Steiner: Why Capital One Is Down -12% Today

In this excerpt from today’s edition of The Macro Show, Financials Sector Head Josh Steiner explains three reasons why Capital One shares are plunging today, while CEO Keith McCullough explains why you can’t afford to ignore macro factors. 


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HAIN | Cosmetic Deception

Today Hain Celestial (HAIN) announced that they have agreed to acquire the Mona Group, a branded plant-based drink manufacturer in Europe for an undisclosed amount. Mona has two brands that they operate, Joya, which makes up a majority of the sales and Happy which is relatively unknown. In calendar year 2014 the collective Mona Group had $50 million in net sales.


HAIN | Cosmetic Deception - HAIN CHART 1


The plant-based segment is a very competitive market, and as private label is getting more prominent it is imperative to have the top brand in your respective categories.  Joya and Happy are not top brands and they face an uphill battle in the plant-based beverage business. Alpro, a top brand for WhiteWave (WWAV) is a clear leader in European plant-based beverages with #1 brand position and $510 million in net sales in FY2014. Furthermore, Alpro has a 43% market share in plant-based beverages across Europe and the nearest competitor has only 7% (HAIN or Joya are not even in the top 5).


This brings us to our next point, below is a quote from Irwin Simon, CEO of HAIN from the press release that is blatantly incorrect:

"We are excited by the acquisition of Mona, which expands our presence in plant-based products in Europe, solidifying our leadership position in the category with the addition of Joya® and Happy® to our Dream™, Lima® and Natumi® brands.  This acquisition increases the scale of our plant-based operations to over $100 million net sales in Europe in a growing category of branded and private label products, while providing us with additional manufacturing capacity,"


HAIN is not even in a leadership position to solidify. Irwin is living in la la land, potentially doesn’t even know the competitive market or he is just deceiving investors, in our outreach to the company we didn’t hear anything back on this point.



There is no fundamental organic growth in Europe to support their projections so management turns to M&A. The UK revenues are deteriorating on a sequential basis, so HAIN is forced to acquire businesses to meet expectation. The sooner people realize this point the better, HAIN specializes in buying companies and just putting them on the shelf to rot.


HAIN is on our Hedgeye Consumer Staples Best Ideas list as a Short, this transaction further convinces us that management is using the same old tricks to meet expectations.


DXJ: Adding Japanese Stocks to Investing Ideas (Long Side)

Please note we are adding DXJ to Investing Ideas today. CEO Keith McCullough explains why below.

*   *   *   *   *

DXJ: Adding Japanese Stocks to Investing Ideas (Long Side) - z tok

Long Japan remains the back-door way to be long lower-volatility-lower-valuation-liquid-equities. Unlike in Europe, USA, and China, Japanese growth data is actually accelerating too (PMI accelerated in July to 51.4 from 50.1 in June). 


Pardon? Buy Japan as both the absolute (rate of change) and relative momentum of its growth factor is beating China and Europe? Yep. That’s the really cool kids’ portfolio – long AMZN, SBUX, and Nikkei!


Oh, did I mention that Japan’s rate of change in growth will be accelerating in the 2nd half of 2015 as the beloved navel gazer market (USA) slows? What the un-cool kids own are basically US cyclicals (I think they’re now called “value” stocks):


  1. Industrials (XLI) down another -0.9% yesterday (down -4.4% in the last month)
  2. Dow Transports down another -2.1% yesterday (down -4.1% in the last month)
  3. Russell 2000 down another -1.1% yesterday (down -3.0% in the last month)


So much for the “global growth is back, buy reflation” idea…



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Takeaway: New Home Sales for June were a disappointment and usher in the seasonally-soft third quarter performance period for Housing equities.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


NHS | #THUD - Compendium 072415 


Today's Focus: June New Home Sales 

It’s generally difficult to characterize +18% YoY growth as disappointing but with sales retreating -6.6% sequentially (vs +0.3% estimates) along with negative revisions to both April and May, New Home Sales in June could be aptly characterized as a dud. 


On the supply side, the inventory of new homes rose +5.4% month-over-month to 215K on a unit basis while accelerating +230 bps sequentially to +9.1% YoY.  Geographically, sales declined sequentially across all regions except the Northeast while year-over-year sales growth was positive across all geographies with growth of +23% and +24% in the Northeast and South, respectively, leading the gains. As a percentage of the total market, New Home share dropped to just 8.1% in June (LT average =  ~11.4%) as existing sales made another post-crisis high in the latest month. 


As it relates to New Construction activity, we highlighted the distortion in the May/June Starts data last week but it’s worth a quick re-iteration.  The +295% YoY growth in MF permits in the Northeast ahead of the impending NYC tax exemption expiry helped augment the Total Starts figures for a second month in June and drove MF share of total up to a 42-year high.  A reversal of that pull forward sets the stage for a potential retreat/disappointment in the reported July data.      


IS GOOD, GOOD ENOUGH? | CONCEPTUAL REDUX:  We titled our 3Q15 Housing Themes Presentation IS GOOD, GOOD ENOUGH?.  The deck is over 120 slides of data intensive analysis but the overarching theme can be sufficiently captured conceptually:  The Housing data in 3Q will be “good” but the large-scale positive reversal we’ve seen over the last ~9-months is now rearview, the comps get tougher after the reported June data and we don’t have any discrete catalysts in the nearer-term.   Further, performance seasonality in the stocks is recurrent and pervasive and 3Q represents the soft-patch period.   


From a longer-term perspective, the mean reversion upside to average & peak levels of activity (recall: housing cycles are long and autocorrelated) remains both conspicuous and compelling, but the asymmetry in the setup and the leverage to our expectation for a positive inflection in both fundamentals and investor attitudes when we reversed to bullish back in November of last-year has, in large part, played out.  


Again, we think the data will remain “good”  -  with Purchase Application demand flat sequentially in 3Q (but holding near 2Y highs) and NHS declining in the latest month (but still above the TTM ave) “good” is proving an apt adjective -  but, tactically, the prospect for aggregate builder outperformance in the near-term carries a diminished probability.  Here, the Title Insurers and Mortgage Insurers offer some tactical cover while moving upstream towards larger cap/lower beta/liquidity/quality style factors make sense in terms of direct builder exposure.  



NHS | #THUD - NHS   SF Starts




NHS | #THUD - NHS Comps


NHS | #THUD - EHS to NHS Ratio


NHS | #THUD - NHS Inventory






NHS | #THUD - NHS Mean   Median Price




About New Home Sales:

Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.



Joshua Steiner, CFA


Christian B. Drake


RTA Live: July 24, 2015

Below is the replay from today's edition of RTA Live.



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