Cartoon of the Day: Twisted

Cartoon of the Day: Twisted - Oil cartoon 05.20.2015

Dollar down, oil up ... Dollar up, oil down ... Rinse, twist and repeat.

GLD: Adding Gold to Investing Ideas

Takeaway: We are adding Gold to Investing Ideas today.

Please note that we are adding Gold (GLD) to Investing Ideas today. Below is a brief note from CEO Keith McCullough. We'll have an additional update in this weekend's edition.


GLD: Adding Gold to Investing Ideas - z g


I've been waiting, patiently, on this one - and here it is - a buy signal on Gold. 


To review what will really make Gold rip:


1. Down Dollar 

2. Down Rates


With the 10yr UST (and German 10yr) making lower-long-term highs here, the catalyst for Gold to go up is clear. 


We'll see if I was patient enough.




  • Earlier this morning, DNV inspectors made the inspections. Minor scratches on the ship. 
  • Dawn expected to arrive in Boston on Friday morning, as scheduled
  • Passengers on ship will receive a 15% credit on future cruise
  • No cancellations for next week's Dawn cruise

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.




1. Target: Good Algorithm -- Notable Comments on Credit

a)  Put up one of the better growth algorithms in the quarter, with comps of +2.3%, revenue +2.8%, gross profit +6.1%. EBIT +7.6%, and EPS +13.0%. That compares to 3.9% revenue and 2.4% EPS growth for the 13 major retailers that reported over the past week and a half.  

b)  E-comm grew at 37%, just off the 40% long term growth target management laid out at its analyst day. Store comps get much tougher as the year progresses with a 2.9% book end, and if e-comm can’t grow at a 40%+ rate now off a very small base, then when will we see it?

c)  Though the earnings growth algorithm looked good as noted above, it fell apart on the cash flow line -- something that matters from where we sit --  with cash from ops down -12% as the sales to inventory was up 9% heading out of the quarter. Retailers can blame the port strike until the cows come home, but the fact is that balance sheets look a lot messier headed out of 1Q and that’s a negative margin event. TGT maybe able to cushion the blow given the price action taken in 2Q of last year to fight off the data breach, but its definitely a negative flag.

d)  Guidance  leaves a lot to be desired after a $0.07 beat. The $0.05 lift to the low end of guidance implies a guide down for the rest of the year as comps get tougher. The weak price action today relative to the headline beat supports this.

e)  We thought that the biggest takeaway was that credit income was up $3mm in the quarter as sales penetration from the RedCard were up 110bps to 21.5% of total. Profitably of the RedCard fell by 30bp to 4.1%. Management commented that credit risk was at all time lows and there was an increase in payment rates by consumers on their balances.    This is in-line with what we noted last week in our analysis of KSS credit portfolio, in that charge-off rates for the 100 largest banks in the US are currently sitting at 30-year lows.  The companies with the greatest credit exposure (M, KSS, DDS, TGT, JWN) might be getting credit for this now when things are good -- but will likely see a disproportionate hit on the downside if credit mean-reverts.


2. AEO - Amazing what positive comps can do for a company. AEO still has a lot of wood to chop before it can come even remotely close to claiming victory. But it bucked the trend we've seen out of other retailers and put up an accelerating comp trend  on a 2yr basis. Importantly, inventories look very clean coming out of the quarter. We need to see a lot more than this to get interested here.


3. LOW Beats Out HD By Our Math

a)  Expectations were high headed into the quarter after HD threw up a 6.1% comp yesterday, and LOW has been trading at a premium to HD on a NTM P/E basis over the past 6+ months.

b)  While the headline print out of LOW was below expectations, we'd note that it put up a near identical earnings growth algorithm as HD this quarter . Both landed at 21% EPS growth, but LOW had a slightly lower comp of 5.2% (HD was 6.1%) as the company opted to be less promotional than HD. As such, LOW put up 18% EBIT growth vs HD at 14%, a notable difference.  HD made up for the lower EBIT growth with financial engineering -- something we won't pay much for.

c)  The lower promotional cadence out of LOW reaccelerated the comp gap between the two. As you can see in the chart below, the comp spread between the two retailers has reaccelerated in the past two quarters after flattening out in 3Q14. LOW has not outcomped HD in 24 quarters -- basically the entire economic cycle. We'd be surprised if that does not change over the next year.




HD & LOW Multiples


















5 Real Risks That Could Derail Hillary Clinton’s White House Bid

Listening to most recent mainstream media reports, you get the sense that former Secretary of State Hilary Clinton is not only a shoe in to win the Democratic nomination for President, she’s also very likely to win the general election.  While most people on the right may view this with varying degrees of trepidation and disbelief, the view is actually well founded in current polls. 

5 Real Risks That Could Derail Hillary Clinton’s White House Bid - z hi


As it relates to her party’s nomination, the top six polling candidates based on poll aggregates are as follows:

  • Clinton – 64.2%;
  • Warren – 12.5%;
  • Biden - 9.8%;
  • Sanders – 7.4%; and
  • Webb – 2.6%.

You get the point.  The current “race” for the Democratic nomination isn’t really a race.  Her current spread over Elizabeth Warren is a staggering +51.7 points.  Fast forward to the general election match up, Clinton holds a sizable lead against various potential Republican nominees.   Her most significant competitors— the GOP triumvirate of Jeb Bush, Rand Paul, and Marco Rubio—all trail over 7 points behind her in the poll aggregates.


The bottom line is that if the election was held today, there’s little doubt Hilary Clinton would be elected President.  The election of course is not today and between now and November 8th, 2016 a lot can, and will, happen.  Without further ado, here are five key factors that could put what currently looks like an inevitable Clinton Presidency at risk.


1. The Clinton Foundation - This risk is the most topical right now given the current scrutiny the Foundation is receiving thanks to Peter Schweitzer’s book, “Clinton Cash: The Untold Story of How and why Foreign Governments and Businesses Helped Make Bill and Hillary Rich.” It is also very likely an issue that will not go away.  On some level, whether the Clintons acted ethically as it relates to the Foundation is irrelevant because there is enough fodder that it will allow Republicans to continue to keep the heat on the Foundation.  To the extent the scrutiny accelerates, the Foundation has the potential to become Clinton’s “Swift Boat” moment.
2. Likeability (and accessibility) – Since announcing her candidacy more than 35 days ago, Hillary has answered a grand total of 8 questions from the press.   Whether this lack of accessibility is ultimately perceived as a lack of a common touch (think Hillary going into Chipotle wearing sunglasses and not leaving a tip) remains to be seen. However,  as the chart below shows, her favorability has taken a steady decline since she left office as Secretary of State in February 2013.  Most interesting, since actually announcing her intention to run for President, her “Unfavorable” rating has exceeded her “Favorable” rating.  

5 Real Risks That Could Derail Hillary Clinton’s White House Bid - z dj1

3. Rubio Emergence – Ultimately for Hillary to not win the Presidency, a front running Republican candidate will have to emerge.  The current GOP crop of contenders is broad, some would even argue deep, but there’s really no one is standing out or breaking out from the crowd.   In the Real Clear Politics chart below, we show the top 14 candidates for the Republican nomination. (Yes, 14!) As the RCP chart shows, there is no clear front runner.  In fact, Bush, Walker and Rubio are all basically in a statistical dead heat.   

5 Real Risks That Could Derail Hillary Clinton’s White House Bid - z dj2

From our perch, it feels like the Republicans need a candidate that is not white, middle-aged and male. In the front runner category, Rubio clearly fits that bill.  Latinos’ lack of support in 2012 (only 3 out of 10 votes) was noted as a key reason for Romney’s inability to win the election, so clearly this demographic will be key for the Republicans. Rubio (and to some extent Bush, given his Mexican born wife and bilingualism) has the best chance of increasing the Latino votes based on their backgrounds and policies.


4. Bill’s Gaffes – While there is no question that Bill Clinton is one of the most talented politicians of his generation, there is also no question he is (and maybe increasingly so) prone to putting his foot in his mouth. In today’s hyper-plugged in digital world, where no one is safe from a rogue iPhone recording a candidate’s every word, this may pose a delicate challenge for the former commander in chief.  Don’t forget that the key negative turning point for Romney in 2012 was his 47% quote:


“There are 47 percent of the people who will vote for the president no matter what … who are dependent upon government, who believe that they are victims. … These are people who pay no income tax. … and so my job is not to worry about those people. I’ll never convince them that they should take personal responsibility and care for their lives.”


Remember, Romney said this in the friendly confines of a Republican fundraiser. The lesson? No environment in the day of iPhones and social media is off limits in terms of quotable material.  Bill Clinton may have the political acumen to not have a major gaffe, but his historical penchant for the spotlight makes it difficult for him to stay out of the media.  


The most recent gaffe was his response to NBC’s Cynthia McFadden after she inquired about his enormous speaking fees ($500,000 and above). Clinton responded, “I gotta pay our bills.” That’ll play well in Peoria. While this quote won’t sink Hilary’s campaign, it does offer a taste of what may come from his mouth in the months ahead. It will certainly be used over and over by the Republicans to portray the Clintons as rich and out of touch.


5. Benghazi (and general track record) – In aggregate, Hillary Clinton’s role as Secretary of State is regarded favorably and without much controversy with one big elephant-in-the-room exception – Benghazi.  This was of course the unfortunate turn of events that led to the deaths of U.S. Ambassador J. Christopher Stevens and three other Americans when the U.S. diplomatic mission in Benghazi, Libya was attacked.   We are going to reserve analysis of the events, but believe this will become a major thorn in her side, especially as it gets into the nitty-gritty of the campaign post the nominating conventions.   The downside of having a track record is that in can and will be scrutinized under a microscope and Benghazi remains a major issue.


Despite these five key challenges to Clinton’s candidacy, make no mistake about it: this remains her race to lose.


Daryl Jones is the Director of Research at Hedgeye Risk Management.



Takeaway: It seems that absent a complete derailment of the growth story, the probability of mass capitulation on the long side is low.

This note was originally published May 14, 2015 at 07:28 in Healthcare 



We have had numerous discussions about ATHN over the last several weeks with some of the top shareholders and most prominent bears.  What is clear from these discussions is that there is a large duration mismatch between the timing and expectations of how the bull and bear thesis play out.  Many of the metrics the bears are looking to as catalysts in the short-term are known to long-term shareholders, but largely dismissed due to greater emphasis on the TAM. This lack of consensus among investor types appears to be the reason why the forward 12-mo excess return of the stock is positively correlated with short-interest.  It seems that absent a complete derailment of the growth story, the probability of mass capitulation on the long side is low.  



We have summarized the bear and bull arguments from our discussions below. Please let us know if you would like to dig deeper on any of these points.

  • Rising % of capitalized R&D to ~18% in 1Q15 <- 1Q15 elevated due to recent acquisitions.  Investing in the business to drive growth.  Company guided ~16% cash R&D expense (~6% capitalized) as they develop their inpatient offering.
  • Slowing physician growth <- Not focused on quarter-to-quarter doc adds... more concerned about long-term adoption and strategic direction of the company.
  • Company is going to miss consensus estimates for doc adds because they are unreasonably high <- Probably right... but that doesn't mean they will miss revenue guidance for the year or next. It is a shame that the Sell Side hasn't figured out how to accurately model the company given the transparency and metrics they provide.
  • Not a SAAS company, does not deserve SAAS multiple <- Company's offering is the definition of SAAS, subscription based software service with a single instance, multi-tenant delivery platform.  Outsourcing component provides competitive advantage and high multiple deserved given growth and margin opportunity.
  • Increased competition from CERN, MDRX and EPIC <- Competition is always a risk, but precedent exists where SAAS companies take significant share quickly away from legacy providers in market's outside of healthcare that are even more penetrated and competitive.  Additionally, ATHN's market reputation is high in RCM outsourcing, other companies have tried and failed.  Enough share exists outside of EPIC where ATHN can continue to grow and become a dominant player.
  • Increased reliance on new products and inpatient opportunity to drive growth <- Ambulatory opportunity remains significant, continued cross selling, while the company is taking the right approach in tackling the inpatient opportunity.  Under 100 bed hospital market is large and underserved, EPIC not a major player, and ATHN can take share by altering the cost curve and value proposition.
  • West Penn Allegheny ~600 athenaCollector customer disconnecting <- Not concerned with variability in doc adds in the short-term.
  • Jonathan Bush commentary on 1Q15 earnings call related to lack of urgency due to no government mandates causing drop in close rates <- Largely expected given lack of federal mandate.  Core business is Revenue Cycle Management and is much less dependent on EHR incentives. ICD-10 is likely to be a short-term catalyst.
  • Jonathan Bush commentary around variability in Enterprise bookings <- Enterprise bookings are lumpy, this is a known fact, and something the company has been very straight forward about over the years.
  • Epocrates has been a disappointment with sales declines in excess of -20% in 2014  <- Epocrates is doing what it was meant to do... That is, provide the company with access to a network of over 300k physicians, spread awareness and drive lead generation for core, athenahealth branded products.  Epcorates sales actually grew 2% YoY in 1Q15 and positive bookings commentary is encouraging.  Much of the sales decline was due to management deciding to walk away from certain parts of the business.
  • Not getting any traction with Enterprise Coordinator <- Still early days with population health and they have a really good product.  Change in go-to-market strategy makes sense and should lead to shorter sales cycles by splitting the referral management and population health components.  
  • They are a phone bank with little operating leverage <- athenaCollector gross margin is running in the mid-70s.  If you look at the company's P&L on a unit cost basis (e.g., # physicians per direct employee) you can see similar leverage to other SAAS companies. Long-term profitability targets established by the company are attainable. 
  • Change in revenue recognition timing on Imp & Other boosted sales growth <- Better matches revenue with implementation expense, rather than amortize over the estimated life of the customer.
  • Significant cash burn in 1Q15 <- Excluding acquisitions, in-line with seasonal trends due to timing of cash bonuses... cash balance builds through Q4.
  • Low KLAS rating for athenaClinicals <- athenaCollector is their core product and is ranked Best in KLAS. 43% of athenaCollector physicians are using athenaClinicals and management is addressing the issue with the roll out of a new interface sometime this year.
  • They are giving it away for free <- Industry standard to provide Enterprise clients with discounts... Take rate has increased from 3.7% in 1Q09 to 4.5% in 1Q15.

ownership analysis

We believe it is important to consider ownership before taking a long or short position.  Our hopeful thinking is that we better our chances of being right by understanding what drives the buy and sell decisions of those responsible for the stock's fate, and based on the results of our own due-diligence process, align ourselves accordingly. 


In the case of ATHN, 85% of shares outstanding are owned by the top 10 institutional shareholders with the majority being large mutual funds with long investment horizons.  More specific, 60% of shares are owned by funds with a holding period between 2-4 years and 35% have a holding period greater than 4+ years.  We compared ATHN to VRX in the chart below to provide context.


ATHN | SHORTS FIGHTING AN UPHILL BATTLE? - 2015 05 13 ATHN Holders Distribution




It seems that absent a complete derailment of the growth story, the probability of mass capitulation on the long side is low.  Meanwhile, the positive correlation between short interest and forward excess return suggests that while the bears may control the narrative in the short-term, over the long-run, bulls are often right. 




Please call or e-mail with any questions.


Andrew Freedman





Thomas Tobin
Managing Director 



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