The Economic Data calendar for the week of the 24th of August through the 28th 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.
Takeaway: Current Investing Ideas: MCD, RH, XLU, LNKD, UUP, ZOES, FNGN, DXJ, HOLX, FL, VIRT, PENN, GIS, VNQ, EDV & TLT
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.
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.
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:
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:
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:
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.
Recovery Intact; Market Snapped (DXJ Update)
It’s been a rough week for Asian equities, capped by a regional fireworks show on Friday. Specifically:
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:
This contrasts with the continued recovery in Japanese growth, as most recently reiterated by a similar Nikkei-Markit flash PMI report:
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:
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:
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.
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.
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?”
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.
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:
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.
Hedgeye Financials analyst Jonathan Casteleyn reiterates his bearish case on Virtu Financial. We see fair value -30-40% lower on shares of VIRT.
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.
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:
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.
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 …
"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.
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:
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.
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***The roundup below is an example of our daily internal data-driven research process. Specifically, it helps our team contextualize the key economic releases and policy developments occurring across Developed Asia and Emerging Market economies on a daily basis. To the extent you'd like to be BCC'ed on such emails please shoot us a quick note and we'll add you to the list.***
DM Asia Investment Ideas Summary:
Emerging Markets Investment Ideas Summary:
ETF Divergence Monitor:
Data Source: Bloomberg, unless otherwise noted.
Takeaway: HIBB already preannounced this one, though it threw out guidance for the back half that is anything but a slam-dunk.
HIBB already preannounced this one, though it threw out guidance for the back half that is anything but a slam-dunk. We still think there’s earnings risk this year, but more importantly we think that the end-game is margins getting cut in half, and about $1.50 in earnings in three years. That’s a pretty massive statement given that the consensus is at $3.85. What kind of multiple do you put on a name with shrinking earnings and 60% downside to consensus? Even if we generously say 15x a trough-ish EPS number, we’re talking about a $22 stock.
What We Liked
What We Didn’t Like
1. Comps were not a surprise given the preannouncement last week, but the composition of the quarter (negative comps in both June and July) leads us to believe that there is something more material going on with HIBB’s consumer group than it cares to admit. The long term trend in monthly comps is pretty clear and over the near term HIBB has a lot of wood to chop against mid/high single digit comps in the months of September through November. A 2% comp isn’t a heroic assumption for 3Q given the HSD comp to date fueled by the tax shift and the weight of August for the quarter at 4%. But, that means the company would have to print something in the 0.5% range in 4Q to get to flat for the year and that implies a 170bps acceleration on the 2yr trend line. We’d argue that the comp trend chart below is one of the ugliest in all of retail.
2. Gross margins have been down in 9 of the past 10 quarters and we think there is still room to move lower as the company continues to delever on the occupancy side with negative to LSD comps. The company needs at least a 3% to leverage on the gross margin line and we don’t have any confidence that the company can consistently deliver anything close to that number. Plus the inventory level is still far too high with the sales to inventory spread at -8% with merchandise that management clearly stated hasn’t resonated with customers.
WhiteWave Foods (WWAV) is on our Hedgeye Consumer Staples Best Ideas list as a LONG and Hain Celestial (HAIN) is on the Consumer Staples Best Ideas list as a SHORT.
With both stocks down roughly -11% over the past week, we wanted to give you our update.
HAIN IS STILL A SHORT. HAIN reported a soft quarter this week that saw a significant slowdown in the organic growth rate to 6%. In addition, the quality of the HAIN’s quarter was extremely weak with a significant increase in the rate of “adjustments” to make the number and a significantly lower tax rate. Given all that, HAIN just barley met consensus numbers.
Both stocks are weak today given the significant slowdown in the natural channel. On this front, HAIN has significantly more exposure to the natural channel. In fact, as WWAV points out HAIN is not even one of the largest 25 companies in conventional channels. While this may provide some upside for future growth, the company is facing significantly greater “better-for-you” competition in that channel.
Another area of concern for HAIN is the UK. The company reported flat revenue growth on a constant currency basis. Given the maturity of the core brands in the UK, at best this business has little organic growth. On a sum-of-the-parts basis, we believe the HAIN UK business is significantly overvalued.
WWAV IS STILL A BUY. In our Black Book presentation we called out the fact that there were going to be short term dips in the stock price. This is one of those dips, and we view it as a Black Friday Super Sale. The stock has come down from $50/share to $44/share in just five trading days.
We feel this stock is being unfairly dinged due to its perceived high correlation with the Natural channel stores such as Whole Foods Market (WFM). In fact, Wal-Mart and its subsidiaries is their largest customer, accounting for 14.6% of total sales, with the top 10 customers together accounting for roughly 44% of sales, making them very well diversified from a customer perspective. Moreover, their brands are leaders in every category they participate; few CPG companies can make that claim, although some will try (HAIN).
Bottom-line, WWAV is still on our Hedgeye Consumer Staples Best Ideas list, and will probably be on the list until it is acquired.
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