Investing Ideas Newsletter

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

Investing Ideas Newsletter       - bubble cartoon 09.09.2014

 

Below are Hedgeye analysts’ latest updates on our sixteen current high-conviction long and short investing ideas. We also feature CEO Keith McCullough’s updated levels for each.  

LEVELS

Investing Ideas Newsletter       - z levs 8 21 2015 4 43 15 PM

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

TLT | VNQ | EDV | XLU | UUP

It was a very good week for those sitting behind the long-bond coming out of the FOMC minutes release on Wednesday. During a tumultuous 5-day stretch in which the S&P 500 fell over -5%, subscribers who followed our recommendation on TLT were sheltered from the market storm and gained almost +2%. Moreover, during the past month, TLT has gained +5.7% versus a -6.8% loss for the S&P 500 (a 1,200 basis point difference). In other words, it has paid handsomely to buck the consensus tide.

 

The yield curve flattened for the second consecutive week with utilities leading relative S&P sector performance. The Hedgeye macro team reiterates that growth is slowing globally.

 

Last week, we outlined the scenarios behind both this week’s FOMC minutes release and the next statement in September:

  1. “The Fed runs the risk of tightening into a late-cycle slowdown which could ultimately flatten the yield curve (BULLISH for TLT, EDV, VNQ).
  2. Slower growth and deflationary headwinds are acknowledged and the can is kicked on a rate hike which should also be good for bonds. Until growth inflects positively, you’ll see TLT in our investment conclusions as the yield curve is the best proxy for forward looking growth expectations.”

This week, we saw the second of the two scenarios play out in markets as the statement was taken as more dovish than expected. While we are positioned for more growth slowing and deflation, a Fed that kicks the can, rather than opting for a potential policy mistake (raising rates into a late-cycle slowdown) would continue to pressure the U.S. dollar.

 

Remember that going into this week consensus was short U.S. dollars and short gold. A more dovish Fed brings pain to those positioned for a rate hike:

  • The U.S. 10-yr yield moved 14bps lower to 2.06% (good for TLT, EDV, VNQ)
  • The U.S. dollar index got tagged for over -1% (bad for UUP)
  • Precious metals ripped higher: Gold +3.9% w/w;  Silver +1.0% w/w

We will monitor how the market digests this reversal over the next few weeks. Remember that Mario Draghi will get his turn next week at Jackson Hole, and with our #EuropeSlowing theme playing out, we expect he’ll have something to say.

 

The Fed might be able to talk down the USD temporarily, but they have failed to arrest cyclical and structural deflationary headwinds. Manufacturing PMI reported Friday missed expectations and allowed on a sequential and trending basis and inflation readings on Wednesday came in …. drumbroll…. Nowhere near the Fed’s 2% target:

  • CPI Y/Y for July printed +0.2% which was in line with expectations and a slight acceleration from June’s +0.1% Y/Y dud
  • Sequentially, CPI M/M increased a measly +0.1% which missed expectations of +0.2% and decelerated from June’s reading of +0.3%

We reiterate our call on growth slowing. Stick with bonds and utilities. It might not be exciting, but it is better than us having had you long of the Nasdaq or Russell 2000 nosedive moving into this past week.

 

Investing Ideas Newsletter       - zz Domestic Inflation Expectations

 

Investing Ideas Newsletter       - zz Relative Sector Performance

DXJ

Recovery Intact; Market Snapped (DXJ Update)

 

It’s been a rough week for Asian equities, capped by a regional fireworks show on Friday. Specifically:

 

  • Japan’s Nikkei 225 Index declined -3% to close down -5.2% WoW;
  • Hong Kong’s Hang Seng Index declined -1.5% to close down -6.6% WoW;
  • Taiwan’s TAIEX Index declined -3% to close down -6.3% WoW;
  • India’s SENSEX declined -0.9% to close down -2.5% WoW;  
  • Korea’s KOSPI Index declined -2% to close down -5.4% WoW; and
  • China’s Shanghai Composite remained the pace horse, dropping another -4.3% overnight to close down -11.5% WoW.

 

Clearly the CNY devaluation put dour outlook for regional and global growth front-and-center of investor’s brains. On Friday, Chinese growth – in Manufacturing PMI terms – hit a 77-month low with the advent of the flash Caixin-Markit report for the month August:

 

Investing Ideas Newsletter       - z ch 5

 

This contrasts with the continued recovery in Japanese growth, as most recently reiterated by a similar Nikkei-Markit flash PMI report:

 

Investing Ideas Newsletter       - z ch 6

 

Given, we can reasonably conclude that Japanese investors are worried about the outlook for corporate earnings given the headwinds to export growth stemming from Chinese #GrowthSlowing (Japan’s 2nd largest export market at 18.1%) and the recent bout of defensive strength in the yen amid global contagion:

 

Investing Ideas Newsletter       - z ch 7

 

Investing Ideas Newsletter       - z ch 8

 

While we are still of the view that Japanese shares have material upside with respect to the long-term TAIL, we cannot and will not stay wed to the thesis at every price. For the Nikkei specifically, that price is our intermediate-term TREND line of 20,059:

 

Investing Ideas Newsletter       - z ch 9

 

If the index cannot recapture that level over the next week or so of trading, we will be looking to book the gain on the long side of the DXJ. 

HOLX

Despite this week's broad-based market selloff, shares of Hologic are up approximately +4.5% since we added the name to Investing Ideas one month ago, compared to a -7.3% loss for the S&P 500. Healthcare Sector Head Tom Tobin reiterates his high-conviction thesis on the company.

MCD 

One of the ways that McDonald's is going to take market share back is through one of the most popular items on its menu—the Egg McMuffin. "I honestly believe that if there is a silver bullet, it’s all day breakfast for McDonald’s," says Restaurants Sector Head Howard Penney. "And I do believe they’re going down that road and they will do it."

 

Penney adds that we’ll probably know more about that at the November analyst meeting and what the breakfast potential will be. There’s obviously a lot of things that go around MCD doing breakfast (e.g. shrinking other parts of the menu, etc).

 

As you can see in the slide below, our Restaurants team did a survey which asked the following question: “Would you go to McDonald’s more often if you could order breakfast for lunch?”

 

Investing Ideas Newsletter       - z 44

 

While 66.7% said no, over 33% said yes. Relative to the size of McDonald’s, that's a big number. If you could get a third of their customers to come back more often, because you’re serving breakfast at lunch, this would be the silver bullet to help MCD grow its comps again. 

RH

With last week’s announcement of Teen, the catalyst calendar is just starting to pick up, and should be the best that RH has seen – perhaps ever

 

Here’s the road map: 

 

  1. Earnings on September 10. We’re looking for a strong, consistent quarter out of RH, with 18% revenue leveraging to 25% EPS growth. The company already disclosed and telegraphed everything about this quarter that we need. If there’s any surprise, it should be on the plus side. But all-in, this quarter should have the lowest volatility out of any we’ve seen in a while.
  2. RH Teen -- launch on September 18, with subsequent mailing of 200-page sourcebook and dedicated space inside future design galleries.
  3. RH Modern – launches within a week of RH Teen. This will have a 370-page sourcebook with a simultaneous opening of a stand-alone store on Beverly Blvd.
  4. Starting Late Sept/Early Oct, Successive Design Gallery Openings In
    • Chicago (62,000 feet in the most elite part of Chicago’s Gold Coast  -- but at a non-elite cost).
    • Denver (another anchor property -- using 53,000 feet of the 90,000 left vacant by Saks at Cherry Creek).
    • Tampa (47,000 feet, which is spot on with what our real estate analysis suggests is appropriate for 10% market share and $1,200/ft).
    • Austin (47,000 feet at The Domain – likely to replace one of the two small-format stores in the area, one is just 4-miles away. That makes sense given that our math suggests that Austin could support 50-60k feet for RH).

5) Square Footage Growth Returns. Add up the four stores in the point above and we’re looking at about 210k square feet. That alone represents about 25% growth in square footage (and that’s not counting Atlanta).

 

So all in, there’s two new and significant merchandising initiatives, which are solid on their own. But to pair them with the square footage growth acceleration seems almost like a fantastic coincidence. But it’s not. This has been in the plan all along. 

 

Investing Ideas Newsletter       - zz RH Chicago then now

VIRT

Hedgeye Financials analyst Jonathan Casteleyn reiterates his bearish case on Virtu Financial. We see fair value -30-40% lower on shares of VIRT.

LNKD

Hedgeye Internet & Media Sector Head Hesham Shaaban reiterates his bullishness on LinkedIn. He will be speaking with company management next week and will be able to add additional color to his thesis then.

ZOES

Hedgeye's veteran Restaurants analyst Howard Penney views Zoe's Kitchen as one of the best small-cap growth names in the Restaurant category.

 

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

Our Financials analyst Jonathan Cateleyn will be meeting with the new CEO of Financial Engines this coming week and will have incremental color then.

 

He notes that the new Chief Executive took over at the end of last year from the legacy executive that originally took the company public, so it will be valuable to understand how his stewardship differs from the prior strategy that made this a solid small cap grower.

 

We will have a detailed update after our meeting with the firm’s management.   

FL

The biggest pushback, by a long shot, on our Foot Locker short call is timing, and how long we have to wait for it to play out. While FL is unlikely to completely melt down this week on the print, especially 2-weeks ahead of an analyst meeting, we definitely think that the building blocks of our thesis will be incrementally evident in the quarter to be reported on Friday (as well as in the meeting on 3/16).

 

But this is a complex call with many layers that will peel off one at a time systematically as 2015 progresses, resulting in downward revisions and revealing a down year in 2016.  Ultimately we think it will result in consensus estimates coming down meaningfully for the first time in six years, and we’ll see both lower estimates and multiple compression. We get to $20 downside, and $6 upside.

 

FL remains one of our top short ideas, but it is also perhaps the most complex. It’s not just about Nike, or about Ken Hick’s leaving, or about e-commerce threats. It’s about this company just having come off a six-year run that was driven by a ‘perfect storm’ (the good kind) of …

PENN

"We continue to like Penn National Gaming here due to stable regional gaming trends, better than expected quarterly and annual earnings, and the Plainridge and Jamul contribution to PENN’s two-year growth story," writes Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan. 

GIS

General Mills remains one of our favorite names in the Consumer Staples space.

 

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. 


7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more