Zone Defense

"When my time on Earth is gone, and my activities here are past, I want them to bury me upside down, and my critics can kiss my ass."

-Coach Bobby Knight


Let's play a game.  


I'll give you a pre-game quote from a player and you tell me what athlete said it:  


We just need to go out there and play our game..control the tempo…limit unforced errors…stay focused and put ourselves in the best position to win.” 




In truth, that quote could have come from any player, in any sport, before or after any game, in any decade over the last century.  


The same clichéd commentary and truthy but trite observations - season after season, year after year.


And still we listen….


In April of 2011, after 98 years of Central Banking omerta, Bernanke gave the first ever post-FOMC meeting press conference.  Policy makers globally followed suit and the Main Event in the Central Planning League was born.   


Now nearly 5 years into post-FOMC meeting press conferences, manic Jackson Hole media coverage, hyper-scrutinized congressional testimonies, and serial pre-and post central bank brinksmanship and bailout announcements, the policy maker press conference has graduated from intriguing newbie to dowdy veteran.   In the marginally insightful, boilerplate generalities genre, the pre/post-game presser now has a worthy rival.


Zone Defense - a. Knight


Back to the Global Macro Grind …..


Sports analogies tend to work for a host of reasons.  Most people have some athletic experience and on-the-field lessons carry transferability and real-life applicability. Further, sports strategy is typically tractable and straightforward and when invoked to describe an off-the-field dynamic, sports metaphors have the Occam’s razor’ish ability to help simplify the complex. 


Let’s simplify some Macro complexity with a tangible example.  


Last week we hosted both our 3Q15 Macro Themes and 3Q15 Housing Themes calls.  I’ll focus on our lead Macro theme this morning and touch on our Housing call – “Is Good, Good Enough” in 3Q15 - in the next missive. 


Scouting Report:  Our lead Macro theme was #ConsumerCycle in which we profiled the consumption cycles of the last half-century, contextualized the current cycle and detailed how best to be counter-cyclically positioned as the consumer cycle enters its twilight. 


The crux of our conclusion on growth – which is Slower for Longer – carries both cyclical and secular components. 


  • Cyclical:  Harder GDP comps and easier inflation comps alongside the ongoing rise in share of wallet in major consumer cost centers (think Rent) anchor our consumer squeeze starting line-up.  That this cyclical squeeze is occurring against the late-cycle backdrop of peaking employment, the cresting in consumer confidence and consensus over-optimism (see Chart of the Day below) around the capacity (or willingness) of the consumer to carry the recovery further buttresses the case.   
  • Secular:  Past-peak demographics (domestically and across the major DM economies), ongoing over-leverage, and select components of the secular stagnation thesis continue to get the Franchise tag as the slower-for-longer dynasty enters its 8th banner year.   


The Draft:  Who do you draft in the latter innings of a slower-for-longer game?

  • larger-cap, lower-beta, pricing-power, liquidity, defensive yield (think Long-term Treasures (TLT) or Healthcare (XLV))


The DL:  Who gets benched or Traded?

  • smaller cap, higher-beta, illiquidity, negative deflation/strong-dollar leverage, central bank Rotate-the-QE exposure (think EURO (FXE) or Industrials (XLI))

In sports speak, the asset allocation rotation essentially amounts to falling back into a half-court zone defense from full-court man-to-man pressure.    


The Game Plan:  Keith highlighted the “sell’ call in yesterday’s Early Look but the larger risk management strategy is worth reiterating.  When something is at the top end of its immediate-term risk range, you sell some.  When it retraces to the bottom end of its risk range, you buy some more – provided that the security holds TRADE support.  If it breaches TRADE support to the downside – that’s fine - you are out of the way (or underweight) and can wait for a test and hold of TREND support before buying back the exposure.   Repeat.


The Score:  The U.S. remains atop the standings in the best-house, bad developed market neighborhood division, but went 0 for 2 in yesterday’s macro double-header with both Retail Sales and Small Business Confidence sliding to close out 2Q. 


Headline Retail Sales declined -0.3% sequentially and decelerated on both a 1Y and 2Y basis in June.   While the sequential decline in Auto Sales in June (released on 7/1)  telegraphed the Headline deceleration, the magnitude of retreat was disappointing and the trend across the various sub-aggregates was similarly languid.   


Whether aggregate income growth can maintain its recent ~5% pace and Services and NonDurables consumption can continue to support household spending growth to the same extent they have in 1H15 remain TBD.  The broader trend is Wage Income and Services Consumption (~2/3rds of household spending) remains positive but the internals in the June employment report were soft and both employment and consumption comps steepen in 2H15.


Small Business Confidence, meanwhile, declined -4.2 points to a 15-month low in June with the Forward Expectations, Job Openings, Hiring Plans and Compensation Plans readings all retreating sequentially.    With small business (1-499 employees) representing over 99% of total U.S. Employer firms and >60% of net private sector hiring on a monthly basis, the state of sentiment matters in handicapping the prospects for labor and wage trends.


The (Policy) Commissioner:  middling-to-down confidence and consumerism is not what Team Janet wants to see - particularly with sanguine hopes of a September lift-off still lingering and a sustained attempt at policy normalization stirring restlessly in the queue.  


The Investment league has ~252 games a year.  It’s a marathon, not a race.  But it’s also a game of alpha inches with short-term performance compounding to long-term outperformance.


To emotional and cerebral durability and memorable performances,


Christian B. Drake


Zone Defense - Consumption Consensus CoD



Takeaway: RCL has disappointed investors twice in a row regarding yield guidance. They won't fail a 3rd time. NCLH is setting up for a great year.

The Hedgeye Gaming, Lodging, and Leisure team will host a conference call TODAY AT 11AM to discuss the latest findings from our proprietary cruise pricing database.  


Watch a replay below.


Points of discussion include:

  • Pricing pivots (RCL, NCLH, CCL) for July 2015
    • Stronger Caribbean 
    • Europe off the lows
    • Asia getting better
  • RCL/NCLH F2Q preview and FY 2015 outlook
  • Early look at 2016 Asia pricing
  • RCL's newest ships: A look at the past, present and future  



The Macro Show Replay | July 15, 2015



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INVITE (ATHN) | BEST IDEA UPDATE CALL - 2015 07 14 Best Idea Update

athenahealth (athn) best idea update call 

We added athenahealth (ATHN) to the Hedgeye Best Idea List as a Long in August 2014.  Since then, we have heard push back and praise from investors on both sides of the debate.  We've continuously reevaluated our thesis and added depth to our research along the way, and at each turn found ourselves arriving at the same conclusion with more confidence than before.  We remain long ATHN and believe the stock will reclaim $200 as our long thesis plays out.




In the presentation, we will review much of the incremental work completed over the last year, challenge the bear case using market share data from SK&A, and evaluate the company's ability to succeed in the inpatient space, which we see as much improved from where they were a year ago.  We will also unveil at least one new tracker (with others in development) that will give us visibility into share gain/losses by other vendors on weekly basis and review the results of our EHR/RCM pricing survey.


This call will be held on Thursday, July 23rd at 11:00am ET.


Please contact  for further information.  An invite with dial-in instructions will be sent to subscribers ahead of the conference call.


INVITE (ATHN) | BEST IDEA UPDATE CALL - 2015 07 15 Practice Management Share

presentation outline

  • Company and financial snapshot
  • Business model overview
  • Regulatory backdrop
    • Meaningful Use
    • PQRS / ACOs / FQHCs
    • Fee for Value
  • Practice Management & EHR Market Share Analysis 
    • Epic, Cerner, eClinicalWorks, Allscripts and more
    • Independent vs. Health System
    • Share by specialty and size
    • How big of a threat are Epic and Cerner?
  • Inpatient Opportunity
    • Market share analysis
    • Pricing and modelling adoption
  • Key Drivers
    • ATHN Tracker Update… Q2 Doc Add Preview
    • NEW tracker introduction
    • Results of RCM/EHR Pricing Survey
  • Field Notes
    • Former CPSI Sales Rep
    • Current Healthland Sales Rep
    • CEO of RazorInsights Hospital
    • Former Sales Manager eClinicalWorks
  • Valuation and sentiment
  • Risks and timing

Please call or e-mail with any questions.


Thomas Tobin
Managing Director 



Andrew Freedman





KATE - At This Price, LBO Math Matters

Takeaway: No one wants to touch KATE. But with a 29% IRR plus $788mm in NOLs, other buyers might be interested.

The Equity market wants nothing but to sell KATE, and all the work we do on the brand's three-year roadmap won't change that dynamic over the near-term leading up to earnings next month (which look fine, by the way). But at a price, someone's gotta care about this name. Our LBO analysis arrives at a 29% IRR assuming a 50% take-out premium at current levels, and margin levels more than 1,000bp below other brands in the so-called 'handbag space'.  And that's not even giving KATE credit for its $788mm in NOLs (equal to 29% of its equity value -- which is massive -- ie NOL is very high, or equity value low).


We've gotten so many calls from people saying 'I want to buy it, but I'm afraid of it.' Quite frankly, so are we given how irrationally it trades. But our numbers haven't changed. We think the business looks solid, and that ultimately the stock will follow the numbers.  If its traditional shareholder list won't buy the name, perhaps a different one will emerge.  The model makes a lot of sense from where we sit.

KATE - At This Price, LBO Math Matters - KATE LBO chart1B


Key Assumptions

-The stock closed at $21.63 -- let's conservatively use a 50% discount to the current price.

-A capital structure of 50% Equity and 50% Debt gets us leverage of 7.0x on 2016 EBITDA of $304mm.  This leverage is above current regulatory guidelines, but we think a bank would be willing to stretch for this deal due to its relatively small size and the 50% stake being taken by the equity holder. Additionally, the deal remains attractive even at lower leverage levels.

-We have revenue going from $1.7bn in 2016 to $3.3bn in 2020 and the EBITDA margin moving from 18% to 25%.

-With a 10x take out EBITDA multiple on our estimated take out EBITDA of $886mm we get an IRR of 29%.

-Importantly, there's also $788mm in NOLs that don't expire until 2028.

KATE - At This Price, LBO Math Matters - KATE LBO chart2B

VIDEO: Tom Tobin Previews Best Idea Call on Athenahealth | $ATHN


Earlier today, Hedgeye Healthcare Sector Head Tom Tobin and Analyst Andrew Freedman gave an overview of their upcoming Best Idea Call on Athenahealth. Tom and Andrew offer a brief history of their long idea before outlining the current bull case.


The call will take place Thursday, July 23 at 11:00AM ET. If you would like access to this institutional presentation, please contact

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