Client Talking Points
Pretty straightforward trade here with another socialist compromise equating to Euro +1% vs. USD and all of the correlation trades to USD reflating. The key here isn’t being reactive, its making good decisions at the low and high end of the range which is now 1.09-1.12 EUR/USD. In other words since we have no European shorts on, we’ll probably start making sales at EUR/USD $1.12 (they can’t print growth).
Euro Up equals Dollar Down equals Commodities/Oil Up, but the risk ranges here have widened, big time (leading indicator of continued volatility) – the risk range for WTI is now $49.62-55.29 and we see no reason why you can’t test the top-end of that range if Janet Yellen is dovish in here Cleveland speech.
Last, but not least, big night for the non-halted (> 1400 stocks still halted) part of the market – Shanghai Comp +4.5% on the session but still in crash mode, -24.5% month-over-month. We’re not smart enough to dip a toe in this market yet (plus we wouldn’t want it chopped off by a Chinese dude if we then made a sale).
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|FIXED INCOME||28%||INTL CURRENCIES||6%|
Top Long Ideas
We’re all-in on Kate Spade at current levels. The Hedgeye Retail team believes 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.
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.
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:
Three for the Road
TWEET OF THE DAY
McCullough: #Draghi Is Gearing Up For More 'Cowbell'
via @KeithMcCullough on @FoxBusiness
QUOTE OF THE DAY
The greatest of faults, I should say, is to be conscious of none.
STAT OF THE DAY
As of 2013, ~41% of Households making < $45K paid more than 50% of income towards housing costs while over 70% of households paid more than 30% of income towards rent.
Hedgeye Risk Management CEO Keith McCullough offers his take on what's going on in Europe, China and Greece with Fox Business anchor Maria Bartiromo and FBN’s Charles Payne and Cheryl Casone.
We would like to introduce a note that we will be releasing periodically called, Just Charts. The purpose of this will be to revisit our restaurant dashboard and analyze our Long and Short names as well as other notable names in the industry.
There won’t always be a definitive call made, but we will give you our perspective on current trends and expectations.
That being said, the first name we would like to revisit is Chipotle (CMG). CMG remains on the Hedgeye Restaurants ideas list as a LONG.
CMG has been under significant selling recently as we approach the 2H15, when the company will be up against very challenging comparisons. Despite these near-term challenges we like CMG for the tail duration. How to trade this stock going into the 2Q print is difficult to call. I suspect that a “better than bad” same-store sales print could cause some short covering.
CMG shares are down 9.6% year-to-date versus up 0.3% for the S&P 500. The short-term sales comparisons are a cyclical and not secular problem for the company. One turn on the EV/NTM EBITDA multiple suggest 5.7% upside/downside in the name.
CMG is facing some very difficult comparisons over the next three quarters and that has the street nervous. Will CMG post declining same-store sales over the next three quarters? The 2Q15 print will set the tone for the balance of the year. The consensus estimate of 6% for 2Q15 suggests only a slight slowdown in two-year trends from 11.9% in 1Q15 to 11.7% in 2Q15E. I suspect that 6% might be an aggressive estimate for 2Q15.
RESTAURANT LEVEL MARGINS
Restaurant level margins are expected to be 28.04% in 2Q15, up 74 bps year-over year. The company should benefit from lower food, labor and other costs in the quarter. The trend in margins supports our LONG thesis.
Operating margins will also improve nicely in 2Q15. G&A should come down by 88bps to help push operating margins up 18.8%, up 164bps year-over year. There continues to be significant leverage in the business model.
SENTIMENT AND VALUATION
EV / NTM EBITDA
Trading at 16.6x EV/NTM EBITDA the stock is not cheap, but it’s not aggressively overvalued given the opportunities for the company. Yes, CMG is trading at a premium to its peer set, but deservingly so, as we said previously, it will grow into the valuation.
CMG’s short interest is low hovering right around 4-4.5% of the float. While it has moved up in 2015, there is not a big negative bet against this company.
With 60% of the analysts having a buy on the stock and no sell ratings, there is also a positive bias to the name. Given the financial performance of the company for the past two years, the bullish bias appears to be justified.
HEDGEYE RESTAURANTS IDEA LIST
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