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Welcome to August

Client Talking Points

VIX/VOLUME

Sub 12 in the front-month VIX has been a clean cut sell signal for U.S. Equities post every rally to lower-highs in 2015. What was most interesting about last week’s month-end markup was Friday’s total U.S. Equity volume -13% and -21% vs. the 1 month and 1 year averages.

OIL

After a -2.6% #Deflation move last week, WTI drops another -1.5% this morning to $46.40, taking its 1-month crash to -26%. We have no idea how consensus is complacent about this after being too complacent on last year’s initial crash (Russia’s Ruble and stock market continue to crash too).  

UST 10YR

With both Global Growth & Inflation Slowing what does consensus chase (other than charts)? The Long Bond. Yep. AFTER the non-consensus 1 month move from 2.54% to 2.19%, CFTC futures/options net position moves back to net LONG +58,783 contracts.

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET, with Hedgeye CEO Keith McCullough.

Asset Allocation

CASH 50% US EQUITIES 4%
INTL EQUITIES 8% COMMODITIES 0%
FIXED INCOME 23% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
HOLX

HOLX’s earnings release were as good as we expected, and in some spots, much better than our optimistic view. Given the move in the price, we did begin to do some work on Hologic’s Diagnostic segment. We touched base with a lab Director who currently does his testing on Hologic/Gen-Probe’s Panther system. During the call management made some positive comments about uptake of the systems and rising utilization per box. Our contact suggested the benefit from the Affordable Care Act was substantial  over the last 12 months, pushing volume up to a mid-teens growth rate, but that trends were flattening. But on the positive side Qiagen continues to cede share with an out of date test and the alternatives are primarily Roche and Hologic, but not Cepheid’s system. The bottom line is that we may be too conservative with our estimates for Diagnostics, which we’ve been assuming treads water from here.  However, we’re starting to think there is some incremental acceleration that’s possible, which would be welcome news indeed. 

PENN

After attending PENN’s analyst day at the Plainridge Casino in Massachusetts our Gaming, Lodging & Leisure Team struggled to find any negative takeaways. The property opened very strong in late June, and the strength continued in July. We are now raising our win per day per slot assumption to $500 from $400. Terrific highway access, a lower gaming tax rate and garage parking provide a competitive advantage in what seems to be a deeper market than the consensus view. Our 2015 and 2016 estimates are materially above the Street for EBITDA and EPS. Most importantly, we think PENN should generate an ROI of 28% on Plainridge, much higher than the Street anticipates.

TLT

As largely expected a sequential acceleration in GDP from Q1 to Q2 on a seasonally adjusted annual basis pulled forward the market’s expectation for a rate hike which = USD strength. The USD finished positive on the week (+0.50% on Thursday’s print alone).

  • U.S. GDP reported Thursday for Q2 came in at +2.3% on a Q/Q seasonally-adjusted annual rate and the market took it as a positive print à rate hike expectations pulled forward.
  •  Remember that 1) Consensus focuses on this SAAR number and 2) The GDP acceleration came off of an awful Q1 print (Q1 revised to a measly +0.60% for Q1 vs. initially reported -0.20%)
  • On a Y/Y basis (crazy Hedgeye speak) GDP for Q2 actually decelerated to +2.3% YY vs. 2.9% prior
  • With very difficult base effects in our model for 2H 2015 GDP we expect Q2 data (especially the GDP print) to provide support for the USD
  • Our expectation for Y/Y GDP in Q3/Q4 are +1.6% Y/Y (+1.4% Q/Q SAAR) and +1.5% Y/Y (+1.7% Q/Q SAAR) respectively; These prints (Q3 will come in October) will stoke a relatively more dovish FED for a short time (USD headwind) but until then we’ll ride the Q2 data train.  

Three for the Road

TWEET OF THE DAY

VIDEO: Demographics Expert Neil Howe Returns for Rapid-Fire Discussion on Election, Housing, and More https://app.hedgeye.com/insights/45589-demographics-expert-neil-howe-returns-for-rapid-fire-discussion-on-ele… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

The price of greatness is responsibility.

Winston Churchill

STAT OF THE DAY

Ronda Rousey knocked-out her opponent Bethe Correia in 34 seconds in a UFC match Saturday.


The Macro Show Replay | August 3, 2015

 


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

7/30/15 BLMN | ANOTHER BACK HALF MISS?

7/30/15 PNRA | THE EVOLUTION CONTINUES

7/29/15 BWLD | COVERING THE SHORT

7/27/15 MCD | THE GAME CHANGER | ALL DAY BREAKFAST (ADB) SURVEY RESULTS

7/24/15 MCD | RIGHT ON TRACK

 

RECENT NEWS FLOW

Friday, July 31

RUTH | Delivered a nice quarter on Friday, with SSS growth of 4.2% versus consensus estimates of 3.3%, built by a traffic increase of 0.7% and an increase in average check of 3.5% (click here for press release, or here for news article)

 

Thursday, July 30

FRGI | Reported 2Q15 results, SSS increased 4.3% at Pollo Tropical versus consensus estimates of 5.1% and 5.6% at Taco Cabana versus consensus estimates of 4.4% (click here for press release, or here for news article)

 

Wednesday, July 29

WEN | Testing antibiotic-free chicken in certain markets (click here for article)

JMBA | Provided an update on refranchising efforts, expects to be 90% franchised organization by the end of 2015 (click here for article)

PNRA | Reported strong 2Q15 results, and an even better outlook for the next 12-18 months, refer to our earnings summary here for more detail

 

Tuesday, July 28

Minimum wage increases continuing to spread across the country (click here for article)

 

Monday, July 27

DRI | Names Todd Burrowes, former RT COO, as president of LongHorn Steakhouse (click here for article)

PLKI | Focusing on value, bringing back Rip’n Chick’n for only $3.99 (click here for article)

 

SECTOR PERFORMANCE

Casual dining and quick service stocks, in aggregate, outperformed the XLY last week. The XLY was up 1.7%, top performers from casual dining were BWLD and FRGI posting an increase of 13.6% and 13.1%, respectively, while SHAK and PNRA led the quick service pack, up 18.6% and 9.7%, respectively.

Monday Mashup - CHART 3

Monday Mashup - CHART 4

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLY remains bullish on a TRADE and TREND duration.

Monday Mashup - CHART 2

 

CASUAL DINING RESTAURANTS

Monday Mashup - CHART 5

Monday Mashup - CHART 6

 

QUICK SERVICE RESTAURANTS

Monday Mashup - CHART 7

Monday Mashup - CHART 8


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Demographics Expert Neil Howe Returns for Rapid-Fire Discussion on Election, Housing, and More

In a special two-part edition of Hedgeye's Real Conversations, Hedgeye CEO Keith McCullough welcomes back demographer, author, and historian Neil Howe to discuss politics, central planning, and millennials.

 

Armed with his unrivaled expertise on demographics, Neil breaks down how the 2016 Republican field stacks up to the current Democratic candidates and what the upcoming election will look like compared to 2008.

 

 

In Part 2, Neil discusses what the Federal Reserve will likely do versus what it should do, what massive corporate earnings might actually represent, and the sector that is responsible for positive GDP growth in the U.S.


The Week Ahead

The Economic Data calendar for the week of the 3rd of August through the 7th of August is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.

CLICK IMAGE TO ENLARGE.

The Week Ahead - ZZZZ 07.31.15 Week Ahead

 


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: UUP, ZOES, FNGN, DXJ, HOLX, FL, VIRT, PENN, GIS, VNQ, EDV & TLT

Investing Ideas Newsletter       - 1

 

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

 

Please note we added UUP (U.S. Dollar), ZOES (Zoe's Kitchen) and FNGN (Financial Engines) this past week. 

LEVELS

Investing Ideas Newsletter       - 2

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

ZOES

ZOES stock sky rocketed in June, and although the valuation is high, we don’t view it as overvalued. This is a differentiated concept with little competition in its way. ZOES’ operational and profitability metrics are ahead that of Chipotle’s in their early days, giving us even greater conviction in this LONG idea.

 

About a month ago their CFO resigned and although he was a leader within the company, we are confident they have the talent in house to carry the company forward.

 

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

 

FNGN

 

FNGN is a battleground small cap name that we think is misunderstood and undervalued. FNGN will report 2Q15 earnings on Wednesday, August 5th, after which we will provide our fundamental update. 

 

The Department of Labor (DOL) is in the midst of a 75 day comment period for pending adjustments to the handling of retirement accounts and client assets. Currently, the language and verbiage points to broad sweeping principles to ensure low fees, avoiding conflicts of interest/steering, with sweeping adjustments within the IRA markets. Buried within the literature is mention of continued support for independent advice within both the IRA and DC/401K market, which in final form would continue to make the case for independent advisory firms including Financial Engines (FNGN).

 

While the finalized proposals won't likely take shape until the end of the year, the rule set in current form looks to extend the regulatory tailwind from the 2006 Pension Protection Act, which suggests a default investment alternative to allow for improved investment results (otherwise potentially assigning liability to plan sponsors). We note that the most recent annual Cerulli survey of the retirement market continues to point to "Fiduciary Concerns" as driving delegation of investment decisions to independent 401K advisors in concert with this ongoing regulatory push.

 

Investing Ideas Newsletter       - 15

 

 

HOLX

HOLX’s earnings release were as good as we expected, and in some spots, much better than our optimistic view.

 

We’ll have the monthly update for July by Monday morning for our 3D Tomo Tracker. Strength in the Hologic’s Breast Health segment caught analysts off guard, and the questions from the sellside seemed to be searching for a handle on the upside. For their part, management responded by eliminating any disclosure about unit placements or market conversion!  Maybe that was a reaction to recent downgrades into their earnings. Given our tracking tools, we don’t really mind less disclosure, but it will be interesting to see how consensus numbers change over the coming days.  

 

Given the move in the price, we did begin to do some work on Hologic’s Diagnostic segment. We touched base with a lab Director who currently does his testing on Hologic/Gen-Probe’s Panther system. During the call management made some positive comments about uptake of the systems and rising utilization per box. Our contact suggested the benefit from the Affordable Care Act was substantial  over the last 12 months, pushing volume up to a mid-teens growth rate, but that trends were flattening. But on the positive side Qiagen continues to cede share with an out of date test and the alternatives are primarily Roche and Hologic, but not Cepheid’s system.  

 

The bottom line is that we may be too conservative with our estimates for Diagnostics, which we’ve been assuming treads water from here.  However, we’re starting to think there is some incremental acceleration that’s possible, which would be welcome news indeed.  

 

Investing Ideas Newsletter       - slide6

FL

Coming off a period of growth, Foot Locker boosted returns by 2,000 basis points without spending. That productivity improvement was driven by a rationalization of the store base as FL removed duplicate and underperforming stores throughout the U.S. The slide below shows an example where 3 FL store concepts are in the same mall location (North Riverside Park). Over the past 5 years FL has removed these redundancies. Now there are few opportunities left to close or 'rebanner' stores, and no more capital to pull away from this model.

 

The change was led by Ken Hicks, CEO from 2009 to 2015, who is now gone (retired). His team is still there, but the new plan involves spending to grow, which we see driving down asset returns. That's never a positive for a company's multiple especially when you consider that FL is trading at a peak 16.5x earnings multiple.

 

Investing Ideas Newsletter       - FL II7 31

DXJ

Still Working: DXJ Update

 

Japan – our favorite country exposure on the long side of equities – continues to deliver positive absolute and relative returns and we continue to prefer the hedged exposure offered by the DXJ, given the currency’s inverse correlation to the QQE fueled equity market. Specifically, the DXJ finished up +0.7% on Friday to cap a +1.4% gain for the week. That compares to 1-day and weekly returns of -0.2% and +1.2%, respectively, for the SPY.

 

With respect to the key economic data released this week, household spending slowed sharply again in June as core CPI ticked commensurably.

 

Investing Ideas Newsletter       - 7

 

Investing Ideas Newsletter       - 8

 

Investing Ideas Newsletter       - 9

 

One might think this should lend pause to the BoJ’s drive to perpetuate a sustainable and structural increase in inflation, but the trend in real incomes remains extremely positive, having rebounded in a more-or-less strength line to +2.8% YoY in June from a bottom of -7.1% YoY in April 2014. Rising real incomes is positive on the margin for Japanese equities as it gives the BoJ additional scope to combat the trending deceleration in both reported inflation and inflation expectations. Regarding the latter, Japan’s 10Y breakeven rate is down from its YTD high of 1.12% to 0.96% latest; recall that it has been making a series of lower-highs since peaking at 1.39% in June of last year.

 

Investing Ideas Newsletter       - 10

 

Investing Ideas Newsletter       - 11

 

With monetary policy remaining accommodative and set to become incrementally supportive of the Japanese equity market (we anticipate QQE expansion within the next 4-6 months), the positive trend in Japanese manufacturing and trade data is an additional tailwind to the extent such trends are reflected in improving corporate operating metrics. Recall that a structural improvement in the ROEs of Japanese corporations and increased financial engineering are as key to our bullish bias on Japanese stocks as the country’s debt and demographically challenged inability to meet its growth and inflation targets (i.e. perpetual QQE) is.

 

Investing Ideas Newsletter       - 12

 

Investing Ideas Newsletter       - 13

 

Investing Ideas Newsletter       - 14

 

All told, we reiterate our bullish bias on Japanese equities and continue to see substantial upside over the intermediate-to-long term.

 

 

VIRT

 

VIRT will report 2Q15 earnings on Wednesday, August 5th, after which we will provide our fundamental update. 

 

Our Financials team believes that VIRT is being valued incorrectly by the market. Our main qualm is that the company takes intraday prop risk, but has no tangible equity capital to cover any potential trading losses. We see fair value in the mid-teens (30-40% downside).

PENN

 

After attending PENN’s analyst day at the Plainridge Casino in Massachusetts our Gaming, Lodging & Leisure Team struggled to find any negative takeaways. The property opened very strong in late June, and the strength continued in July.

 

We are now raising our win per day per slot assumption to $500 from $400. Terrific highway access, a lower gaming tax rate and garage parking provide a competitive advantage in what seems to be a deeper market than the consensus view. Our 2015 and 2016 estimates are materially above the Street for EBITDA and EPS. Most importantly, we think PENN should generate an ROI of 28% on Plainridge, much higher than the Street anticipates.

 

PENN has a done a nice job with the new casino (clean bathrooms and ample parking) and it’s showing in the early results.  We believe Street estimates for PENN will need to move higher as early as Q3 and certainly for 2016, due in part to the strength of Plainridge.  We’re now projecting $340 and $383 million in company EBITDA for 2015 and 2016. Our EPS estimates are $0.66 and $1.10 for 2015 and 2016, respectively - 12% and 16% above the Street, respectively. 

 

GIS

This Thursday we posted a full note on why GIS should buy WhiteWave Foods (WWAV). This transformational transaction although dilutive would reinvent the way GIS operates forever. We are confident investors will look past the dilution and to the immense amount of growth WWAV would provide.

 

Investing Ideas Newsletter       - GIS CHART 3a

 

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. 

 

TLT | VNQ | EDV | UUP

We added UUP to investing ideas this week as a largely expected sequential acceleration in GDP from Q1 to Q2 on a seasonally adjusted annual basis pulled forward the market’s expectation for a rate hike which = USD strength. The USD finished positive on the week (+0.50% on Thursday’s print alone)

  • U.S. GDP reported Thursday for Q2 came in at +2.3% on a Q/Q seasonally-adjusted annual rate and the market took it as a positive print à rate hike expectations pulled forward.
  •  Remember that 1) Consensus focuses on this SAAR number and 2) The GDP acceleration came off of an awful Q1 print (Q1 revised to a measly +0.60% for Q1 vs. initially reported -0.20%)
  • On a Y/Y basis (crazy Hedgeye speak) GDP for Q2 actually decelerated to +2.3% YY vs. 2.9% prior
  • With very difficult base effects in our model for 2H 2015 GDP we expect Q2 data (especially the GDP print) to provide support for the USD
  • Our expectation for Y/Y GDP in Q3/Q4 are +1.6% Y/Y (+1.4% Q/Q SAAR) and +1.5% Y/Y (+1.7% Q/Q SAAR) respectively; These prints (Q3 will come in October) will stoke a relatively more dovish FED for a short time (USD headwind) but until then we’ll ride the Q2 data train.   

Investing Ideas Newsletter       - 07.31.15 Base Effects

 


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