Investing Ideas - Levels

Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction investing ideas.

Investing Ideas - Levels - z levels

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

Anything longer than 3 years is unpredictable.


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EWG, ZOES, VNQ, EDV, GS, ITB, TLT, MTW, MUB, RH

Below are Hedgeye analysts’ latest updates on our ten current high-conviction long investing ideas.


Please note 1) we added ZOES and EWG this week and 2) we will send CEO Keith McCullough’s updated levels for each ticker in a separate email.


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


Investing Ideas Newsletter      - China cartoon 04.14.2014



We added ZOES to Investing Ideas on April 14th. Below are the key points to our long ZOES thesis:

  1. Strong brand positioning: Zoe’s is a fast casual concept serving a menu of fresh, wholesome Mediterranean-inspired meals. In addition to being a first mover in the space, the brand primarily appeals to educated, affluent, and active females – a demographic that is traditionally difficult to capture.  With more than 70% of dining decisions in America made by women, Zoe’s is uniquely positioned for success. Zoe’s boasts an unparalleled catering program (16% of sales) that drives, consumer trial, brand awareness, and mix and serves as a direct competitive differentiator versus peers.
  2. Impressive early stage profitability: Zoe's has very impressive early stage profitability for a fast casual concept. In fact, it’s the best we’ve ever seen.  Young, high growth restaurant concepts are typically not very profitable as they face significant investment costs in conjunction with efforts to achieve critical mass in individual markets. Zoe’s was able to generate $120k in restaurant level EBITDA per store at only 84 units. This is a level that took Chipotle 400+ units to reach. In addition, at 102 stores, Zoe’s was achieving higher AUVs ($1.470mm) than both Panera ($1,274mm) and Chipotle ($1,056) did at 113 and 227 units, respectively.
  3. Disciplined growth strategy: Zoe’s has a focused, systematic approach to its new unit expansion strategy that separates it from its competitors.  Aside from stringent requirements, Zoe’s approach to new market expansion is refreshingly calculated. The concept entered into one new market (Philadelphia) in 2013 and 2014 and plans to do the same in 2015 (Kansas City). This rapid penetration approach drives brand awareness and benefits these new units as they ramp. Management has pegged the long-term domestic potential of the concept at ~1,600 units, but the fashion in which they plan to get there is what stands out to us.

CLICK HERE to watch an excerpt from Restaurant Sector Head Howard Penney's conference call with institutional investors where he outlines his bullish thesis on Zoe's. 

Investing Ideas Newsletter      - Slide1


Goldman Sachs (GS) sailed through first quarter earnings this week posting a sizeable beat lead by a rebound in both its trading businesses. Earnings for the firm came in at $5.94 per share, over a $1.50 more than expectations of $4.25.


It has always been a directional guessing game forecasting trading results for the major dealers as there aren’t many independent data series on trends intra quarter, but even the most bullish estimate for GS was too conservative. Relative to JPMorgan (JPM) and Bank of America (BAC) who also printed results this week, GS put up the best year-over-year growth in fixed income trading (or FICC) with +10% growth in the period. This mark compared to the +5% increase at JPM and the -10% decrease year-over-year for BAC.


In addition, GS is not normally known for its equity trading franchise however with $1.1 billion in equity trading revenues in the first quarter, an astounding +170% increase from 1Q14, the company may have taken the mantel from perennial equity leader Morgan Stanley (MS) who reports next week. At a normalized ~12% return on tangible capital, our model spits out fair value for the stock in the mid $250 per share range. 

Investing Ideas Newsletter      - chart10


April Showers


The housing data was mixed in the latest week with the April homebuilder confidence survey (NAHB HMI) putting in a strong sequential improvement, while March Housing Starts were a bit soft. 

  • NAHB HMI:  The National Association of Home Builders (NAHB) released its April Housing Market Index survey (HMI) – essentially a survey of builder confidence – on Wednesday. The print was strong as it showed a nice bounce across all three survey categories: Traffic of prospective buyers, current conditions, and expectations 6 months out. The news coming out of the new home market has been less auspicious YTD based largely on weather dynamics that have depressed activity in the Northeast and Midwest. As such, it was good to see builder optimism pick up in the April survey.    
  • Housing Starts/Permits: Housing Starts were up sequentially in March, but by less than the market expected. Total Starts rose by 2% to 926,000 (seasonally-adjusted annualized rate) from 908,000 in February. Markets, however, were expecting a more substantial increase to 1,040,000. The February starts numbers were severely impacted by winter weather in the Northeast and Midwest. We both expected and saw those regions bounce back significantly in March, as Starts in the Northeast rose 115% month-over-month and Starts in the Midwest rose 31%. The culprit for the March shortfall was the West, where Starts declined 19% month-over-month, and as the West is the second largest of the four building regions in the U.S. (trailing only the South in number of units), this was enough to cause the miss. It’s unclear exactly what drove the decline in the West, but the leading theory seems to be the response to the California drought. Apparently, it’s become more difficult for some builders to obtain building permits based on the new, stricter water usage standards. Additionally, some builders seem to be unclear on exactly what the new restrictions entail from a new construction standpoint. This has had the effect of reducing permit filings and depressing housing starts in California. It’s unclear yet whether this represents a time shift in activity, i.e. Permits and Starts will bounce back once the new water regulations are better understood or whether this represents a longer-term reduction in the amount of new construction we should expect in California.

In short, we continue to like the setup for the sector over the current quarter.

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We added German equities (EWG) to Investing Ideas on April 17th. The key bullet points outlining our view are included below:

  • “QE is only just beginning; the Euro will continue to weaken; Germany will disproportionately benefit due to exports; and asset classes like equities will inflate due to money creation (the German economy sits in the sweet spot to benefit from a weaker euro as its exports account for a monster 47% of German GDP)
  • Since the ECB announced QE on 1/22/15 the correlation between the DAX and EUR/USD is -0.84, a strong negative correlation that we expect to persist as the ECB keeps its foot on the QE pedal for longer than its intended target (late 2016)
  • Recommending long the DAX (HEWG or EWG) and short EUR/USD (FXE)”

Investing Ideas Newsletter      - chart6

Investing Ideas Newsletter      - chart7


On the domestic fixed income front we’re looking at lower yields for longer. The U.S. 10-Year Treasury yield made another lower high late last week then declined week-over-week to 1.90% (-5bps w/w). Lower yields benefit those slow-growth fixed income cash flows tied to the treasury curve (yields down, bonds up). Four of five tickers in our macro lineup for investing ideas are directly tied to this relationship (And so are German equities but not directly).


Of interest to our call on lower rates for longer, CPI printed NEGATIVE y/y for March on Friday and missed consensus estimates on both a m/m and y/y basis:

  • CPI m/m +0.2% MAR vs. +0.3% est. (+0.2% prior)
  • CPI y/y -0.1% MAR vs. 0.0% est. (+0.0% prior)

TLT, EDV, MUB, and VNQ set-up nicely in a slow-growth, deflationary setting because inflation missing=expectation for even easier policy=More central-planning cowbell=lower yields for longer.

One of our three big topics in the @Hedgeye Q2 2015 macro themes deck, which we presented last week, was #LateCycle USA. A reality you won’t here on mainstream media is that many late cycle indicators (which are labeled as proof of a “booming” economy by some) look best before the crest in the economic cycle. The labor market and corporate earnings are two of these indicators which we analyze extensively.


Jobless claims data, while coming in higher than consensus estimates this weeks, showed another week of sub-300K claims from new applicants:

  • Initial jobless claims increased +294K vs. 280K estimated (+281K prior)

GREAT NEWS! Except that this data series among others in the employment arena paints the rosiest picture of the economy before it peaks. Stick with vehicles to play our #lower-rates-for longer thesis. 

Investing Ideas Newsletter      - chart8

Investing Ideas Newsletter      - chart9



RH is adding a second store on Greenwich Avenue in Greenwich, CT.  This is proof that the 22k sq. ft. Greenwich store is too small. We will likely see fewer Legacy Store closures as RH continues category expansion.


This is the first time we've seen RH swap out a Legacy Store for a Design Gallery in a market and then supplement the new footprint with an additional concept -- in this case it's Baby & Child. Our analysis suggests that the Greenwich market could support a 65k sq. ft. store. Meaning the current 22k sq. ft. store, while in a great location, and at a significant ROI, could and should be much bigger versus how it exists today in order to capture the market opportunity and properly display the company's expanding category portfolio.


Instead of swapping out the door (the current Greenwich Design Gallery has extremely favorable rent economics -- especially given the prime location) for a bigger store, like we saw in West Hollywood and will see in Houston, RH is adding square footage across the street. The new door at 4,800 sq. ft. is taking over space vacated by Gap Kids (the RH Legacy Store the company closed last year was 5,500 sq. ft.).


More than anything, we think this is a very bullish statement on the success of the Greenwich market. The company would not be opening a Baby & Child concept unless the Design Gallery was crushing it in year 1. Between Baby & Child, 2 new pending concepts (which could merit their own doors), and the addition of Kitchens still TBD, we think we'll see a lot more of this. As in, Legacy Store closures as new Design Galleries open up will be lower than most expect.


Investing Ideas Newsletter      - chart13


CLICK HERE to see images from the Greenwich Design project.

Investing Ideas Newsletter      - Slide1


MTW revised down its 2015 guidance for the Foodservice Equipment segment and preannounced a weaker than expected 1Q 2015.  Sales in the quarter are a noteworthy miss, but we do not believe that the release has relevance for our sum-of-the-parts valuation thesis, and see many reasons to anticipate stronger operating results in 2H 2015.  Basically, we think investors stand to be paid for suffering through this volatility, with potential share price upside on separation ranging from the high 20s to low 40s.


Foodservice: A portion of MTW’s larger foodservice customers have reduced capital spending, hurting first quarter results against tougher comps.  Foodservice laps some key operating issues in 2H 2015, with 1H 2015 still mired in lingering cost challenges. Following robust traffic earlier in the year, February and March traffic was fairly weak.  Still, the Foodservice segment has a significant opportunity relative to current customer capital spending environment as it gets its operations in order later this year.  

Investing Ideas Newsletter      - chart11


Cranes: However, the MTW release also referenced “pockets of improvement” in the Cranes segment.  This is a positive, since a common investor theme has been the avoidance of crane manufacturers on concerns of weakness in crane demand from the oil patch.  Backlog data, not included in the preannouncement, is needed to get a better sense of Crane segment dynamics, but the tone sounded positive. This matches our expectation that the trajectory of crane demand should have been positive coming out of 1Q15.

Investing Ideas Newsletter      - chart12 


Upshot:  Near-term profit weakness is partly why the shares are ‘cheap’, and we think holders may be compensated well for the volatility. The shares are currently trading lower on a weaker than expected 1Q15, but 2Q15 should show improved Crane segment results and 2H should show better Foodservice Equipment results. With potential share price upside on separation ranging from the high 20s to low 40s, we do not expect the preannouncement to have longer-term relevance.



* * * * * * * * * * 


replay | germany: still bullish

Earlier this week, our European analyst Matthew Hedrick led a discussion on why we are still bullish on the German equity market.

Investing Ideas Newsletter      - z germany

twitter (twtr): are acquisitions enough?

Internet & Media analyst Hesham Shaaban says TWTR tried to warn consensus, but they weren’t listening.

Investing Ideas Newsletter      - z twtr

Cartoon of the Day: Store, Baby, Store!

Cartoon of the Day: Store, Baby, Store! - Oil cartoon 04.17.2015


U.S. oil supply is a key point in Hedgeye's bearish view of oil over intermediate-term TREND and long-term TAIL durations.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

The Week Ahead

The Economic Data calendar for the week of the 20th of April through the 24th of April is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - Week Ahead


Keith's Macro Notebook 4/17: China | Greece | Oil


Hedgeye Director Of Research Daryl Jones shares the top three things in CEO Keith McCullough's macro notebook this morning.

Retail Callouts (4/17): NKE, UA, COH, FL, GIL, ROST, SKX , +93 More

Takeaway: We think that this summer’s preannouncement calendar is setting up to be particularly robust. Update on math for NKE NBA deal - UA impact.

Preannouncement Season -- Three Months Away


Conclusion: Yesterday we updated and emailed our SIGMA deck for about 100 companies, (Ping us if you would like a copy). The number of companies screening short is nearly 3x what we usually see. We think that it’s game-time for picking stocks in this group. Earnings matter more than ever. We need to manage risk ahead of what will likely be a busy preannouncement season this summer. We’ll be back with changes to our Idea List and Bench after vetting the tickers below appropriately.


As background, in this analysis we triangulate the P&L and balance sheet to hone in on which companies are likely to beat on the Gross Margin line, and of course…which companies are going to miss. Over time, the relationship between this analysis and stock moves is just over 90%.


In running this analysis for the group, we typically find that roughly 10% of the stocks fall onto our Long screen, with another 10% Short. This quarter, however, we’re looking at about 20% screening Long, and just over 30% Short. Tickers are as follows… (particularly notable callouts are bold and underlined)






Industry Trend: The retail group in aggregate ended the fourth quarter in the sweet spot – sales growing faster than inventories, and margins up y/y. We know, that’s old news.  When earnings season kicks off in earnest next week, we’ll see this position hold – which absolutely needs to happen with the group at 22x earnings and 9.5x EBITDA (peak, by a long shot).  It is very rare that we see the group hold the upper right quadrant for more than two quarters – meaning that there’s likely risk to either a) guidance with the upcoming round of earnings reports, b) earnings misses when 2Q earnings hit in July, or c) multiple compression in anticipation of slowing earnings growth. We think that this summer’s preannouncement calendar will be particularly robust.

Retail Callouts (4/17): NKE, UA, COH, FL, GIL, ROST, SKX , +93 More - 4 17 chart1


NKE, UA, AdiBok - Nike near deal for NBA uniform rights


Takeaway: There is not a chance that Nike let's this NBA deal slip through its fingers. Nike couldn't care less about Adidas or Reebok as a threat to its basketball franchise. But the thought of UnderArmour securing the NBA deal likely has Nike quaking in its boots. That's why there's almost no chance Nike loses it. Consider the math. The deal is now for about $36mm/yr. Let's say the new deal comes in at $45mm per year, that's just 4.5% of NKE's existing endorsement budget, for UA it's 50%. That's actually not too far above what Kevin Plank had Board approval to pay for Kevin Durant before Nike outbid them (near $30mm). But make no mistake, if Nike had to pay $100mm for this deal, we think it would. If UA was smart, it would push the bidding as high as possible to potentially dislocate marketing dollars that Nike would otherwise spend elsewhere.





Carlyle Group eyes retail and CPG world with Walmart exec on team



Sneaker Makers Train Their Eyes on Fashion



TJX - TJ Maxx Now Sells Plus-Size Clothing On Its Website



TGT - Lilly Pulitzer for Target Pop-Up Opens in Bryant Park



JWN - Nordstrom Partners With Italian Trade Commission



Macerich Shareholders Threaten Lawsuit



SRSC - Sears Canada CEO says more store closures possible



Do It Best relaunches ecommerce site



DSW - U.S. shoe giant DSW sticks to big-box format as it plans to double presence in Canada



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