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June 8, 2015

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BULLISH TRENDS

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BEARISH TRENDS

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Two-Hitter: Ben Axler Brings One Long Idea & One Short to Hedgeye TV

 

In his third trip to the Hedgeye studio, Spruce Point Capital Founding Partner Ben Axler sits down with Hedgeye Industrials Sector Head Jay Van Sciver to discuss two of his latest ideas: Long TACO and Short NCR.


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: OC, PENN, GIS, GLD, VNQ, EDV, ITB, TLT & HIBB

Editor's Note: We are pleased to present the video below exclusively for Investing Ideas subscribers. It is a brief update from Hedgeye Managing Director Josh Steiner on our bullish Housing (ITB) call. 

 

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Below are Hedgeye analysts’ latest updates on our nine current high-conviction long and short investing ideas and CEO Keith McCullough’s updated levels for each. Please note we added Owens Corning (OC) this week and removed Shake Shack (SHAK) as a short.

 

We feature two additional pieces of content at the bottom. 

Investing Ideas Newsletter      - z levels

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

Investing Ideas Newsletter      - Growth cartoon 06.03.2015

IDEAS UPDATES

OC

We added Owens Corning to Investing Ideas on Friday. According to CEO Keith McCullough, "I’m ready to get people to invest in this one longer-term before I see the company report everything that will take it to higher prices."

 

Hedgeye Industrials Sector Head Jay Van Sciver wrote an interesting note on the bullish state of affairs at Owens Corning.

 

Click here to read it in its entirety. 

PENN

Penn National Gaming is a true growth story in regional gaming, finally, ripe with catalysts, same store and new unit growth, and accelerating cash flow. 

 

We see stability in regional gaming revenues over the next several months providing some much needed earnings visibility.  PENN maintains the best new unit growth story in domestic gaming with the opening of the Plainridge casino in Massachusetts in June and the Jamul casino in Q2 2016.  Both properties should well exceed current Street estimates for win per slot and EBITDA. 

 

PENN has a proven track record as the best regional casino operator and recently proved its prowess at successfully opening racinos (casinos at racetracks) with estimate beating Dayton and Mahoning commencing slot operations last year.

 

The upshot: if we're close to being right on our significantly higher 2015 and 2016 EPS projections ($0.60 vs $0.47 and $1.00 vs $0.74, respectively), PENN has a lot of upside.

 

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ITB

Please see our Housing video update by Sector Head Josh Steiner above.

GIS

We are very bullish on the strength of General Mills' brands and the long-term growth potential of the stock. The 2015 fiscal year was a busy one for GIS as they underwent a major restructuring project and the $820MM acquisition of Annie’s.

 

We see multiple ways you can win being LONG:

  1. The current management transforms into an Activist management team - 15% chance
  2. Fundamentally – Gluten Free Cheerios is a home run – 40% chance
  3. Management sells the company – 10% chance
  4. An Activist shareholder takes a position – 35% chance

Please note above our increased faith in management to be able to fundamentally improve the business.

 

Management needs to start focusing (temporarily) on their non-core assets that represent roughly 28% of the portfolio such as, Pillsbury, Gold Medal, Green Giant and Progresso.  Divesting these brands would free up resources and provide greater capital to acquire a strong high growth business.

 

GIS is a company known for great brands, and consumers are proving that once again. GIS is growing share in key categories this year grain snacks $ share up 187 bps vs last year, yogurt up 75 bps and RTE  cereal up 31 bps. GIS is often a leader in the categories in which they compete and they are continuing to show their strength.

 

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Selling the company is an option, albeit an unlikely one given the current valuation. If the price were to slip a little, some big players in the market will take a harder look at it. This is also the case for an activist coming on board, for someone willing to put in the work there is still plenty of meat on the bone, but most would probably want to see a pullback in the stock before taking a major position.

 

All-in-all this stock is built for growth and with it currently paying a generous 3.1% dividend, that has never been decreased or interrupted, it is a worthwhile bet that this ship will turn.

TLT | VNQ | GLD | EDV 

Friday’s non-farm payrolls report remained consistent with the recent TREND of late cycle labor market strength: POSITIVE.

  • Non-Farm Payrolls +280K MAY (beating estimates of +226K) vs. 223K APRIL
  • NFP & Private payrolls improving sequentially (MoM and 3M/6M MA) and in RoC terms
  • Positive revision to the April print
  • Wages (both total private & nonsupervisory workers) accelerate sequentially (still decidedly middling, however) 

 

To reiterate our interpretation of the current strength in the labor market, in our Q2 2015 macro themes deck we took a birds-eye view of the labor market’s lagging relationship to the business cycle, and the conclusion remains: The labor market looks the best at the end of the cycle.

 

We aren’t calling for a recession next month, but rather the data gathered presents a strong argument that we are in the latter innings of the current economic expansion. As seen in the second table we are amidst the fourth largest expansion since the great depression (73 months) and hovering 8 months beyond the average expansion length (65 months).

 

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Considering we are already well passed an above average length expansion, and moving into the second half of 2015 growth and inflation comps (i.e. the base effects) become very difficult, growth is likely to continue to slow. We put the likelihood of a rate hike in 2015 as highly unlikely and continue to expect rates to move to make a series of lower-highs through the balance the year (bullish for EDV, TLT, and VNQ.

 

When forward looking growth expectations are downwardly revised and the Fed kicks the can on rate hike expectations, rates and the dollar move lower. Gold has historically performed well in an environment of falling rates and a declining U.S. dollar and we don’t expect anything different this time around. Supporting our view, both gold (GLD) and treasuries (TLT, EDV) remain BULLISH on an intermediate-term TREND duration (3-months or more).   

HIBB

No matter which way we slice it, competition in Hibbett Sports core market looks much different today than it did 15 years ago.

 

That is the primary reason that HIBB is looking to areas like the Midwest, Northeast, and West Coast for growth. Areas that HIBB’s current infrastructure – it has just one distribution center located in Birmingham, AL – can’t support, so the company must partner with 3PL (third-party logistics) providers to service new markets. That means lower margins and is one of only a handful of reasons we see margins coming down from industry tops at 13% down to the mid-single digits over the next 4 years.

 

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Pre-2000 (before the sporting goods industry benefited from the influx of cash driven by the expansion of NKE and UA), competition was cordoned into separate territories. With DKS in the Northeast, Academy in Texas/Gulf Coast, Sports Authority in key metropolitan centers, and HIBB dominating the Southeastern United States. Since then we’ve seen a big regional migration with footprints now sitting on top of one another. In HIBB’s core market we’ve seen Sports Authority and Dick’s Sporting Good’s increase unit counts in HIBB’s core market by ~50%, and Academy double its unit count over the past 4 years.

 

That’s not a competitive set that lends itself to market share gains.

 

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ADDITIONAL RESEARCH CONTENT BELOW

just (ugly) charts: Problematic Industrial Data

It's not all rainbows and puppy dogs and our Industrials team has some charts to prove it.

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FUND FLOWS: 13 weeks and counting

The negative trend in domestic equity flows continued and a new trend of negative muni fund flows has appeared.

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Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

The Week Ahead

The Economic Data calendar for the week of the 8th of June through the 12th of June is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.

CLICK TO ENLARGE.

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REPLAY: MACAU MAY CONF CALL

View our video replay from our conference call earlier.

 



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