Below are Hedgeye analysts’ latest updates on our seven current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.
*Please note we removed Vanguard Extended Duration ETF (EDV) this week.
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.
- "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
CARTOON OF THE WEEK
A generational ramp for #StrongDollar.
This week’s housing data was headlined by Wednesday’s Mortgage Purchase Application figures which showed purchase demand rising 2% sequentially and +2.5% year-over-year. The positive growth recorded in the current quarter to-date represents the first quarter of positive year-over-year growth in 18-months.
We expect demand to pick-up a bit from here as the weather drag moderates and a supportive macro backdrop asserts itself against easy comps. With the improvement in the broader domestic labor market ongoing, employment growth in the key housing demographic of 20-34 year-olds accelerating alongside accelerating residential construction employment and rising real income growth, the rate of change in reported housing demand should continue to rise.
Elsewhere across the industry, Fannie Mae’s monthly survey on consumer sentiment around housing showed that the percentage of consumers who believe it would be easy to get a mortgage increased to a record high 54% in February. Further, the share of consumers who think the economy is on the right track exceeded the share who believe it’s on the wrong track for the 1st time in 5 years as the ongoing improvement in the labor market continues to drive the broader rise in consumer sentiment.
Next week will be a more data intensive one for housing as we’ll get NAHB builder confidence numbers for March on Monday, February Housing Starts data on Tuesday and Purchase Applications figures from the MBA on Wednesday.
We keep a close eye on internet traffic to gauge the both the trends in a company's e-commerce visitation and customer demand for product. It’s especially important for a brand like Restoration Hardware where e-commerce sales account for about 50% of the consolidated revenue. Below is a chart showing the year over year improvement in indexed traffic rank for restorationhardware.com and a Retail Composite. The traffic rank metric looks at the respective e-commerce site(s) and ranks it against all other sites on the internet on a trailing 3 month basis.
Retail as a whole had a strong holiday season measured by the visitation statistics. RH was no different. The notable takeaway here is the divergence seen in the past few weeks as retail is starting to roll which is what we would expect following the peak volume Holiday selling period. RH’s traffic rank remains strong yoy.
E-Commerce is a significant portion of business for RH as it makes up 50% of sales. Yet a unique aspect compared to other retailers is that RH is channel agnostic. Meaning unlike a typical retailer (the Kohl's and Macy’s of the world) who sells online at a gross margin about 1000bps below the Brick and Mortar business, RH gets the same margin whether they sell through their website or through a design gallery. That’s because RH for the most part is not a cash and carry business. With +90% of all orders shipped directly from a DC regardless of where that order is placed.
All in the RH brand looks extremely healthy through the 1st month of 1Q15 and remains our favorite name in retail.
Shares of Manitowoc are likely to trade higher on the split, Board declassification and lack of problematic upstream oil & gas exposure. Even with the post-announcement aftermarket rally, MTW shares are still down by about a third over the past year. MTW is still trading below our low-end of sum of the parts valuation of $26 versus a high end SOTP valuation range of $39, suggesting a break-up would release value for shareholders.
In fact, we think the valuation of the Foodservice segment exceeds the current firm value, providing the Crane business for free.
That said, it would be naïve to expect smooth sailing after the initial rally. Splits like the one planned for MTW may create long-term value, but tend to do so with short-term costs. There is still much to be determined.
From a long-term perspective, new construction for both residential and nonresidential construction activity remains extremely depressed. Measures such as floor space per worker and residential housing starts suggest that the eventual cyclical rebound will roughly double from new construction activity. We expect the residential and nonresidential construction recoveries to be reasonably simultaneous in coming years, driving higher capacity utilization and pricing for Owens Corning.
OC’s Insulation business is impacted the most of its three businesses – the other two being Roofing and Composites – by nonresidential and residential activity. With a 45% market share of the US Fiberglass Insulation Market, Owens Corning offers attractive exposure in a well-structured market.
Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan reiterates his bullish call on Penn National Gaming and will provide a new update next week.
TLT | MUB
We’re staying long of TLT and MUB and removing EDV from the group of tickers to stay long of #GrowthSlowing and #Deflation this week.
We want to remain less sensitive to interest rate movements in the short-term into next week’s FOMC meeting and ensuing rate hike rhetoric (And booking a +13% gain in EDV vs. +2% for the S&P 500 is something to feel good about).
While we don’t have a crystal ball, we do know that the Federal Reserve is “data dependent” and recent data has brought forward the market’s expectation for a rate hike. This week’s jobless claims release was a positive again, following last Friday’s Non-Farm Payrolls beat:
Meanwhile, the rolling data improved WoW by 4k to 302k.
- Jobless Claims dropped by 36K on a seasonally adjusted basis bringing the number back below 300K (See last weekend’s update for the significance of the 300K line)
- Claims slowed to 8.3% on a Y/Y% change basis (non-seasonally adjusted)
- The rolling data also improved W/W by 4k to 302k
All-in-all this week’s data coupled with last week’s non-farm payrolls print paints a similar picture:
The labor market looks to be improving which we peg as a major focal point for the Federal Reserve.
Just remember that the labor market always peaks in advance of a recession….
While we still expect Treasury yields to make all-time lows over the longer-term as growth and deflation trend lower, a hawkish turn will warrant the same market reaction that we saw last Friday post-NFP report (Hint: you don’t want to be overly-exposed to long-duration bonds or commodities):
- Yields will move higher (Bad For Bonds)
- The U.S. Dollar will continue its upward trajectory
- Commodities and their related asset classes will move lower
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ADDITIONAL RESEARCH CONTENT BELOW
Disaster guidance release + premature debt service talk = waning confidence in a name that will struggle to tread water moving forward.
Mobile may be the most misunderstood part of the BABA story. What some see as an opportunity is actually its largest secular headwind.