This note was originally published at 8am on February 12, 2015 for Hedgeye subscribers.
"It ain't what they call you, it's what you answer to."
Chutzpah in English connotes courage or confidence. In Yiddish, the language from which the word originates, chutzpah means extreme arrogance. Which describes you?
As stock market operators, capitalists and business builders, we are often called arrogant, when in fact we are actually just confident. We are confident in our work ethic, teammates and vision.
In case you missed it, a couple of days ago the Huffington Post ran an interesting article about Hedgeye. The author, Ben Walsh, came to our office for a day and had some very thoughtful questions about our company and business.
Admittedly, he also struggled with the question of confidence or arrogance. Nonetheless, he did have some interesting insights about Hedgeye and we thought we’d share the article.
Click image to read.
The fact is, none of us will ever build anything in life if we aren't confident.
Speaking of chutzpah, it's clear that embattled NBC news anchor Brian Williams has some. Although now that he's sitting in the penalty box for six months, feeling shame, perhaps that will change. In the cartoon below, we actually propose an alternative job for Mr. Williams.
Back to the Global Macro Grind ...
Chutzpah or confidence in your analytical abilities is a truly important characteristic of being a good stock market operator. For as you all know, and as Ben Graham famously said:
"In the short term stocks are a weighing machine, in the long run they are a voting machine."
Speaking of analytical abilities, on the Hedgeye team, our Internet analyst Hesham Shabaan has been on a run of almost epic proportions with his short calls on Pandora, Yelp and Twitter. (If you aren't currently subscribing to his research, it would be worth emailing firstname.lastname@example.org to do so.)
His newest Best Idea short is the Chinese juggernaut Ali-Bubble. Sorry, Alibaba. The core of his thesis is as follows:
1. GMV GROWTH TO SLOW PRECIPITOUSLY: China's upper class drives the bulk of BABA's GMV. There is no other plausible explanation after comparing BABA's reported metrics to China consumer demographic data. That means the next wave of user growth will come from a much weaker consumer, leading to declining GMV/Active Buyer, and slowing GMV growth.
2. MODEL FACING SECULAR PRESSURE: Slowing GMV growth naturally bodes poorly for commissions. But the bigger issue is Marketing Revenues (~60% of total), which are facing secular pricing pressure as a weaker consumer pressures ad conversions and ROI. We were already seeing this in BABA’s financials, but the street just took notice of this last print, because...
3. TMALL CAN'T SAVE THE DAY: The one thing that was keeping us on the sidelines was the migration of GMV moving over to BABA's Tmall platform (where BABA collects commissions). That sputtered out in F3Q15, leading to a sharp slowdown in Commission revenue growth, which exposed the weakness in its Market segment (both reported in its China Retail segment). Tmall Mix shift can't be trusted a secular growth driver moving forward, so we don't need to worry about getting run over by it longer term.
Yes, BABA on some level is the Chinese Internet, but if its growth is decelerating and potentially going to disappoint, does it matter?
The other component to the thesis on BABA is the macro economic backdrop in China. If BABA is indeed the majority of e-commerce that occurs in China, it will be on some level hostage to economic activity in China.
In the Chart of the Day below, we show Chinese GDP growth going back 25 years. The clear takeaway from this chart is obviously that last year Chinese growth was at its lowest level in 24 years. In part, the government is actively trying to slow growth, so this makes sense. But even in a command economy like China, the ability of central bankers to manage a slow down in a perfectly orderly fashion is limited.
On Sunday we received Chinese trade data, which further emphasized a Chinese economy that is slowing. While it is always dangerous to take data in isolation, Chinese exports in January fell by -3.3% from year ago levels. Meanwhile, imports dropped a staggering -19.9%, which was the lowest level since the financial crisis of 2009.
More so than the U.S., China is an economy that is largely driven by exports. In fact, in 2014 Chinese exports totaled $2.34 trillion, which are about 50% larger than the world’s second largest exporter, the U.S. Combined, Japan and the EU are well more than 25% of Chinese exports.
The implication here is pretty clear, which is that the combination of a government that is trying to at least manage growth, if not slow it, with an economy that is dependent on exports to regions in which growth is definitely decelerating, means that the Chinese economy may be set up to disappoint on the downside.
Frankly, if the Chinese economy is going to disappoint, we aren’t sure there is a better way to play that then a company that is levered to Chinese wealth creation and trades at almost 14x 2015 sales. Valuation, of course, isn’t everything, but it is a good measure of expectations. And as they say about expectations, they are the root of all heartache.
Our immediate-term Global Macro Risk Ranges are:
UST 10yr Yield 1.62-2.09%
Oil (WTI) 46.43-53.66
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Please enjoy this replay of Hedgeye's Morning Macro Call with CEO Keith McCullough and Senior Macro Analyst Darius Dale.
In this excerpt from today's edition of RTA Live, Hedgeye CEO Keith McCullough talks about how we combine research with quantitative analysis and applies this process to our current view on housing and specifically the ITB (U.S. Home Construction ETF).
In this excerpt from this Morning’s Institutional Macro Call, Housing Co-Sector Head Josh Steiner explains in granular detail the primary reasons why we are bullish on housing.
Watch today's entire 30-minute Morning Macro Call HERE
Our short thesis is predicated on our belief that management does not have a feasible growth algorithm. This is vital because, if we are right, an aggressive growth agenda will only come at the expense of shareholders. To get to the heart of the matter, we specifically asked the company about this seven months ago on the 2Q14 earnings call. Though we had our doubts, the answer, at the time, seemed legitimate:
Q – Howard W. Penney: Thank you for taking my question. As Matt was sort of pressing you on the performance of the current store base, can you go through what the economics are, given sort of the small number of stores in the comp store base and the total number of stores? Can you go through the economics of how you envision this unfolding – the Grille, excuse me -- how you envision this concept rolling out in terms of volumes, margins, and when you think you'll get to a fairly consistent performance? Thanks
A – Thomas J. Pennison: Sure, Howard. This is Tom. From the time we laid this out, we looked at the prototypical Grille was between $4.5 million and $6 million and we really saw a target in that $5.25 million is what our prototype was. So we target internally to be within that $5 million to $6 million AUV.
Within that AUV, we're looking to have a restaurant level EBITDA between 20% and 25%. Now, while we do have more favorable food costs, our cost of sales that our Grille gives us that was spoken to, we give a little bit of that back on our restaurant operating expenses because the lunch day-part has the labor to be a little bit higher as well as some of the premier spots we're utilizing, occupancy can be a little bit higher on that lower base, but that 20% to 25% is – we have been achieving that with the class of 2011 and 2012.
Unfortunately, we had such a large component of the Grille today is relatively new restaurants in a non-comparable group that's not fully visible yet, but we are between that 20% and 25% target for both 2011 and 2012 as well as already approaching that on a run rate with some of the 2013 openings.
At the ICR conference this past January, management unveiled Grille margins – and they weren’t close to what they’d depicted on the 2Q14 earnings call.
Oftentimes management will say what they need to until they no longer can. If anything, this is further proof of that. But our point is – and this should be the biggest takeaway – that Del Frisco’s growth algorithm is broken and the Grille is not ready to grow at such a rapid pace. We’re trying to call out what no one else will. The facts are in the chart above. You can be the judge.