Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction investing ideas.
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.
Anything longer than 3 years is unpredictable.
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.
We added ZOES to Investing Ideas on April 14th. Below are the key points to our long ZOES thesis:
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.
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.
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.
In short, we continue to like the setup for the sector over the current quarter.
We added German equities (EWG) to Investing Ideas on April 17th. The key bullet points outlining our view are included below:
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:
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:
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.
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.
CLICK HERE to see images from the Greenwich Design project.
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.
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.
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.
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ADDITIONAL RESEARCH CONTENT BELOW
Earlier this week, our European analyst Matthew Hedrick led a discussion on why we are still bullish on the German equity market.
Internet & Media analyst Hesham Shaaban says TWTR tried to warn consensus, but they weren’t listening.
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
U.S. oil supply is a key point in Hedgeye's bearish view of oil over intermediate-term TREND and long-term TAIL durations.
Hedgeye Director Of Research Daryl Jones shares the top three things in CEO Keith McCullough's macro notebook this morning.
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