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Investing Ideas Newsletter

Takeaway: Current Investing Ideas: DE, VIRT, KATE, PENN, GIS, GLD, VNQ, EDV & TLT

Investing Ideas Newsletter      - 4th of july cartoon

 

Below are Hedgeye analysts’ latest updates on our nine current high-conviction long and short investing ideas as well as CEO Keith McCullough’s updated levels for each.  

 

Please note we removed ZOES, FNGN and ITB from the long side this week as well as HIBB (short).

 

We added DE and VIRTon the short side.

LEVELS

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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

IDEAS UPDATES

kate

We’re all-in on Kate Spade at current levels.

 

The Hedgeye Retail team notes that the stock is off 34% over the past 2 months, due to sentiment concerns around 'the space' (KORS is off 31%), but our fundamental outlook has not changed one bit. The business remains very strong. We think that comps are accelerating into the double digits in 2H, and we think that KATE’s margin guidance for this year will prove conservative.

 

Ultimately we think that numbers this year are 10% too low – a delta that widens to 20%+ next year, and to 50%+ by 2018 when we think KATE has $2.50 to $3.00 in earnings power. Using decelerating multiples as growth accelerates and the P&L matures gets us 50%+ upside in a year and a 2-3-bagger by 2018. 

PENN

Our Gaming, Lodging and Leisure team reiterates its high-conviction thesis on Penn National Gaming. PENN remains one of our favorite names on the long side. It maintains the best new unit growth story in domestic gaming.

 

PENN's property in Massachusetts has had an excellent start. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.

GIS

FISCAL 2015 SUMMARY:

  • Net sales: Net sales increased 1% on a constant-currency basis to $17,630mm, coming in just shy of consensus at $17,635. The 53 week contributed roughly 1 point of net sales growth and the addition of the Annie’s business provided another 1 point lift. So backing those out sales were down roughly 1%. This year started off rough, but gained traction in the 2H, and we expect this momentum to continue into FY16.
  • Segment operating profit: Declined 2% on constant-currency basis to $3,035mm coming in above consensus estimates of $2,899mm.
  • Adjusted diluted EPS: Totaled $2.86 for the full year, up 4% from a year ago levels on a constant-currency basis. The 53rd week drove much of the improvement versus last year, contributing $0.04 of EPS for the full year.

 

Gaining Share in Key Categories: General Mills improved their share in key growth categories of U.S. Retail. Increasing Grain snacks share by 168 basis points (bps), Frozen Hot Snacks by 97bps, Yogurt by 88bps, RTE Cereal by 26 bps and Frozen Pizza by 23bps. Now, not all the performance was positive they lost substantial share in underperforming categories. Frozen vegetables lost 168bps, Dessert Mixes down 144bps and Dry Packaged Dinners down 72bps, all categories that we believe need to be divested.

 

Robust growth seen across the International segment, on a constant-currency basis, Latin America increased 17%, Asia / Pacific up 5%, Europe up 5% and Canada was about flat. This robust growth was driven by innovation in key markets like Brazil with Yoki and China’s dumpling and ice cream businesses.

 

Convenience & Foodservice continues to improve the product portfolio by pruning lower performing SKUs, freeing the business to focus on the key priority platform. These platforms (cereal, snacks, yogurt, mixes, biscuits and frozen breakfast) are providing all the growth for the division, collectively up 9% this year.

 

FY16 Hedgeye Guidance ―

Looking into FY16 we are excited about the possibilities. Management is working hard on their “Consumer First” initiative and making great changes to current product while also introducing new products.  Below is not a comprehensive list but some of the biggest things that we are looking forward to this year:

  1. Yoplait in China
  2. Gluten-Free Cheerios
  3. No artificial colors or flavors in the cereal
  4. Granola innovation / Muesli
  5. Greek Plenti / Whips
  6. Original yogurt sugar reduction
  7. Renovation on Grain Snacks
  8. Strong push on Natural & Organic products
  9. Delivering Value to consumer on brands like Totino’s and Hamburger Helper
  10. Bringing U.S. innovation International

 

Bottom line is they are still struggling; we don’t want to shy away from that. But the core of the portfolio is growing and management seems to be working tirelessly on implementing changes to grow the rest of the portfolio, especially cereal.  We also still believe that to have continued growth into the future a sizeable acquisition or divestiture would be beneficial to the business. 

de

Investing is difficult, but investing in shares subject to weather conditions adds to the challenge.  Welcome to Ag Equipment. 

 

We see the agricultural equipment down cycle as a multi-year affair with a good deal further to run.  The significant move higher in agricultural commodity prices from 2006-2013, along with ethanol mandates and equipment tax incentives, facilitated an accelerated refresh of the large agricultural equipment fleet.  A young fleet should depress new equipment demand for the next several years.

 

Used equipment inventories are also elevated, adding to industry pressure.  Farm land values, the dominant asset in the farm balance sheet, have declined recently after years of strong gains in a potential negative for confidence. Other key markets, like Brazil, have already shown sharp declines in equipment demand. 

 

For Deere in particular, we expect another leg down in production volume to have a meaningful impact on profitability given present utilization.

 

We are using the recent strength in DE shares associated with its FY2Q beat and a bounce in grain prices since mid-June as an entry point.  A key risk to our view is that agricultural commodity prices continue to move higher, perhaps driven by unfavorable growing conditions in key regions (i.e. weather).  Still, we expect sales of large agricultural equipment to normalize in coming years, pushing DE’s results below current estimates.  

VIRT

Financials Sector Co-Head Jonathan Casteleyn writes that, "shares of newly issued Virtu Financial are very richly valued. Despite principal risk in their daily trading operations, the stock is being priced in-line with the exchanges."

 

He adds that VIRT has no tangible equity capital to absorb a potential trading loss. It would have to draw down credit lines should their historical track record in trading break down. He estimates shares are worth $18 per share or the mid point of our scenario analysis.

TLT | VNQ | GLD | EDV 

The Hedgeye Growth, Inflation, Policy (GIP) model is signaling a move into QUAD 3 for the second half of 2015. This is a set-up for the domestic economy where growth is slowing and inflation is accelerating.

 

We reiterate our intermediate to long-term bullish bias on long-duration Fixed Income and gold.

 

Our back-testing results cast a favorable outlook for Long-Term Treasuries, REITs, and Gold with a favorable set-up as seen in the first three charts below. When growth is slowing (QUAD 3 and QUAD 4), long term rates tend to move lower.  The logic is simple:

  • #GrowthSlowing: As growth slows, a revision in forward-looking growth expectations manifest in lower yields
  • #InflationAccelerating: Commodity prices have made a significant move off of the 2015 lows as seen in the last chart below, and we expect the follow-through to play out in Q3 inflation readings. CPI readings track the commodity price sample used in chart #4 below very closely and CPI compares are easy in 2H 2015 vs. more difficult GDP comps (QUAD 3)       

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LEISURE LETTER (07/02/2015)

TICKERS: WYNN, MGM

COMPANY NEWS     

WYNN - Summer specials at the Wynn Macau for Macau residents include the following. 

  • Accommodation – Macau residents can stay at the Forbes Five-Star Wynn Macau. The package includes one-night’s accommodation, choice of breakfast for two persons, complimentary WiFi, complimentary parking and late check-out till 3pm. 
  • Dining – Restaurants at Wynn Macau will be offering tasting menus for local residents. 
  • Spa – Residents can enjoy 20% saving on all spa treatments available at the Forbes Five-Star Spa at Wynn with a range of spa services including facials and massages. Complimentary parking is inclusive.

ARTICLE HERE

 

MGM - The Mandalay Bay Resort and Casino in Las Vegas has begun the final phase of a $100 million renovation, in which all 3,211 guestrooms will be updated.  

ARTICLE HERE


MGM - MGM Resorts is pitching a $1 billion gambling complex for downtown Atlanta that backers say would funnel tens of millions of dollars into the HOPE scholarship.  But first it would have to overcome stiff opposition in the General Assembly and the governor’s office. 

  • MGM’s proposal would create 3,500 jobs and offer Las Vegas-style casino gambling, as opposed to past ideas involving video slot machines, said state Rep. Ron Stephens, who chairs the House’s economic development committee. He called it the “Cadillac” of casino projects.
  • An MGM Resorts spokesman confirmed the company’s interest in Atlanta but said its analysis in “the very preliminary stages.”

ARTICLE HERE

 

Airbnb - Panel of Hoteliers argue that boutique hotels are less at risk throughout the expansion and growing popularity of Airbnb. Takeaways from panel:

  • CEO of Trust Hospitality argued that Airbnb was simply a play on price, and that's the main reason why anyone uses the platform. With that mentioned, the panel made the case that the Airbnb customers are interested in both the experience and the price. 
  • Here to stay. The panel was in agreement that Airbnb is not going anywhere and the current regulatory and they will overcome the majority of their regulatory headwinds. 

ARTICLE HERE

Takeaway: Airbnb continues to make waves in the headlines 


CCL - The 1,266-passenger Ryndam will return to Harwich a day early, on Friday July 3, so staff can perform a deep clean before its next cruise. The ship was forced to cut short the 14-day round-trip cruise from the U.K. due to a Norovirus outbreak.

ARTICLE HERE 

INDUSTRY NEWS

China Anti-Graft - The People’s Daily, an organ of the Communist Party of China, as saying the party’s Central Commission for Discipline Inspection will use the country’s telecommunications companies to keep tabs on mainland officials when they are abroad. 

ARTICLE HERE


Las Vegas Housing - Las Vegas slipped out of the "Top 5 Distressed Markets" for the month of May, but that is not expected to last long. The market’s share of distressed sales fell by nearly half in May, to 13% of the market. That was down from 23.8% in May 2014. 

  • Nevada’s default laws went through several iterations in 2011 and 2013, which banks said complicated their ability to foreclose. As lenders have adjusted, foreclosure starts — first-time filings of notices of default — have picked up noticeably in 2015. 
  • It was also cited that due to the stabilization in home prices and negative equity dropping, homeowners will likely be able to exit their homes without the 'distressed' tag associated with the sale. 

ARTICLE HERE

 

Athens, Greece - The Hellenic Gaming Commission, arrived at a radical change of circumstances which will lead to the actual  suspension of OPAP VLTs business activity. The new regulation, decided by the Gaming Commission only a few days prior to the scheduled launch of the VLTs. 

ARTICLE HERE

Takeaway: Bad news for the suppliers 

MACRO 

Hedgeye Macro Team remains negative on Europe 

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot has happened in 2015.


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INITIAL CLAIMS | 5 QTRS TO GO

Takeaway: If history rhymes, we've got 5 quarters of track from here to oblivion.

Below is the breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

Late-Cycle Strength Rolls On:  Claims this past week were clearly again low at 281k, but the economy is equally clearly late cycle. Once again we'll revisit the key question, which is how long can labor market strength of this magnitude continue?

 

In the chart below, we show that in the last three cycles, once claims dipped below 330k they remained there for 24 months, 45 months, and 31 months, in the late 1980s, late 1990s/early 2000s, and 2006-2008 period, respectively before the economy went into recession. In the current cycle, claims have been below 330k for 16 months and counting. The average of these last three cycles is 33 months, which would translate to another ~5 quarters of track.

 

INITIAL CLAIMS | 5 QTRS TO GO - Claims1

 

Indexed claims in energy heavy states fell in the week ending June 20th while rising for the country as a whole. The spread between the two series in the chart below tightened from 30 to 24.  

 

The spread compression in the claims series accords with the Challenger Job Cut Announcement data for June which showed energy sector job cut announcements fall to a 7-month low of just 290 while Ex-Energy announcements rose by 6.2K to the highest level in 11-months. 

 

INITIAL CLAIMS | 5 QTRS TO GO - Claims18 normal  4

 

INITIAL CLAIMS | 5 QTRS TO GO - Challenger

 

The Data

Prior to revision, initial jobless claims rose 10k to 281k from 271k WoW, as the prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 1k WoW to 274.75k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -12.7% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -13.2%

 

INITIAL CLAIMS | 5 QTRS TO GO - Claims2 normal  3

 

INITIAL CLAIMS | 5 QTRS TO GO - Claims3 normal  3

 

INITIAL CLAIMS | 5 QTRS TO GO - Claims4 normal  3

 

INITIAL CLAIMS | 5 QTRS TO GO - Claims5 normal  3

 

INITIAL CLAIMS | 5 QTRS TO GO - Claims6 normal  4

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 



#CommodityCorrelations, Greece, Japan

Client Talking Points

#CommodityCorrelations

Welcome to chaotic macro. With cross-asset volatility rising and sideways FX trading, inverse commodity correlations to the USD have broken down over the last 1-3 months. Things like crude oil and copper, which typically sniff out the direction USD, are registering r-squared correlations of +.54 and -.14 to the USD on a 1-month basis and -.22 and +0.64 on a 3-month basis. History suggests this won’t last for an extended period of time, but strap your seatbelts for more non-linear volatility in the interim.      

Greece

All eyes are on Greece’s Sunday referendum vote (as it relates to credit proposals boiled down to YES you want to stay in the Eurozone, or NO you don’t).  Both Tsipras and Varoufakis have upped the ante by saying they will resign if there is a YES vote. We expect ~70% probability of YES, but if a NO comes through expect it to wreck havoc on the markets on Monday. 

Japan

The Nikkei closed up nearly +1% today, reversing week-to-date weakness on one of the three prongs in our bullish “win-win-win” thesis: subdued survey-based measures of inflation expectations. Specifically, the BoJ’s Tankan Survey showed little change to firms’ FY16 price expectations and its Consumer Survey showed no change to consumers’ price expectations one and five years out. The BoJ has too much demographic hay to bale to meet its inflation target, which effectively means QQE in perpetuity. We reiterate our intermediate-to-long term bullish bias on Japanese equities. 

Asset Allocation

CASH 48% US EQUITIES 6%
INTL EQUITIES 12% COMMODITIES 7%
FIXED INCOME 27% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
ZOES

We came out of the earnings report being very positive about management doing all the little things right. They continue to prove that they are some of the best operators in the industry. Importantly, many small cap restaurant companies with an undisciplined unit growth strategy experience significant labor inefficiencies as they expand. ZOES is in a different class of companies.  In a quarter where ZOES opened 12 new company-owned restaurants they managed to decrease both COGS and labor. 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
PENN

PENN’s new property, Plainridge Park in Massachusetts, had a strong opening. We expect slot win per day of $400, above Street expectations. In addition, June state gaming revenues will begin to roll out in 1-2 weeks. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.

TLT

After a Fed-fueled week of strength in slow-growth, yield-chasing asset classes and long duration fixed income, both the Dollar and interest rates re-couped their losses from Fed Week. The dollar declined, rates increased, and as a result, those long of gold took some pain. Will this continue? Will a long, sustained rate liftoff ensue? We don’t think so. We continue to repeat that the chance of further downward revisions to forward looking growth estimates from the Federal Reserve and consensus macro is much more likely than not. The attempted suspension of economic gravity from policy makers weakens the currency and puts pressure on bond yields. We remain long of this set-up with gold and long-duration fixed income.

Three for the Road

TWEET OF THE DAY

CHART OF THE DAY: Is #Greece Just The Tip Of Europe's Iceberg? app.hedgeye.com/insights/44990… via @Hedgeye

QUOTE OF THE DAY

“People who say it cannot be done, should not interrupt those who are doing it.”

– George Bernard Shaw

STAT OF THE DAY

Joey Chestnut (USA) successfully ate 61 hot dogs last year at Nathan's Hot Dog Eating Contest.


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