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Extend, Pretend and Devalue

Client Talking Points

EURO

The Euro is down hard this morning (-1% vs USD) after tapping the top-end of our 1.11-1.14 risk range and the Greeks having 48 hours to put on their best dress – the Euro is worth less as the Eurozone continues to socialize leverage and bad behavior.

 

YIELDS

Another day, another big rip in Global Yields as Italian and Spanish Yields come off last week’s freak-out highs. The German 10YR is up +13 basis points from 0.78% to 0.91% pressuring both U.S. and JGB yields to the upside again.

VOLATILITY

The ole “buy everything” call worked, somehow – but this one wasn’t that hard to get right if you had A) a more dovish Fed and B) another Greek bailout right. It’s sad, but front-running predictable central planning behavior works; VIX still range bound 12.29-15.46.

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET, with Macro Analyst Darius Dale and Macro & Housing Analyst Christian Drake.

Asset Allocation

CASH 34% US EQUITIES 9%
INTL EQUITIES 15% COMMODITIES 14%
FIXED INCOME 25% INTL CURRENCIES 3%

Top Long Ideas

Company Ticker Sector Duration
PENN

Shares of Penn National Gaming are up approximately 9% since it was added to Investing Ideas on May 26. Our Gaming, Lodging & Leisure team reiterates their high conviction on the stock and notes that Ohio and Kansas have both been super-strong revenue generators in the month of May. This positive development has has led our analysts to raise their estimates even higher (and we're already the highest on the street...).

ITB

It was a busy week across the housing space with a host of fundamental releases, builder earnings and notable regulatory updates.   Net-net-net....the past week offered another positive update on the state of the residential real estate market with housing turned in a second week of strong, positive absolute and relative performance. The NAHB HMI (Builder Confidence Index) for June surged across all categories and in all regions, posting its best reading in almost 10 years. Total Starts declined -11% MoM to +1.036 MM units with SF and MF starts declining -5.4% and -20.2% month-over-month, respectively.  Permits, meanwhile, rose to an 8-year high advancing +11.8% sequentially and +25% year-over-year.   The strength in permits augurs forward strength in Starts and suggest residential construction spending will be (increasingly) supportive of GDP growth over the next couple quarters.

TLT

Bottom line right now remains that Lower-For-Longer is firmly intact as long as US #GrowthSlowing is. As Keith pointed out on Friday, Consensus Macro is still stubbornly sticking to the tired idea that rates have to go higher - they just have to... because, they haven't? All told, it was a great week sticking with the process on the long side of bonds. Here we feature an in-depth discussion from Senior Macro Analyst Darius Dale which does a thorough job outlining where our macro team currently stands with respect to the Fed, interest rates, markets and economy. The prescient discussion occured just hours before release of the FOMC statement.

Three for the Road

TWEET OF THE DAY

We reiterate our bullish bias on Japanese equities. Nikkei 225 up +19.2% YTD vs. a measly +3.1% return for the SPX. 

@HedgeyeDDale

QUOTE OF THE DAY

Great is the human who has not lost his childlike heart.

Mencius, 4th century BCE

STAT OF THE DAY

Jordan Spieth won the U.S. Open, his victory marks the first time a player has won the first two majors of the year since Tiger in 2002 and the youngest to win the US Open since Bobby Jones 1923.

 

 


The Macro Show Replay | June 23, 2015

 

 


June 23, 2015

June 23, 2015 - HE DTR 6 23 15

 


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

BOJA | Getting Deep Fried

BOJA | Getting Deep Fried - Chart 1 replace

 

Back on 6/4/15 we added Bojangles’ (BOJA) to our Hedgeye Restaurants Short Bench. Since then we have begun to refine our thinking and wanted to share our updates as we work out the final details.  As a result we are upgrading it to the Restaurant Best Short Ideas.

 

Currently BOJA shares are trading at approximately 16.5x 2016E EBITDA, or an approximately 15% premium to the mean of the three other regional chicken companies (LOCO, FRGI, and PLKI).  That being said, it’s also not hard to make the case that LOCO and FRGI are overvalued too, making BOJA even more ridiculously overvalued.     

 

KEY POINTS WE PLAN TO MAKE:

 

Bull Case is Unlikely – The bull case for BOJA is grounded on BOJA’s strong fundamental momentum continuing for years. My read on the fundamentals suggest that there is little leverage in the business model or upside to the current estimates.

 

New Unit Economics Don’t Add up – Each new BOJA restaurant costs slightly more than $2.1 million. The average unit volume is between $1.7 million and $1.5 million for new units in non-core markets. This puts the concept sales to investment ratio at .68, one of the lowest in the industry and suggests you should be allocating your capital elsewhere.

 

Same-Store Sales – In the recent past BOJA has used price as a primary driver of same-store sales growth. Going forward, guidance is for low-single digit same-store sales primarily driven by 2%-3% pricing and flattish traffic. All this pricing is due to rising commodity costs specifically on chicken, which leads into our next point.

 

Commodity Costs – Chicken represents 38% of COGS, and will likely drive a majority of the mid-single digit commodity basket inflation expected in 2015.

 

Low and Declining Margins – Due to the higher cost of sales, restaurant level margins will contract in 2015, as price increases will not fully offset rising costs.

 

Valuation – The market is putting insanely high multiples on average restaurant businesses.

 

Downside – Our bear case has 30% downside in the name.

 

We will be making our point more clear later this week with more robust details.

 

BOJA | Getting Deep Fried - CHaRT 2 


ZOES: Adding Zoe's Kitchen to Investing Ideas

Takeaway: We are adding Zoe's Kitchen (ZOES) to Investing Ideas.

Please note that we are adding Zoe's Kitchen to Investing Ideas today. We will provide an additional update in this weekend's edition of Investing Ideas.

 

ZOES: Adding Zoe's Kitchen to Investing Ideas - z5

 

According to Hedgeye CEO Keith McCullough:

 

If you have patience in this profession, it's almost uncanny how the things you think you "missed not owning enough of" have a way of mean reverting (correcting). 

 

Last week ZOES announced that CFO Jason Morgan has resigned to pursue other business opportunities.  Mr. Morgan has been at ZOES for eight years, this decision reflects his personal career choice and in the coming days and week it will be clear where he is going.  Importantly, transition to a new CFO will likely not have a material lasting impact on the company's prospects.

 

On the contrary, Mr. Morgan is a very talented restaurant executive and is leaving the company in a very strong position with a deep bench of seasoned financial executives.  Over the coming months James Besch, current Controller will lead ZOES’ financial team as the company begins a formal search for a new CFO.

 

OUR LONG TERM VIEW IS UNCHANGED - We view ZOES as one of the best small cap growth names.  The company is set-up for long-term success for the following reasons:

 

  1. Superior brand positioning
  2. Management philosophy and execution
  3. Unit opening geographic profile
  4. Early-stage average unit volumes and returns

Howard Penney remains The long-term Bull. Buy red,

KM



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