Hedgeye presents The Macro Show for Monday March 16, 2015. Hedgeye CEO Keith McCullough breaks down what's happening in global macro this morning and takes your questions.
James Rickards, best-selling author of Currency Wars, spoke with Hedgeye CEO Keith McCullough about how he finds the truth, the continuation of the currency wars, what the Fed gets wrong and much more in this exclusive interview.
Jim’s first appearance on Hedgeye TV in May 2014 was met with wide acclaim, and he did not disappoint in his return to Stamford for Hedgeye’s first ever live “Market Marathon” held in January. After 45 minutes of raw & unfiltered commentary on markets and the people that move them, Rickards and McCullough turned it over to the viewers, offering an extended viewer Q&A session powered by user-submitted questions.
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.47%
SHORT SIGNALS 78.68%
Takeaway: Current Investing Ideas: ITB, TLT, OC, MTW, MUB, PENN, RH
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.
Takeaway: This management team is playing defense in a game it simply cannot win.
Conclusion: The reversal in the stock today says it all. Great quarter. But top line trends are decelerating, costs are accelerating, and capital requirements are going nowhere but up. Any form of growth from here on out – in existing stores, new stores, and online, will all come at a lower margin. This year will be a roller coaster (mostly down) but we think next year’s earnings miss becomes explosive. Still one of our top shorts.
- Comps beat printed Street estimates – which we expected. 5.4% This quarter is literally as good as it can get for HIBB. 1) Wal-Mart, from which HIBB draws traffic in its core market, just printed the first positive traffic comp in nine quarters. 2) Athletic retailers like Dick’s and Foot Locker both printed solid comps in the last two weeks (DKS +3.4%, and FL +10%). 3) HIBB went against its second-easiest comp in over five years in the month of January.
- Comps 1QTD are down MSD. February comps were up against a tough 7.2% comp last year. That month carries the bulk of the volume in the quarter. We think it’s close to 40%, though management indicated it was 35% of the quarter, the math just doesn’t add up. If we look at the numbers from last year it would mean that weights by month were Feb 35%, March 49%, and April just 16%.
- For the quarter, in order to climb out of the hole and get to flat on the year, HIBB would need to average a 3.3% comp in March and April. To get to 1%, the math works out to a 5% comp in March and April. We don’t think that happens.
Costs Accelerating: The $0.12 in cost pressure in FY16 is just the beginning of a multi-year investment cycle for HIBB. Most of that is driven by investment to build an e-commerce operation from scratch. For the year it’ll cost HIBB somewhere in the range of 50bps-60bps in operating margin. That won’t go away in 2017, in fact it will accelerate (more on that below). We also think it’s important keep in mind that the hurdle rate for HIBB at a 3% comp (which the company has been unable to achieve in over 2yrs) makes it very difficult for the company to leverage fixed cost on both the COGS and SG&A lines.
- Distribution – HIBB currently outsources distribution for about 20% of its stores. With only one DC located in Birmingham, AL it’s extremely difficult for the company to efficiently supply its new stores popping up in states like PA, MN, and WI. That means the majority of new growth comes in at an incrementally lower margin. That will compound itself until the company builds a new DC that can service these markets, which has its own capital and margin implications. But, HIBB has to tap new geographies in order to drive the top line – the company’s core southern markets are tapped and competition for consumers in a market that HIBB has historically dominated looks a lot different than it did 4yrs ago. Academy has increased its unit count in the ‘Bible Belt’ by 93% over the past 4 years, Sports Authority and Dick’s Sporting Goods are +45%.
E-Commerce: It appears as if HIBB will finally start making the push towards e-commerce in earnest. Though no concrete timeline was given, it was clear on the call that there is finally a sense of urgency to start competing on the web. Management said it would cost them $0.05 in this upcoming year. That will accelerate as HIBB gets closer to its launch date. All in it equates to about 3-5 percentage points of margin based on what we’ve seen from other companies (to see our Black Book for more detail CLICK HERE).
- The POS system is step 1a in the rollout of an e-commerce channel. Here is how we are thinking about the HIBB’s e-comm needs and timeline. This would of course mean that HIBB decides to build its capabilities in house rather than outsource which would get the company to market faster but come with an extra margin hit.
- 1a) POS – hardware installation, 2H calendar ’15.
- 1b) POS – software and implementation, 1H ‘16
- 2) DC – Pick and pack capabilities, 2H ’16 – 1H ‘17
- 3) Ship-from-store – 2H ’16 – 1H ‘17
- 4) IT and website construction – now – 1H ’17
- All in we are looking at a minimum of 18-24 months of investment needed just to get the e-commerce systems in place before customers even place an order. And that’s while other competing retailers move just as fast if not faster in accelerating their own dot.com business. In other words, HIBB iwill not be gaining share online – just losing share at a lesser rate until its implementation is complete. And again, we think management is in complete denial as to the negative margin impact.
- Then HIBB will be stuck fulfilling orders for a channel with Gross Margins at least 1000bps below the Brick and Mortar business.
Previous Note on HIBB from Thursday 3/12
03/12/15 06:55 AM EDT
HIBB – As Good As It Gets
Takeaway: This quarter should be as good as it gets for HIBB. Don’t get used to it.
We think that HIBB is one of the most structurally challenged retailers out there. But we’re definitely not counting on the company showing its true colors with the print this Friday. This quarter is literally as good as it can get for HIBB. 1) Wal-Mart, from which HIBB draws traffic in its core market, just printed the first positive traffic comp in nine quarters. 2) Athletic retailers like Dick’s and Foot Locker both printed solid comps in the last two weeks (DKS +3.4%, and FL +10%). 3) HIBB went against its second-easiest comp in over five years in the month of January. All-in, the comp for 4Q14 will more likely than not come in ahead of the Street’s 3.2% expectation. Somewhere in the mid-single digits is more likely, with EPS closer to the low $0.70s vs. the Street at $0.68.
So…what does this mean? It means that HIBB is our least favorite type of call. The kind where we say it’s a short, but where estimates in the upcoming quarter are too low. When we hear someone make that kind of pitch, it usually ends up being a really lousy call.
So how and why can we stick with a short call on a name in the face of a likely positive event? A few reasons...
1) Smoking Required. HIBB absolutely positively has to smoke this quarter due to factors above (see charts below). Again, the climate has never been more favorable for a retailer like HIBB. The stock is up 10% relative to the market over the past month. If it does NOT smoke numbers, then it spells big trouble for this company.
2) e-Commerce Hit Inevitable. It’s no secret the company needs to install an e-commerce platform. It should be very expensive – costing 3-5 points in margin over 12-18 months before a dollar in dot.com revenue is recognized. Will HIBB announce that initiative on Friday? We don’t know. It will be some time this year. They’re just prolonging the inevitable.
3) Huge Estimate Gap. The gap in margin between our estimates and the Street’s are simply colossal. This year, we’re 7% below. That’s not huge. But in ’16 we’re at $2.06 vs the Street at $3.33. By the time we get to year 5 of our model, we have HIBB earning $1.35 vs the Street at $4.74. The point here is that if we’re calling for estimates to come down next year by nearly 40%, we’re hardly going to be spooked by a few pennies on the upside.
WMT Traffic – Key For HIBB Comp – Positive For The First Time In Nine Quarters
FL Comp Trends Are Off The Chart. Not Identical Businesses, But Close Enough.
Ditto For DKS – Though Less Positive Than FL. Comp Driven By e-Comm (which HIBB does not have), Brick&Mortar Down
HIBB Monthly Comp Trend Shows The This Quarter Goes Against Second Easiest Comp In Over 5-Years
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