"To be clear, my mistake wasn’t being short Oil for this entire move up (we covered commodity shorts ahead of an easier Fed and #LateCycle Labor reports, for a trade)," Hedgeye CEO Keith McCullough wrote this morning. "It wasn’t being long it at $100 either. It was in not being long it from $45 to $62. My main mistake there was that I didn’t think Oil’s Volatility was going to compress almost as fast as it exploded to the upside."
Editor's Note: This is an excerpt from today's morning research. Click here to learn more and to subscribe to America's fastest-growing independent research firm.
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Oil experienced an epic 6 month crash, then rally. Right now, the inverse correlation between Oil and the U.S. Dollar is screaming (yes, we know that supply and demand narratives help too…) with USD signaling immediate-term lower-highs and Oil higher-lows into this US jobs report. Bad jobs report = USD bearish, Oil bullish.
Speaking of the Dollar, the Russell 2000 does not like Down Dollar. That makes sense to me as the “tax cut” from lower gas prices is, well, getting cut! This is going to be a problem for an economic narrative that even Janet Yellen has been forced to acknowledge recently (#StrongDollar, Down Oil, Stronger Consumption).
The Russell 2000 in the midst of a -4.7% correction. Overlay that with the USD and you’ll get the point.
As I spelled out in today’s Morning Newsletter, my intermediate-term TREND price deck for Oil is now $42.06-$69.03.
We will host a conference call on Friday, May 8th at 11:00AM ET to discuss the latest Macau data, our outlook on the market and the stocks and the presentation of a new, original research topic.
RELEVANT TICKERS INCLUDE:
LVS, WYNN, MGM, MPEL, 0027.HK, 1128.HK, 1928.HK, 2282.HK, 6883.HK, and 0880.HK.
- Details behind April's 39% GGR decline
- Discussion of base mass trends
- The impact of Mass re-classifications
- Revised 2015 monthly market projections
- 1Q comparative analysis
- Hedgeye company EBITDA estimates vs the Street (LVS, WYNN, MGM, MPEL, and Galaxy Entertainment)
- Research Topic: Does stock market investing impact Macau gambling?
Attendance on this call is limited. Please note if you are not a Tier 1 or 2 subscriber to our Gaming, Lodging, and Leisure research there will be a fee associated with this call. Ping for more information.
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.33%
SHORT SIGNALS 78.51%
Takeaway: WEN is on our Investment Ideas list as a long.
Good Quarter, Better Announcements
Wendy’s reported 1Q15 results this morning, delivering a top line miss ($466.2 million vs $472.8 million estimate) and a bottom line beat ($0.06 vs $0.05 estimate). Company owned same-store sales of +2.6% fell short of the +3.1% consensus estimate, while franchise same-store sales of +3.4% surpassed the +2.6% consensus estimate.
In addition to solid operating results, management announced several new initiatives in this morning’s press release. The company announced its intent to sell off its non-core bakery operations in May 2015, provided an update on its debt refinancing to be completed by June 1 and its newly announced intent to return net proceeds of approximately $1.1 billion to shareholders via share repurchase (~27% of equity value), and revealed plans to provide updated guidance on June 3 to reflect these initiatives.
We continue to like Wendy’s on the long side, given its willingness to transform the business model to a leaner, more efficient machine. The newly pending sale of its non-core distribution business supports this stance and should allow for greater sourcing flexibility, enhance focus on the core business, and eliminate future bakery capital expenditures. As a whole, Wendy’s new operating model will deliver more predictable earnings growth, higher EBITDA margins, and higher earnings quality, while requiring less capital outlay. The sell-side will continue to overlook the story here, until they no longer can.
Side Note: Is Panera Paying Attention?
We recently called PNRA out as the next activist target, given its recent underperformance and seeming inability to turn around the operations of the business in a reasonable amount of time. Our number one suggestion for fixing Panera was to sell off non-core assets. Panera currently produces and distributes its fresh dough through a leased fleet of temperature controlled trucks owned and operated by the company. The proceeds from the sale could be redeployed back into the business or returned to shareholders. Both options are more attractive than owning this low margin non-core business. Contact if you’d like to access our recent Black Book on the name.
What We Liked in Wendy’s 1Q15 Print
- Bottom line beat
- Strong franchise comps
- North America company owned restaurant margin improved 160 bps y/y
- Adjusted EBITDA margin improved 360 bps y/y due to increased royalties & income and a reduction in G&A
- Debt refinancing on schedule for June 1, with the intent to return net proceeds to shareholders through share repurchases
- Plan to divest non-core bakery operations in May 2015
- Lowered 2015 capex outlook by $15 million to $250-260 million
- Lowered 2015 food inflation outlook from 4% to 1.5% given lower than anticipated beef prices
- Raised company restaurant margin outlook to 16.5-17% to reflect easing commodity prices
- Planned update from the company on June 3
What We Didn’t Like in Wendy’s 1Q15 Print
- Top line miss
- Disappointing company comps
- Revised company operated comp outlook from 3% to 2.5-3%
Takeaway: Active domestic equity managers continued to bleed assets while active international mandates continue to see solid subscriptions.
This note was originally published April 30, 2015 at 12:23 in Financials. For more information on how you can subscribe to our various products click here.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
The exodus from active domestic equity managers shows no sign of abating. In the past 2 weeks, the active domestic equity category experienced its biggest net withdrawal of 2015 (of -$5.7 billion last week), which has been followed by another substantial withdrawal in the most recent week (in the 5 days ending April 22nd) of -$3.4 billion. The first 16 weeks of 2015 have now tallied -$19.1 billion in redemptions in the active domestic equity category compared to +$20.0 billion in the first 4 months of 2014. We remain cautious on the active equity manager space and maintain our short/avoid recommendation on Janus Capital and T Rowe Price. Conversely, investors have used at least a portion of their domestic equity redemptions to make contributions to international equity funds, which had their largest inflow in 119 weeks of +$6.5 billion this week.
In the most recent 5-day period ending April 22nd, total equity mutual funds put up net inflows of +$3.1 billion, outpacing the year-to-date weekly average inflow of +$1.2 billion and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$6.5 billion and domestic stock fund withdrawals of -$3.4 billion. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 10 weeks of positive flows over the same time period.
Fixed income mutual funds put up net inflows of +$3.8 billion, outpacing the year-to-date weekly average inflow of +$2.3 billion and the 2014 average inflow of +$929 million. The inflow was composed of tax-free or municipal bond funds contributions of +$683 million and taxable bond funds contributions of +$3.1 billion.
Equity ETFs had net subscriptions of +$3.2 billion, outpacing the year-to-date weekly average inflow of +$1.8 billion and matching the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$2.2 billion, outpacing the year-to-date weekly average inflow of +$1.6 billion and the 2014 average inflow of +$1.0 billion.
Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.
Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:
Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:
Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors withdrew -$714 million or -4% from the XLF Financials ETF. Conversely, investors contributed +$662 million or +5% to the XLE Energy ETF on expectations for an energy price rebound.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$290 million spread for the week (+$6.3 billion of total equity inflow net of the +$6.0 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.1 billion (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$15.5 billion (negative numbers imply more positive money flow to bonds for the week.)
Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
Hedgeye Senior Macro Analyst Darius Dale shares the top three things in CEO Keith McCullough's macro notebook this morning.
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