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