Investing Ideas Newsletter

Takeaway: Current Investing Ideas: ITB, TLT, MTW, MUB, RH

A Message From Hedgeye CEO Keith McCullough


With the stock market back to its all-time-highs, I’m erring on the side of caution and capital preservation right now. As you know, all-time is a long time, so I think it’s as good a time as any for investors to reduce some of their higher-beta equity exposure.


Since Warren Buffett taught me Rule #1 of Investing (“Don’t Lose Money”), I’ve always had a deep respect for cash, liquidity, and flexibility. There is a time to protect capital so that we can invest in names on the next correction.


In looking at what I call our “bench” of research ideas, we have at least a dozen names on the bench that I will be looking to bring back to Investing Ideas when opportunities (lower prices) present themselves.


Now that the Fed’s decision is out of the way, the best longer-term position to protect against both Global #Deflation and #GrowthSlowing remains Long-term Bonds.


Have a great weekend,



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Below are Hedgeye analysts’ latest updates on our five current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.


*Please note we removed PENN and OC this week.


We also feature two additional pieces of content at the bottom.

Investing Ideas Newsletter      - le7 

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      - Stimulus cartoon 03.16.2015






(False) Reality: Monday and Tuesday conjured fears of an organic slowdown in housing activity as Builder Confidence retreated for a 3rd consecutive month in March and New Home Starts in February saw their biggest month-over-month decline since January 2007.  We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather. 


As it relates to builder confidence, the Current Traffic component of the index led the weakness in the composite reading, which is consistent with a severe weather related drop in the flow of active buyers.  The NAHB also cited supply chain concerns, particularly in terms of labor supply.   Residential construction employment saw its largest monthly increase in employment in nearly 10 years in January and employment at the industry level continues to run in the high-single digits.  There is clearly strong demand for labor in the sector, however, wage growth has yet to really accelerate according to BLS data so it remains equivocal whether rising labor demand is, in fact, driving accelerating builder cost pressure and/or labor supply shortages at the aggregate level.  Further, while labor supply constraints may serve as a drag to builder confidence, presumably it is rising demand trends that are driving tighter conditions in the resi employment market.  All else equal, we’d view improving demand as a net positive. 


Investing Ideas Newsletter      - 999


On the New Construction side, while the sharp drop in Housing Starts captured most of the headlines, we believe the real story was in the 3% gain in permits. The 57% collapse in starts in the Northeast drove the bulk of the headline decline, again consistent with unusually cold/severe weather weighing on activity.  Ever try to dig and pour a foundation in negative degree temperatures.    We'd expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.


Reported Reality: The reported results for 1Q15 out of the Builders LEN and KBH on Thurs/Friday were as auspicious as the Monday/Tuesday data was ominous.  Both companies beat sales and earnings estimates while reporting strong pricing and accelerating orders growth.  Further, they talked down the weakness in reported Starts in February and guided to incremental margin improvement over the balance of the year with the expectations for continued, ongoing improvement in the demand environment.  


We’re not particularly inclined to take management’s word for it, but with the labor market strengthening, the top-down environment inflecting positively alongside marginal credit box expansion we would agree with the positive, intermediate term outlook.  


Both TLT and MUB continue to grind higher over the intermediate-term, despite some shorter-term pullbacks we’ve seen since adding TLT to Investing Ideas back on August 4th 2014. We have been on the correct side of rates and sitting in TLT has been an alpha-generating trade for the last 6 months.


Scoreboard since August 4th:

  • TLT: +15.1%
  • S&P 500: +8.7%

Investing Ideas Newsletter      - ben tlt crusher 


Investors who were positioned for a rate hike moving into the biggest macro catalyst of Q1 on Wednesday were caught on the wrong side of the trade. That included a big chunk of consensus macro.


Consensus Positioning:

  • Short Treasuries: -173K contracts
  • Short RUSSELL 2000: -41K contracts
  • Long U.S. Dollars: +81K contracts
  • Short S&P 500: -40K contracts (2015 high)


U.S. Treasury 10-YR Positioning:


Investing Ideas Newsletter      - ben graph


By the end of the day, we received more confirmation that we want to stick with TLT and MUB.


1) Consensus macro was wrong; 2) growth and inflation are both surprising to the downside; And 3) the Federal Reserve will not be hiking rates anytime soon.

  • Lower for Longer: Targeted Fed Funds Rate for December 2015 was reduced to 0.625% vs. 1.125% with the prior forecast
  • Growth Slowing: Full-Year 2015 GDP estimate downwardly revised to  2.3-2.7% from 2.6%-3.0%
  • Inflation Slowing: Full-Year 2015 range for PCE Inflation downwardly revised to 0.6-0.8% from 1.0-1.6% previously

The U.S. Dollar moved sharply lower, interest rates flattened (TLT UP), equities and commodities both popped. The same story of the market reacting to the relative policy of the Fed will roll-on and as long as consensus macro is positioned on the wrong side of growth and inflation decelerating, we’re sticking with our long TLT and MUB call.    


This is pretty much the only WSM chart we really care about. 


Investing Ideas Newsletter      - WSM RH comp 2


The 4Q WSM comp was uninspiring at face value at 5.1%, though to be fair the 2-year trends held steady across every concept except for PB Teen (only 6% of rev). But the key for us is that comps trended down for WSM, and trended up for Restoration Hardware (which already preannounced the quarter it will report next week). These two names are often mentioned in the same sentence. But keep in mind that one of them (WSM) grows square footage at 2% on its best day and is comping mid-single digits. The other has square footage growth accelerating to 25% by the end of 2015, and just comped 24% (the second best comp in all of retail behind Kate Spade’s 28%).


WSM took down 1Q guidance, which was almost entirely due to the impact of the West Coast Port issues. The Street will probably look through this, and it should. We certainly will.  But the question about the impact on RH from labor issues has already come up in the hours since the WSM call.


Could RH see some impact? Yes. It definitely could, and we expect there to be mention of it on the call. The company is far less mature than WSM and therefore has less experience dealing with issues like this. But keep in mind one important factor…the business that is at risk of being lost forever is what we’d call ‘cash and carry’. That means that the consumer goes into the store, and walks out with the merchandise in their hands. If it’s stuck on a container ship, the consumer is likely walking away empty handed. Consider the following…


1) An apparel company (which is near 100% ‘cash and carry’), that has delayed containers, gets the merchandise several weeks into the season – after the consumer has already made full price purchases. The goods ultimately get sold, but at a deep discount. That’s problematic.


2) By our math, WSM is closer to 30-40% ‘C&C’. Far from optimal, but the nature of its category carries less risk than apparel, footwear, or some other non-durable category.


3) RH, however, has an estimated 5% of its business that walks out of the store with the consumer on the day of purchase. Could some of that be lost? Yes, and some will. But the remainder of the impact should come down to an extension of the time it takes to deliver product. Maybe it takes 12-weeks on a custom order instead of 7-8 weeks, and yes, that could push revenue into 2Q. If anything, this will simply come down to when the revenue is recognized. When all is said and done, we’d argue that RH is structurally more insulated from lost revenue than any other type of retailer. It will probably come down to a matter of timing.


Recent nonresidential and nonbuilding construction data remains firm for 2015.


The Architecture Billings Index (a survey of architects) typically leads nonresidential and residential construction spending by approximately 9-12 months. More importantly, the ABI Index leads Manitowoc Crane Orders by 2 quarters.


This suggests Manitowoc's crane sales should see a pickup in the first half of the year. 

Investing Ideas Newsletter      - MTW 3 20 2015


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#emerging outflows round ii march 2015 update

We reiterate our bearish bias on Emerging Markets, a view we have held since late September. 

Investing Ideas Newsletter      - zem

mcd: ripe for a trade on the short side

Consistent with our short thesis, MCD gave an uneventful presentation this morning at the UBS Global Consumer Conference.

Investing Ideas Newsletter      - z44

A Good Week for Bond Bulls

A Good Week for Bond Bulls - v9


It was a good week for longer-term investors who get #Deflation and global #GrowthSlowing.


The 10-year U.S. Treasury yield is down -17 basis points on the week to 1.94% this morning. Next support at 1.91% with resistance at 2.05%.


A Good Week for Bond Bulls - 70


Lower for longer remains our call on rates. We remain long TLT.

A Good Week for Bond Bulls - z tlt


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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 80.43%
  • SHORT SIGNALS 78.35%

Keith's Macro Notebook 3/20: Russell 2000 | Japan | UST 10YR




Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

Keith's Daily Trading Ranges [Unlocked]

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. It was originally published March 20, 2015 at 07:28 in Daily Trading RangesClick here to learn more and subscribe.

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NKE – The Math Nobody Is Doing

Takeaway: NKE’s superior relative guide is driven by one major factor – e-commerce. $1bn+ at 70% GM = over half of incremental GP and 6% EPS growth.

Nike’s EPS beat as well as its initial below-consensus guidance for FY16 were not a surprise.  What is a surprise is the composition of the earnings algorithm – and that's the part of the discussion that will be missing this morning. So here’s our two cents. Consider the following…Nike, Ralph Lauren, and VF Corp all guided to about a 500bp hit to top line growth over the next year due to FX. But that contributes to down double digit EPS at RL and +4% EPS at VFC, but double digit growth in earnings at Nike. Despite the biggest FX hit Nike has felt in over five years, the company basically plans to leverage its top line growth rate into earnings by a factor of 2 (+msd sales into +dd eps). And let’s not forget that this is Nike we’re talking about -- it rarely gives initial guidance that it does not ultimately beat (usually by a wide margin). We’re definitely not averse to owning Nike as it sits on our Long Bench, but we’re concerned about valuation and such little room for error at the precise time the most important person in the company is retiring.


NKE – The Math Nobody Is Doing - NKE fx guidance 3


We chalk it up to two factors… a) the impact of e-commerce on the model, and b) how well this company (notably Don Blair) manages the financial model.


A)     Consider e-commerce for a minute.

  1. E-commerce was up 42% in the quarter, which is a sequential slowdown from 2Q’s 66%. But looked at on a 2-year run rate, underlying growth remains at peak levels. We think that Nike has plans to set new peak levels in FY16. How we’re doing the math, e-commerce represents about 6% of Nike’s sales. That’s about $1.8bn today. We think the company will add between $1bn-$1.2bn in FY16, or 55%-65% growth. Nike will probably tell you that we’re too aggressive. But let’s put the accountability pants on. In Oct 2013, the company said that e-comm would go from $540mm in 2013 to $2bn in FY17. It appears to be hitting that goal 1-2 years ahead of plan. It didn’t purposely sandbag, but rather it’s such a dynamic growth opportunity with more and more growth opportunity by the day.
  2. The margin on those sales is a big consideration. How we do the math, e-commerce sales are about 20points margin accretive. That’s outlined in the following table. But more important than the actual gross margin rate is the magnified amount of gross margin dollars as Nike captures a full retail price instead of one with a 50% wholesale discount. A 20%+ margin on a 2x price = nearly 4x the gross margin dollars.
    NKE – The Math Nobody Is Doing - NKE margin math
  3. Yes there are increased working capital requirements, which Nike will have to manage. There will be a learning curve there. But outright capital spending and incremental SG&A investment on e-commerce is shrinking – for now at least – given what Nike has been investing (much of it quietly) over the past three years.
  4. We could actually make the argument that 100% of the e-commerce spend will be incremental – as in, not take away from its wholesale business (FL, FINL, HIBB). Not over the long term, but temporarily. The point is that Nike is going to manage its wholesale model with kid gloves. It will say and do all the right things, as will its partners. But make no mistake, it will aggressively push the envelope with its e-comm model along the way. It will only know it pushed too far when some serious channel stuffing is apparent in the wholesale channel (ie. higher inventories, lower comps at FL, or maybe even 24% growth in a sub-par outlet like KSS in the last qtr).  And at that point, the right decision will likely be to still grow e-comm aggressively.
  5. In the end, we think that e-commerce growth will account for $750mm-$900mm in incremental gross profit – or about 60% of gross profit growth.  That also translates to 5-7% in EPS growth. Back to the comparison to other companies above, we think this largely explains away why Nike is growing earnings 2x the rate of sales while other non-durables brands are flat to down.  


B)      The financial model, and the Don Blair factor, are far simpler. The cross currents impacting Nike’s financials are nothing short of fierce. But the consolidated numbers always manage to balance out and produce consistent results. This is all Blair. We’re not saying that he micromanages daily regional P&Ls, but rather, he has a process for managing the financials such that when one region or business line is challenged, another will always pick up the slack. He built a finance organization from the ground up, and to his credit, has set in motion a process that is bigger than any one individual. That said, things will change when he leaves – perhaps not in the finance organization at all, but in other parts of the company where people ‘behaved’ in a shareholder-friendly way simply knowing that Blair is there.  See our write up on that below. 



Previous Note on CFO Retirement from 2/12/15


02/12/15 05:39 PM EST

NKE - CFO Retirement = Negative Development


Takeaway: This is a bad event. The business is absolutely fine – no issues there. But Blair is as good as they come. Stay away for now.


There’s no sugar-coating this announcement from Nike that CFO Don Blair is retiring. We’ve always said that there’s only one person we’d be worried about leaving Nike, and that is Don.  The reason is that aside from having tremendous credibility with the investment community, Don has served as a critical bridge for Mark Parker (CEO) into the world of cost management, capital deployment, and ROIC – which is key for a CEO who is otherwise (brilliantly) focused on brand, design, and the consumer.  


To be clear, we’re pretty certain that this is not a sign of an impending blow up. Business at Nike is fine, and he is leaving while he’s on top. In fact, to his credit, Don would absolutely not leave if the company was trending in the wrong direction – and he’ll be there until October 31 of this year. Anyone looking for a blowup during that time period will be disappointed.


Andy Campion is perfectly appropriate as a CFO for Nike, Inc. – but as much as people will argue that serving as CFO of the Nike Brand prepared him for this job, we’d say that there is a massive difference between being the CFO of a subsidiary (albeit a huge one) and being the outward-facing CFO of a company that's in the top 10% of the S&P 500. Even Don Blair had an extremely painful initial 2-3 years while he navigated through the confusing internal forecasting process inside Nike. The fact is that Don is one of the best CFOs that I (McGough) have known in 22 years.


The learning curve for his successor will be steep. And keep in mind that Don fought hard (and won) serious clout for the Finance organization in a company that is traditionally Brand and Marketing-driven. With Don no longer as the anchor, we think we’re likely to see more political tussles internally – potentially for a few years – while the new regime is established.


We’re taking Nike from our Long list to our ‘Bench’ until we get more comfort in organizational structure. If we were looking at an 18 multiple, we’d hang in there. But at 23x, we’d rather wait. 


Early Look

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