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Investing Ideas Newsletter

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

Editor's Note: We are pleased to present this Owens Corning video exclusively for Investing Ideas subscribers. It features our Industrials analyst Jay Van Sciver explaining our bullish thesis on shares of OC. 

 

 

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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. 

 

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      - z 44 cartoon

IDEAS UPDATES

OC

Please see the brief Owens Corning video above by our analyst Jay Van Sciver.

PENN

Penn National Gaming will likely tee off on the bears with a strong Q2, upward 2015/2016 EPS revisions, and the start of a 2 year growth period.

 

PENN’s stock has climbed 27% this year on stabilizing regional gaming revenues, transaction-fueled optimism (real estate) surrounding the regional gaming companies and proximity to the opening of the new Plainridge racino on June 24. So what will drive even more upside? More and better. We think regional gaming trends are even better than anticipated by the Street and Q2 earnings should be a solid beat even before Plainridge contributes.

 

Investing Ideas Newsletter      - 1 c

 

Plainridge could contribute win per slot in excess $400 per day, well north of Street expectations. As investors start to look out to 2016, they will consider PENN a growth company again with a full year of Plainridge and the opening of the Penn managed Jamul casino near San Diego in Q2/Q3 2016. Given the strong performance of the Indian casinos near San Diego, we believe Jamul may surpass investor expectations as well. 

ITB

Housing outperformed in the latest week alongside choppy price action in equities and further, extraordinary volatility in sovereign bond markets.  Fundamental data was light with weekly purchase applications data from the MBA the lone release of import for the industry.  The first, high-frequency update on purchase demand in June, however, was positive:

 

Purchase demand rose +9.7% sequentially, taking the index to its strongest level in 2 years at reading of 214.3.  On a year-over-year basis, growth accelerated for a  4th consecutive week to +14.6%.  Inclusive of this weeks gain, demand in 2Q is tracking +14.3% QoQ and +13.4% YoY. 

 

Refinance activity, meanwhile, increased +7% sequentially despite a big +15 bps back-up in mortgage interest rates.  Rates on the 30Y FRM contract rose to 4.17% from 4.02% the week prior and currently sit at the highest rate YTD.  On a year ago basis, rates remain lower by -4% with the current rate of 4.17% comparing to the full year 2014 average of 4.35%.

 

There are a couple notable considerations from this weeks data: First, Purchase demand to start June is (very) strong and suggests the strength observed in Pending Homes Sales in March/April extended into May/June.  Second, whether the notable gain in the latest week singularly reflects the reality of underlying organic demand, represents some measure of a pull-forward in demand in the face of rising rates, or some combination of the two remains to be seen.  

 

Next week will be more data intensive with the release of the NAHB’s HMI (Builder Confidence) for June on Monday, New Home Starts for May on Tuesday, and the Weekly Purchase Application data on Wednesday where we’ll be focused on the extent of follow through strength following last week’s jump.   

 

Investing Ideas Newsletter      - z h Purchase 2013v14v15 

GIS

We remain 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 GIS:

 

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

 

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.

 

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 

We remain the voice on the Slower-For-Longer (lower rates) cycle call. If the confluence of economic data suggested that US growth was accelerating, we would capitulate on this view. As the data slows, expectations for lower interest rates increase (Q4 2014 to Q1 2015).

 

The market has been jockeying for positioning in front of next week’s policy statement from Janet Yellen, and as evidenced in the recent back up in ten-year treasury yields, which causes pain to TLT, EDV, and MUB bulls, the first of what we see as three possible scenarios (outlined below) has been interpreted by the market as more probable than it was last week.   

 

3 Scenarios:

  • Yellen signals that “it’s just time” to hike rates
  • Yellen signals that since the US economic data continues to slow, there’s no rate hike on the table until 2016
  • Yellen signals that she remains “data dependent” (i.e. repeats what she said at the March 18thmeeting)

While we think scenario #3 is the most probable, Consensus Fears Scenario #1, as they should.

 

To be clear, we remain the long-bond bulls (TLT, EDV, MUB). With that being said we aren’t claiming to be able to predict the outcome of next week’s meeting (sure we do have biases). What we do know  is that Hedgeye estimates for growth and inflation shake out much lower against both consensus and central bank forecasts for the full year 2015 (remember that this is after their forecasts have already been downwardly revised). The IMF and World Bank were the latest organizations to join the #globalgrowthslowing camp by capitulating on their previous estimates:

 

Eventually these forecasts will converge (Hedgeye vs. consensus). Whether the rhetoric changes at this meeting or the next, the likelihood of a downward revision(s) in the market’s expectations for growth and inflation looks like something to bet on:

 

Investing Ideas Newsletter      - z TREND in GDP Revisions

 

Investing Ideas Newsletter      - z TREND in Inflation Revisions

HIBB

Hibbett is one of the only retailers today that has zero e-Commerce presence.

 

Investing Ideas Newsletter      - z hibbett

 

The company has maintained for years that its small market strategy has insulated it from the likes of AMZN and Nike.com, but that logic appears to be over. And, we think that’s due in large part to where the growth is coming from in this space. Dick’s Sporting Goods for example, has comped positive in its stores (excl. e-comm) only twice in the past 9 quarters, and the long term guidance DKS set at its analyst day in April suggests more of the same. The way the math works out we may never see Brick and Mortar sales in this industry up again unless we see category growth upwards of 6%.

 

HIBB with no e-commerce presence is stuck between a rock and a hard place. Either the company invests the capital needed to build an e-comm operation from scratch, or market share is at risk. Choice one equates to 300-500bps in EBIT margin headwind over the next  18 to 36 months.  Phase 1 of the e-commerce development is underway in the form of a new POS (point-of-sale) system. And that means higher capital spending, which is planned up 44% this year versus last. IT Investment/Projects make up the lion’s share of that year over year increase.

 

HIBB remains one of our top short ideas in the retail space as comps continue to slow, margins step down from industry peaks of 13% and returns head lower as the company invests heavily to compensate for the fact its way behind on the internet.

 

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ADDITIONAL RESEARCH CONTENT BELOW

kate: the baby vs. bathwater 

The stock is being thrown out with bathwater it wasn’t even bathed in. We’re fighting an uphill sentiment battle, but it’s one worth fighting.

Investing Ideas Newsletter      - z ka

managing commodity exposure: long for a trade with deflationary risks looming

The current trend in commodity strength vs. a declining U.S. dollar has legs into the FED meeting next week, but we continue to believe that global deflation and FX devaluation from abroad will pressure commodity prices over the intermediate to longer-term.

Investing Ideas Newsletter      - z o


Cartoon of the Day: Dick Exits | $TWTR

Cartoon of the Day: Dick Exits | $TWTR - Twitter cartoon 06.12.2015

It's adios for Twitter CEO Dick Costolo.



What The Heck Does Angela Merkel Have To Do With Texas?

Takeaway: Merkel joins the FX War, talking down the Euro.

Editor's Note: This is a brief excerpt from our morning research. If you would like additional information on how you can become a subscriber click here.

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German chancellor Angela Merkel officially joined the Currency War this morning. She was talking down the Euro saying something about  #StrongEuro being a headwind for Spain (or something like that). The EUR/USD  is down -0.6% to $1.11. The risk range is wide ahead of next week’s Fed meeting at $1.08-1.15.

 

That’s a sign of confusion, if nothing else.

 

Follow the bouncing puck – Euro Down, Dollar Up, Oil Down -1.2% - so that’s back to back up days for USD and Down Oil, but it’s all within a relatively tight risk range of $57.68-61.91 for WTI. We’d buy more Oil at the low-end of the range ahead of the Fed.

 

What The Heck Does Angela Merkel Have To Do With Texas? - m oil

 

One thing is for certain: Central planners across the globe show no signs whatsoever of relinquishing their respective turns trying to devalue the purchasing power of The People.


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LEISURE LETTER (06/12/2015)

TICKERS: AHT, PEB, CCL, RCL

EVENTS

June 25: NJ Senate votes on AC PILOT tax bill

COMPANY NEWS   

RCL - A MERS outbreak in South Korea has prompted RCL to cancel planned cruise ship stops in South Korea for Mariner of the Seas, Voyager of the Seas, and Quantum of the Seas until the health situation improves.  Royal Caribbean replaced the stops with an alternate port or a sea day.

ARTICLE HERE 

Takeaway: More of a negative for Mariner/Voyager, neither of which has seen much pricing power in Asia. 

 

AHT- Ashford Trust announced a pair of acquisitions. It completed the acquisition of the 226-room Le Pavillon Hotel for total consideration of $62.5 million in cash ($277,000 per key).  Ashford Inc., will provide $4M in key money for AHT's acquisitions of the Le Pavilion.   

  • Purchase price (after adjusting for key money) equates to an estimated forward 12-month cap rate of 7.8% and an estimated forward 12-month EBITDA multiple of 11.4x

AHT also announced that it has signed a definitive agreement to acquire the 237-room W Atlanta Downtown hotel for total consideration of $56.8 million ($239,000 per key). The previous owner was Capri Capital Partners. HOT will maintain its mgmt contract.

  • Purchase price represents an estimated forward 12-month cap rate of 7.2% and an estimated forward 12-month EBITDA multiple of 11.6x

ARTICLE HERE

ARTICLE HERE

Takeaway: W Atlanta's price per key is roughly in-line with the Hyatt Atlanta Midtown property sold last July. 

 

PEB – Pebblebrook Hotel Trust announced that it has acquired The Tuscan Fisherman’s Wharf, a Best Western Plus Hotel (“The Tuscan”) for $122.0 million. ($552,036 per key). The property will continue to be managed by Kimpton Hotels & Restaurants.  

ARTICLE HERE

 

CCL – Announces that they are cancelling their "Cruise to Nowhere" from Norfolk, VA. “Due to recent changes in how ships are cleared into and out of the United States by U.S. officials, certain short duration cruises without a foreign port of call are subject to itinerary changes beginning in 2016,” said a spokesperson for CCL. 

 

The regulation also forced Norwegian to cancel three two-night cruises Breakaway, scheduled for 2016 out of New York.

ARTICLE HERE 

ARTICLE HERE

 

INDUSTRY NEWS

Leong comments on Coloane Leong states that there is no law prohibiting casinos on the island.  Louis XIII has a casino/hotel under construction in Coloane, expected to open in 201 6. No hotelier on Coloane has ever applied for a licence to run a casino on the island, Secretary of the Economy and Finance Lionel Leong Vai Tac has said.  Leong told reporters that only gaming concessionaires – and not hotel operators – could be granted casino licences. 

ARTICLE HERE

 

Atlantic City bill -  NJ state Assembly on Thursday approved a package of five bills for the struggling seaside resort town. The most important would let its eight casinos make payments in lieu of taxes for 15 years, letting them know exactly how much they owe instead of facing huge potential increases each year.

 

The so-called PILOT bill would let the casinos collectively pay $150 million for the first two years, and $120 million annually for 13 years, assuming gambling revenue stays within certain ranges in the city. Calculations made in December, which the casinos say are still in effect, would grant large tax reductions to billionaire Carl Icahn and Caesars Entertainment, two of whose three Atlantic City casinos are in bankruptcy.

  • The Tropicana, which Icahn owns, and the Trump Taj Mahal, which he is soon to acquire, would pay nearly $19 million less in the first year of the plan. 
  • Caesars and Harrah's would see a nearly $20 million reduction, though Bally's would see a $2.6 million increase in payments. 
  • The Borgata would see a $2.7 million reduction.

That led lawmakers to amend the bill to provide that any casino asked to pay more under the PILOT plan than their tax bill would have been will get an equivalent credit on redevelopment taxes they are obligated to pay the state. Without such a credit, casinos including Resorts and the Golden Nugget would have faced steep increases.

 

The casinos would no longer be able to appeal their tax payments under the PILOT plan, eliminating a vexing financial uncertainty for Atlantic City each year.

The state Senate is due to vote on the bills on June 25.

ARTICLE HERE

Takeaway: Important casino tax bill in AC to keep an eye on as Borgata continues to wait on its tax refunds.

 

1Q 2015 Lottery - increased by 8% globally. The chart below shows Latin American Asia Pacific leading the way. For North America, the California Lottery was the strongest with 12.4% YoY increase in sales. Also performing strongly were the Minnesota State Lottery, which reported a +10.1% increase in sales, and the Connecticut Lottery Corporation, which rose 7.5% YoY. All other participating U.S. lotteries also recorded results in positive territory. This contrasted with the situation with respect to the participating Canadian lotteries, which either saw their sales decline or hold steady.

LEISURE LETTER (06/12/2015) - wla

ARTICLE HERE

Takeaway: North American lottery sales was solid in 1Q 2015 despite a tough macro environment. 

 

New Jersey – Newark: Essex County Executive Joseph DiVincenzo is pushing for a casino to help the beleaguered city. In a letter sent today to Gov. Chris Christie, state Senate President Stephen Sweeney (D-Gloucester), and state Assembly Speaker Vincent Prieto (D-Hudson), DiVincenzo said the city — the largest in the state — is well-positioned to host a north Jersey casino, given its access to highways, public transportation and Newark Liberty International Airport.

ARTICLE HERE 

MACRO

Hedgeye Macro Team remains negative on Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.


Euro, Oil and Yields

Client Talking Points

EURO

Angela Merkel joins the FX War this morning, talking down the Euro as  #StrongEuro is a headwind for Spain (or something like that). The EUR/USD  is down -0.6% to $1.11 (the risk range is wide ahead of Fed meeting next week at $1.08-1.15 – that’s a sign of confusion, if nothing else).

OIL

Follow the bouncing puck – Euro Down, Dollar Up, Oil Down -1.2% - so that’s back to back up days for USD and Down Oil, but it’s all within a relatively tight risk range of $57.68-61.91 WTI (we’d buy more Oil at the low-end of the range ahead of the Fed).

YIELDS

Oh look, the UST 10yr Yield = 2.39% and that’s right where it started the week – nothing must have happened! German Bunds are at 0.86% this morning after ramping to 1.03% only 24 hours ago and Greek Yields just ramped +17 basis points this morning to 11.02%.

 

**The Macro Show - CLICK HERE to watch a replay of today's show with guest analysis from Internet and Media Sector Head Hesham Shaaban. Hesham gave his updated thoughts on Twitter (TWTR) and CEO Dick Costolo stepping down.

 

Asset Allocation

CASH 41% US EQUITIES 6%
INTL EQUITIES 14% COMMODITIES 8%
FIXED INCOME 29% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
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. 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.

ITB

The takeaway on Purchase Activity was mixed as demand declined -3.0% sequentially but accelerated from +13.1% to +13.9% on a year-over-year basis.  More broadly, and inclusive of the latest week, purchase demand in 2Q continues to reflect both sequential and year-over-year improvement with demand growth for the quarter currently tracking +13.6% QoQ and +12.8% YoY. No major callouts in the latest week as the larger trend towards ongoing improvement in purchase activity in 2Q remains intact.  CLICK HERE to watch Housing Sector Head Josh Steiner gives a brief update on our call on ITB.

TLT

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).   

Three for the Road

TWEET OF THE DAY

OIL: textbook fade off the top-end of @Hedgeye_Comdty $57.68-61.91 risk range this wk

@KeithMcCullough

QUOTE OF THE DAY

If you are bored with life, if you don't get up every morning with a burning desire to do things—you don't have enough goals.

Lou Holtz

STAT OF THE DAY

A WBUR poll indicated that 49% of voters in Massachusetts oppose bringing the Olympics to Boston in 2024 and 39% support the effort.


CHART OF THE DAY: The Biggest 1-Month Move (Ever) in Global Bond Yields

Editor's Note: This is a chart and brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here for more information on how you can subscribe. 

 

CHART OF THE DAY: The Biggest 1-Month Move (Ever) in Global Bond Yields - ccc 06.12.15

 

...After seeing the yield quintuple in a month, what’s a German Bund Yield (pronounced Boo-nd) dropping -16% (10yr 0.86% this morning vs. 1.03% yesterday) in 24 hours amongst central planning friends?

 

Germany’s almighty President of the Bundesbank (as in the place where they make the Bunds), Jens Weidman, told the European press yesterday that recent volatility in the European Bond Market was not “exceptionally high.”

 

It’s a good thing that the biggest 1-month percentage move ever in Global Bond Yields and the worst month-to-date for sovereign bonds in over 30 years isn’t exceptional.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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