

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Cartoon of the Day: Moon Shot

Cartoon of the Day: Moon Shot - Kuroda cartoon 02.20.2015

Bank of Japan Governor Haruhiko Kuroda earlier today said that he likes his chances of achieving the central bank's 2% inflation target. In related news... we don't.

Retail Callouts (2/20): JWN, Ports, ANN, VFC, BBY

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.

Retail Callouts (2/20): JWN, Ports, ANN, VFC, BBY - 2 20 chart1

Retail Callouts (2/20): JWN, Ports, ANN, VFC, BBY - 2 20 chart2





Report: West Coast ports running at 50%-60% of capacity; retailers stockpile inventory



ANN - Ann Taylor Parent Said to Be Working With JPMorgan on Sale



VFC - VF Settles ITC Laser Denim Case



KORS - Report: Michael Kors joins Snapchat



BBY - Best Buy adds Curbside app service in Bay Area stores



H2O Plus Names Joy Chen CEO


Keith's Macro Notebook 2/20: Nikkei | Greece | Euro


Hedgeye Director of Research Daryl Jones shares the top three things in Keith's macro notebook this morning.

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 80.52%
  • SHORT SIGNALS 78.70%