Below are Hedgeye analysts’ latest updates on our current high-conviction long and short investing ideas and CEO Keith McCullough’s updated levels for each.
Please note we added Gold as a long and Shake Shack as a short this week.
As always, we also feature two additional pieces of content at the bottom.
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.
- "Trade" is a duration of 3 weeks or less
- "Trend" is a duration of 3 months or more
- "Tail" is a duration of 3 years or less
CARTOON OF THE WEEK
The mind-boggling Shake Shack valuation and chart below bring to mind the famous quote attributed to German writer Karl Gutzkow.
"Oh, how powerfully the magnet of illusion attracts."
What we're witnessing here is an epic bubble being blown before our very eyes.
To provide you with some sense of context, prior to lockup expiration, Chipotle (CMG) was trading at around 18x and peaked at 25.9x. Right now SHAK is trading 6x higher than CMG's peak valuation!
The SHAK bubble is a long-term negative for sales trends. The looming crash in the stock will be bad news for the brand's image.
On Friday's edition of The Macro Show, Howard Penney explains how investors are getting carried away by Shake Shack's concept, much like the Planet Hollywood hype in the late 90's. (If you recall, Planet Hollywood has gone bankrupt twice).
Bottom-line: Howard believes the result of $SHAK's "cult-like" status is a perilous overvaluation.
We think that HIBB is one of the most structurally challenged retailers out there. Top line trends are decelerating, costs are accelerating, and capital requirements are going nowhere but up. Any form of growth from here on out – in existing stores, new stores, and online, will all come at an incrementally lower margin. Numbers in the current year are coming down, but we think next year’s earnings miss becomes explosive. Still one of our top shorts following the 1Q print.
- Comps in March (+8.6%) and April (-3.1%) weren’t enough to make up ground from the negative 8.6% comps in February. This is the first time since 2009 HIBB has comped negative as the trend line continues to march lower. 2QTD comps are up LDD as the company started to see some snap back in demand from the 1,900 store closure days in 1Q and improving weather trends. A push in a Brand Jordan footwear launch helped inflate that number, but the combination of lapping the World Cup in June/July 2014 and the shift of 35% of state tax holidays into 3Q will add additional pressure as we move through the quarter.
- If we compare the comp trend to what we’ve seen printed at DKS, the slope of the comp line is not surprising. At DKS the e-comm business has been driving more than 100% of the comp growth with store comps negative for 7 of the past 9 quarters. Clearly there is a secular shift in buying behavior in this industry. As HIBB exists today, the company can capture 0% of that shift (more on that below). Even positive WMT traffic in the quarter didn’t help.
- To get to the current consensus comp numbers for the year HIBB would need to average a 3.2% comp for the next 3 quarters to dig itself out of the negative hole in the company’s most significant revenue quarter. To get to the 3% level needed to leverage SG&A and occupancy that number climbs up to 4.5%.
Housing got its mojo back in May, rebounding strongly over the last couple of weeks alongside the moderation in rates and ongoing strength in reported price/volume data. Below is a round-up of the data thus far in 2Q:
- Housing Starts: New 7-year high in the latest month
- Purchase Applications (existing market): 2Q15 Tracking +14% QoQ and +13% YoY, on pace for best quarter in two years.
- Pending Home Sales (existing market): PHS are up an average of +11.8% year-over-year the last two months
- New Home Sales (new market): NHS are up an average of +22.5% year-over-year the last two months
- HPI: After a year of discrete deceleration in home price growth in 2014, 2nd derivative HPI has seen 3 consecutive months of acceleration through the latest March data.
What about Existing Home Sales Thursday, that missed right? EHS in April were certainly underwhelming, missing estimates and declining -3.3% sequentially (although they were still +6.1% YoY). Below is how we contextualized the data in our institutional note yesterday:
Here’s the primary issue at play: Pending Home Sales and Existing Home Sales have shown recurrent bouts of divergence and re-convergence in recent quarters. Definitionally, Pending Home Sales (PHS) represent signed contract activity while Existing Home Sales (EHS) represent actual closings. The two measures are invariably tethered and, given the mechanical nature of the relationship, PHS serve as a strong leading indicator for EHS with the relationship strongest on ~1mo lag.
There is some chop in the data from month-to-month but, absent some acute shock to the qualifying ratio, the two only diverge for so long and so much in magnitude before re-convergence between the two series occurs. Practically, this can only occur in a few ways – one series can fully re-couple with the other on a lag, both see subsequent revisions in opposite directions and/or both series (for whatever reason) move in opposite directions with spread compression from both directions.
As can be seen in the chart below, the recent tendency has been for EHS to re-converge with PHS. Given the prevailing pattern, unless PHS in April (released 5/28, next Thursday) are very soft and/or March sees a significant negative revision, the path of least resistance is for upside in Existing Sales over the next couple months. Further, the trend in the high frequency mortgage purchase application data, which is currently running +14% QoQ and +13.3% YoY, argues in favor of that expectation more so than not.
GLD | VNQ | TLT | MUB | EDV
We added GLD back to investing ideas long-side this week for two reasons:
- Yellen will likely be forced to speak to the slowing of domestic economic momentum at the June 17th FOMC meeting
- The downward revision in growth and inflation that is likely to manifest will send rates and the dollar lower as the market adjusts more dovish policy
We remain bullish on bonds and bond-like equities and we think U.S. interest rates are likely to put in yet another lower-high into the June event (see chart below on continued trend in downward revisions to growth and inflation).
Gold trades inversely to the USD as rates go both ways, but gold particularly likes lower growth expectations and a weaker currency. This relationship has played out over a long period of time.
Unless the Fed wants to show the world it has the power to go both ways on rates, we don’t think the Fed will ever be able to justify hiking interest rates. We expect an unarguable slowing of the current economic cycle by Q4 of this year. If you think domestic economic growth is slow now, just wait until the U.S. economy faces very difficult growth and inflation comps in the second half of 2015.
The strength of the labor market continues to be a good indicator of our positioning in the current cycle:
- Seasonally adjusted jobless claims came in at 274k last week vs. 270K est.
- Despite the slight miss, the rolling 4-week SA figure dropped to 266.3k (lowest rolling SA figure since the week ending April 15th, 2000, which also came in at 266.3k) We all know what happened afterwards…..
* * * * * * * * * *
ADDITIONAL RESEARCH CONTENT BELOW
It seems that absent a complete derailment of the growth story, the probability of mass capitulation on the long side is low.
"ETFs partially recovered last week's lost ground but active equity trends continue to accelerate to the downside," writes Hedgeye Financials analyst Jonathan Casteleyn