Interest rates are falling today post dovish Fed comments, so we’re selling Utilities (XLU) today on the bounce. We think there are better opportunities (like Penn Gaming) to be buying on weakness.
Takeaway: We are removing Utilities from Investing Ideas.
Takeaway: We are adding Penn Gaming to Investing Ideas.
Note: The excerpt below was written earlier today by Hedgeye CEO Keith McCullough. Stay tuned for further updates from our Gaming, Lodging & Leisure sector head Todd Jordan.
Janet Yellen's testimony today was, on the margin, dovish. I think this keeps the lower-rates-for-longer Macro Theme in play and also augments our bullish Q1 (Quad1) view of US domestic consumption.
One of the best ways to play that Macro Theme is via regional gaming stocks (where both gas prices and accelerating housing trends are bullish for their core consumer).
As I pointed out in a previous note, Todd Jordan has already added Penn Gaming to our Institutional Research Best Ideas list. So that's not new today - the stock testing the low-end of its risk range on no volume is...
To review Jordan's bull case, while he's not ready to call a V-shaped regional gaming recovery, due to a variety of factors the numbers are looking a lot better. PENN had a solid Q4. January was one of the best months in regional gaming since well before the “Great Recession” began in 2008.
Buy Best Ideas (on red) when testing the low-end of the risk range.
Hedgeye CEO Keith McCullough distills the three things that really matter from Fed Chair Janet Yellen’s testimony before Congress today.
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Takeaway: We remain short, but somewhat cautious into the print (bearish fundamental outlook vs. potentially more bearish buy-side expectations)
- 2015 OFF TO A ROUGH START: 1Q sets the tone for the year given WTW’s seasonal attrition patterns, so the company would not be able to recover if its winter selling season disappoints. Our Google Trackers suggests that is the case, pointing to a notable deceleration in 1Q demand. Meanwhile, consensus estimates are essentially calling for one of WTW’s strongest on record winter selling season on record.
- EXPECTING LIGHT GUIDANCE: Consensus is only looking for -4% decline in 2015 revenues, which would be a marked improvement over its -14% YTD growth in 2014 (despite the deteriorating demand trends mentioned above). We’re expecting 2015 EPS of $0.71-$1.09 (vs. consensus of $1.43) on low-teens revenue declines, and the greater G&A expense levels that management guided to on its last call. WTW's 2015 EPS guidance range could come in under $1.00, with negative 1Q15 EPS guidance (the latter hasn't happened in at least 10 years).
- BUY-SIDE EXPECTING A DISASTER? WTW is down 26% YTD, and short interest has accelerated to 61% of its float as of 1/30/15. The bond market has followed suit, with WTW’s largest tranche trading at $0.65 (down 16% YTD). A short squeeze is possible on anything short of another disaster release, but we had the same concerns last year on a similar setup into the print. However, the stock still appears to have a lot of downside from a mulitple perspective (the below charts are based on consensus estimates).
- HUMANA HAIL MARRY: Humana just announced today that it will offer its employees access to Weight watchers programs at "no cost for six months, and a significant discount thereafter". Two things. First, we don't know how much of a concession WTW is offering to Humana. Second, the structure of the agreement may not yield all that much to WTW after considering the free six-month period vs. its seasonal attrition issues. There is good chance that many participating Humana members will churn off the program before they start paying.
Let us know if you have questions, or would like to discuss in more detail.
Hesham Shaaban, CFA
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