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Cartoon of the Day: Just Imagine...

Cartoon of the Day: Just Imagine... - Japan QE cartoon 04.28.2015

"Last night Japan reported a bomb of a Retail Sales report at -9.7% year-over-year for the month of March," Hedgeye CEO Keith McCullough wrote in today's Morning Newsletter. "That compared to a paltry -1.7% in the month prior. And the Japanese stock market went up on that…"

 


#Confidence?

Being long stocks/commodities ahead of an easier Fed and bombed out Q1 earnings expectations is one thing – holding all long positions related to the consumer as gas prices rise and consumer confidence makes lower-highs is entirely another.

 

As you can see in the data/chart below, “confidence” is both pro-cyclical (Late-Cycle) and mean reverting. If March was the high for this cycle, that’s is going to be a new problem. In rate of change terms, confidence has been bullish for 6 years.

Click image to enlarge.

#Confidence? - z 1

 

#Confidence? - z 2


KORS - Vetting Book. New HedgeyeRetail Product

Takeaway: We're launching our first 'Idea Vetting Book' next week, which will thoroughly vet the bull/bear case (and ultimate EPS power) for KORS.

NEW HEDGEYERETAIL PRODUCT

On Thursday, May 7th at 1:00pm ET we will be releasing a new product for HedgeyeRetail subscribers aimed at Idea generation around battleground stocks in Retail, or those that simply pass through our initial Idea screening process and make it to our Idea Bench. These “Idea Vetting Books” are distinctly different from the Black Books you’ve come to expect from us (and should still expect from us in the same quantity). 

 

While Black Books are focused around our top ideas, the Vetting Books will go through all financial and operational puts and takes across TRADE, TREND, and TAIL durations sourced from a group of roughly 125 stocks. We don’t know where we’ll come out on a given name until the very end of our process – and in some cases, the answer might be that ‘the call’ is to do nothing with the stock. But we’ll explain in detail precisely why that is the case. This is and has been a core part of our internal investment process in sourcing what we consider to be Big Ideas, and with this product, we’re opening it up to our customers.

 

VETTING BOOK #1: MICHAEL KORS (KORS)

Next Thursday’s Vetting Book will be focused around Michael Kors (KORS). The name recently found its way onto our Long bench, after losing $8bn, or 40% of its market value over the past 12-months. How we see it, this name is likely a binary outcome. At $63 it appears to be trading at 14x earnings, but it’s probably not. The ‘e’ part of the equation is wrong. Either the company hits/beats earnings and the stock goes up meaningfully, or numbers come down materially, and the stock looks expensive at a much lower stock price. We’ll focus on vetting the near-term earnings drivers, long-term opportunity for growth as well as the cost of that growth, and ultimately, what the right size and margin structure is for KORS.

 

We’ll be hosting a conference call at 1:00 pm ET on Thursday, May 7th.

 

CALL INFO WILL BE DISTRIBUTED THE WEEK OF MAY 4th.


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McCullough: Sir John Templeton and Signs of Market Euphoria

 

In this excerpt from this morning’s edition of The Macro Show, Hedgeye CEO Keith McCullough responds to a viewer’s question on where markets stand in light of Sir John Templeton’s famous quote: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”


DFRG: Short on Strength

DFRG remains on our Investment Ideas list as a short.

 

DFRG: Short on Strength - 1

 

‘Twas a decent quarter. DFRG delivered a decent quarter highlighted by a $0.02 bottom line beat despite a top line miss.  Management also maintained 2015 EPS guidance of $0.95-0.98.  Double Eagle SSS of +2.3% missed the consensus estimate of +2.6% and represented a 130 bps sequential decline in the two-year average.  Weather did have a negative impact on comps in the quarter.  Sullivan’s, on the other hand, delivered higher than expected same-store sales of +4.8%, driven by a +8.1% increase in average check, offset by a 3.3% decrease in customer counts.  Sullivan’s benefited significantly from the inclusion of New Year’s Eve in the quarter.  A decrease in certain discounted bar menu items once again drove the decline in customer counts.  Two-year average traffic was down -0.4% and -4.9% at Double Eagle and Sullivan’s, respectively, in the quarter.  Despite trending negative for the majority of April, system-wide same-store sales are beginning to trend in the right direction.

 

DFRG: Short on Strength - chart2

 

DFRG: Short on Strength - 3

 

Continued weakness at the Grille. As a reminder, management is now reporting same-store sales metrics for the Grille concept, which declined -3.5% in the quarter, primarily driven by a decrease in customer counts.  Restaurant level margin decreased 80 bps y/y to 15.2%, due in large part to higher restaurant operating expenses (occupancy, marketing and advertising costs), partially offset by lower cost of sales.  Management is holding back its first Grille opening of the year until late 2Q15, in order to give them time to decipher their market research, train new managers, and execute several other initiatives around menu development, brand messaging, and architectural design.  By pushing back Grille openings, management is effectively masking the inefficiencies associated with growing this concept over the intermediate-term.  In our view, it is by delaying the rollout of the Grille that DFRG was able to deliver a decent quarter and very well could once again in 2Q.  Interestingly enough, by delaying the rollout of this concept, management risks exacerbating the negative impact of these openings when they hit the P&L all together in 2H15.  We’d imagine they think they’ll have their issues straightened out by then, but that’s a big bet to make and one that we’ll take the other side of until proven otherwise.

 

DFRG: Short on Strength - chart4

 

Cloudier days loom ahead. We recommend shorting DFRG shares on strength this morning, given a decent but underwhelming quarter, in our view.  Importantly, there was nothing in this quarter that dispelled our bearish thesis.  DFRG continues to be loved on the sell-side, despite the risks associated with the continued rollout of the Grille concept.  If the Grille continues to struggle or new unit guidance is cut, the stock should drop precipitously.  At this point, we’re simply not willing to bet on a turnaround here.  Incremental costs are likely to build to support the rollout over the course of the year which makes EPS growth of 15.2% on 16.1% sales growth look quite aggressive to us.  DFRG is in the clear for now, but cloudier days loom ahead.

 

DFRG: Short on Strength - chart5


Keith's Macro Notebook 4/28: Japan | USD | UST 10YR

 

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


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