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REPLAY | Q&A With Hedgeye Healthcare Sector Head Tom Tobin $HCA $MDSO $ATHN

Hedgeye's Healthcare Sector Head Tom Tobin and Analyst Andrew Freedman hosted a live Q&A session today discussing new developments for HCA, MDSO and ATHN.

 

Watch the replay below to learn about their new MDSO tracker, a web-based program that generates a comprehensive list of customers. 

 


21 Fearless Stanley Cup Playoffs Predictions From Hedgeye

 

Who's going to bring home Lord Stanley's chalice? The New York Rangers? Montreal Canadians? Nashville Predators? With the playoffs in full swing, Hedgeye employees reveal who they like to win the Stanley Cup. 


CAT: E&T Isn’t Dead, At Least Just Yet (Earnings Preview)

Overview

 

We see CAT roughly matching 1Q 2015 EPS expectations, within a range of about $1.23 to $1.39, relative to consensus of $1.35.  Sales estimates look a bit low to us; we get a sales beat from CAT at >$12.7 billion vs. consensus of $12.3 billion.  We’ll explain that deviation away by assuming CAT management set achievable expectations for 1Q 2015 in order to inch guidance higher during the year.  That strategy worked well for much of 2014, and CAT management seems increasingly practiced in managing street expectations.

 

CAT faces greater pressure in the back half of the year, as oil-related order at E&T backlogs run dry.  The eventual draining of E&T backlogs may foil that strategy, but we think that low 2015 expectations have already shifted the focus to 2016.  Management, we suspect, was looking to set a low bar for 2015; they are unlikely to lower guidance in the 1Q 2015 earnings report, and may well try to shade it a bit higher.  Of course, guessing at quarterly results and commentary is an error prone exercise, and our views should be considered in that context.

 

We wouldn’t exactly run long into the print, and remain negative on the prospects for CAT shares.  That said, we are ‘hoping’ for an in line to better-than-expected result so that we can add CAT back to our Best Ideas List on the short side in anticipation of much weaker 2H 2015 results.  In contrast to what some CAT bears are likely expecting, we see the oil & gas exposed Energy and Transportation segment again leading  CAT’s segment profitability in the quarter.  Of course, we worry that ‘everyone’ is expecting E&T to post a stronger first half.  We come out thinking that the severe 2015 guide down pushed weaker longs out of CAT shares, and even an in line 1Q 2015 result may pull in index sensitive buyers.  If so, that may set up an opportunity for CAT bears, like us, to reenter the name. 

 

We are particularly interested in CAT Financial exposures, as discussed here, here, and hereEncourage your favorite First Call listed sell sider to ask about CAT Financial’s exposure to high cost miners (copper, iron ore, coal etc) and shale oil (pressure pumping, well service etc) companies on the earnings call.

 

For additional background on CAT, feel free to ping us or see here, here, here, or here for some relevant notes.

 

 

 

Segment Highlights

 

Energy & Transportation (E&T):  E&T isn’t dead yet, in part because that demise is expected to be more of a 2H 2015 event.  Backlogs in the segment, even with allowed order cancellations, should protect results through much of 1H 2015.  Dealer sales data for the segment – admittedly narrow in scope – similarly do not point to any significant 1Q 2015 declines.  We would expect CAT to retain some deposits for canceled orders in energy-related large engines, and deposit retention can temporarily boost margins.  CAT is guiding to a 5 to 10 percent segment revenue decline for full year 2015, with much of that weakness (aside from specific issues like Tier 4 locomotives) pushed to the second half.  

 

CAT: E&T Isn’t Dead, At Least Just Yet (Earnings Preview) - f1

 

 

Construction Industries (CI):  CAT has guided for Construction Industries sales to decline by 5 to 10 percent in 2015 from 2014.  Weakness in South America, where a government contract sets up a tough comp, offsetting some expected gains in North America, and, most likely, Europe.  We see CI a bit stronger in 1Q and 2Q, although the 1Q 2015 margin is a pretty-much-all-time difficult comparison. 

 

CAT: E&T Isn’t Dead, At Least Just Yet (Earnings Preview) - f2

 

 

Resource Industries (RI):  This somehow forgotten segment doesn’t suffer from a Fed-like zero bound, and we are interested to see how competitive pricing becomes as 2015 progresses.  We model incremental margin weakness into 2015 as aftermarket sales fail to support activity and excess capacity encourages pricing competition for whatever orders remain.  This segment might suffer from remarketed used equipment later this year, adding pressure to what would otherwise be a stabilizing order environment.  Management is forecasting decline of about 10 percent for segment revenue, but we anticipate the declines more equally spread throughout the year.

 

CAT: E&T Isn’t Dead, At Least Just Yet (Earnings Preview) - f3

 

 

Upshot

 

Relative to the scope of CAT’s recent results, we expect a reasonably in line result from CAT.  Management, we suspect, was looking to set a low bar for 2015 in January;  we think they are unlikely to lower guidance in the the 1Q 2015 earnings report.  Like 2014, management may instead be looking to inch the guidance higher.  We expect that to be easier to do in the first half of 2015, during which the E&T backlog should provide a high margin revenue cushion.  The second half may well provide no such padding, and we will look to use meaningful strength to add CAT back to our Best Ideas List on the short side.  

 

 


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 80.64%
  • SHORT SIGNALS 78.61%

The Pain Trade

Client Talking Points

YEN

The Japanese Nikkei corrected last week and Mr. Hamada announced this morning the potential need for more cowbell = Yen Down, Nikkei +1.4% to +14.7% year-to-date. We still like Japanese Equities, don’t forget how committed Abe/Kuroda are to currency devaluation and stock market appreciation.

EUROPE

Europe loves Down Euro, and we have day-2 of that this morning + a big German ZEW print taking the DAX (which we like) +1.4% to +23% year-to-date. Denmark rocketing +2% to +36.6% year-to-date (oh and Greek stocks -3.2% to fresh year-to-date lows of -14.1%).

S&P 500

We called it the Pain Trade because bears sold the lows (again) last week, taking the net SHORT position in SPX (Index + Emini) to -40,978 contracts (the 6 month average is a net LONG position of +31,930 contracts) – maybe a more dovish Fed gets fully priced in before the news next week (April 29th meeting); we’ll see.

Asset Allocation

CASH 31% US EQUITIES 15%
INTL EQUITIES 17% COMMODITIES 1%
FIXED INCOME 30% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MTW

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. 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.

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. 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. The National Association of Home Builders (NAHB) released its April Housing Market Index survey (HMI) – essentially a survey of builder confidence. 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.  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.

TLT

On the domestic fixed income front we’re looking at lower yields for longer. Lower yields benefit those slow-growth fixed income cash flows tied to the treasury curve (yields down, bonds up). TLT sets-up nicely in a slow-growth, deflationary setting because inflation missing=expectation for even easier policy=more central-planning cowbell=lower yields for longer.

Three for the Road

TWEET OF THE DAY

All in, this was an 'ok' qtr by $UA standards. But outstanding qtr by most other standards.

Managing the biz well thru explosive growth.

@HedgeyeRetail

QUOTE OF THE DAY

Most great people have attained their greatest success just one step beyond their greatest failure.

Napoleon Hill

 

 

STAT OF THE DAY

Mobile searches related to mortgages, credit cards, loans and life insurance are gowing 48% year-over-year.


CHART OF THE DAY: The Pain Trade (S&P 500 Net Positioning vs. SPX Index)

CHART OF THE DAY: The Pain Trade (S&P 500 Net Positioning vs. SPX Index) - 04.21.15 chart

 

Editor's Note: This is a brief excerpt and chart from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to become a subscriber.

 

...Pain Trade is the one that the largest % of market participants are not positioned for. One very important way to listen to where the crowd is positioned is in futures and options contract terms. 


Process of Discovery

“Humble inquiry is a process of discovery.”

-Ed Hess

 

That’s a solid research thought from a section of a solid #behavioral book I finished reading on vaca, Learn Or Die. The section is titled “Asking Not Telling” and I thought a lot about that when it comes to my #process.

 

In addressing our ability (or lack thereof) to listen, Hess cites the behavioral research of Edgar Schein (MIT Professor) “who believes that the US has a culture that values telling over asking.”

 

I know more than you, and therefore, I am smarter and better than you.” Sound familiar? … “alternatively, asking says I care about what you think and I am ready to invest myself in listening.” (pg 66) Are you a good listener?

 

Process of Discovery - z li

 

Back to the Global Macro Grind

 

While I am still quite bullish on both stocks and bonds into the Fed meeting next week, I am still short of something that I always seem to be short of – time! That makes the listening exercise all the more important. It’s who/what you listen to that matters.

 

#focus

 

For the first part of my career, I listened to my bosses. Then, while my bosses were making mistake, I started to realize that if I listened more to the market, I could help them make less mistakes. Hedgeye’s #process is highly influenced by this experience.

 

As our process evolves, more and more of my time is spent listening to my analysts. That’s a role reversal from my beginnings. Technically, I’m the boss – but our analysts are empowered to know more than me about their respective domains.

 

In the spirit of listening to the best analyst there is (Mr. Macro Market), here’s what he’s saying this morning:

 

  1. Pain Trade in US Stocks = #on
  2. Chinese, Japanese, and European Bull Market in Equities = still #on
  3. FX and Fixed Income markets = #boring

 

Boring works. Defined in Hedgeye mathematical speak, boring is when the variance of what I call the risk range compresses. Tighter ranges are easier to risk manage. They tend to trend upwardly, as volatility falls. They don’t have a lot of chop.

 

There‘s not a lot of “chop” in raging bull markets (like the Shanghai Composite, Nikkei, or DAX) as the only things getting chopped there are fingers of the short sellers who didn’t obey the commands of the central planners.

 

If you want to discover “chop” try trading something with a widening risk range (rising variance) that goes both up and down with no discernible TREND, then drop whatever that something is -1% one day, and ramp it +1% the next. Rinse/Repeat.

 

That something, in this morning’s case (per Mr. Macro Market) is the SP500:

 

  1. She was -1.1% on Friday, then +0.9% yesterday
  2. She’s been down, up, down, up for the YTD, depending on the month you listened to
  3. And now, she’s ramping what I call the Pain Trade to test the top-end of the range (again)

 

Pain Trade is the one that the largest % of market participants are not positioned for. One very important way to listen to where the crowd is positioned is in futures and options contract terms. Before yesterday’s (and this morning’s pre-market futures) ramp, here’s where non-Commercial CFTC futures/options NET positioning stood:

 

  1. SP500 (Index + Emini) net SHORT position of -40,978
  2. The 3 month avg net position = +13,092 (net LONG)
  3. The 6 month avg net position = +31,930 (net LONG)

 

In other words, if you’re good at listening to Mr. Macro Market, then you have to be quick to contextualize what it is you think you heard. I don’t know about you, but as I get older I need to double check things as I see/hear less well! Then there’s listening to opposing thoughts across multiple durations and trying to put that within a context of rising and falling probabilities…

 

This hockey player guy still thinks the Fed is going to be less hawkish on rates in 2015, but then there’s this Japanese dude named Hamada who told Abe that he might need moarrr central planning cowbell overnight = Down Yen, Up Dollar…

 

Trying to risk manage it all can be quite humbling, indeed.

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) across 12 big macro factors are now as follows:

 

UST 10yr Yield 1.85-1.95% (bearish)
SPX 2084-2117 (bullish)
RUT 1 (bullish)
Nikkei 198 (bullish)
DAX 116 (bullish)

VIX 12.34-15.27 (bullish)

USD 97.02-98.95 (bullish)
EUR/USD 1.05-1.08 (bearish)
YEN 118.61-121.12 (bearish)
Oil (WTI) 48.72-57.69 (bearish)
Gold 1181-1210 (neutral)
Copper 2.67-2.79 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Process of Discovery - 04.21.15 chart


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