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Investing Ideas Newsletter

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

Investing Ideas Newsletter      - global growth.sick bull cartoon 08.24.2015


Below are our analysts’ updates on our fourteen current high conviction long and short investing ideas. Please note we added Gold (GLD) and removed Japanese stocks (DXJ), REITs (VNQ) and the U.S. Dollar (UUP) this week. We also feature CEO Keith McCullough’s updated levels for each.  


Investing Ideas Newsletter      - zz 8 28 2015 11 05 51 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



The update below was written by our Consumer Staples team.


The widely rumored sale of Green Giant by General Mills continues to swirl. The latest is that B&G Foods (BGS) is taking a serious look into the asset. Frankly, we don’t care who buys it as long as it is a half way decent price. Our LONG bull call on GIS is partially dependent on them shedding non-core assets and acquiring high growth businesses. We believe this could be the first of multiple divestitures that GIS executes throughout the next couple of years. In our GIS Black Book we highlighted management identified non-core assets that could be up next.


Investing Ideas Newsletter      - z gis


The selling price of Green Giant is expected to be in the range of $600mm-$800mm pre-tax. We are expecting a hefty tax bill given the likely large step up in asset valuation that will need to occur.  This will still give them the ability to reinvest further into growing the top line or buy a small snacking business. We have talked a lot about the potential snacking assets out there right now and we think this would be the best use of cash.


Talking with many industry professionals it seems as though sales are starting to stabilize. More specifically, cereal, something that everyone seems to think is all GIS has, (in reality its only 20-25% of net sales in any given year) will start to see growth return. The cereal category has bottomed and we feel that there will be a year-over-year increase in the category as GIS and the competition have invested heavily to revive the category.


At the end of the day, rumors are exactly that, rumors, but this sale seems to be coming to fruition, baring complete disconnect on price. To reiterate, this is the first deal of many that GIS has to execute in order to transform their portfolio for growth into the future.


We continue to view GIS as one of the best large cap companies in the staples space. They just announced that they will be releasing 1Q16 results on September 22nd before the market opens. We expect to see continued sequential improvement as they have cleaned up ingredient decks and streamlined the business.


The report below was written by Financials Co-Sector Head Jonathan Casteleyn.


We hosted a well attended investor lunch with the CEO of Financial Engines in New York City last week. The fundamental story is intact with the firm slowly executing on launching new products into the large and very profitable U.S. retirement markets. With more market share than the rest of its competitors combined, we still view the company as one of the best, unknown dominant players in financial services.


The best fundamental aspect of the firm’s positioning is that every two weeks, FNGN gets new inflows, as subscribers to their managed account services allocate part of their salary into their 401K which Financial Engines is managing. This is a far cry from the mature mutual fund industry which looks to garner new assets based on investor preference for risk which in this environment is on the decline.


The firm spoke a lot about new enhancements in its outreach program to get new subscribers in the door with more frequent campaigns and more digital points of presence to continue to push the message that a professionally managed 401K yields better results than investors that self-manage their retirement plans. Our research shows that over a longer period of time professionally managed 401K have yielded over +3% per annum in higher returns than self directed 401K plans.


This message becomes more valuable in times of market volatility as investors look to avoid losses. The stock remains on our institutional Best Ideas list as a long with a fair value of $52 per share.


The company arguably has one of the best growth trajectories in financials launching products into the very large retirement markets:


Investing Ideas Newsletter      - z cast 1


FNGN has one of the most dominant positions in financial services to boot with more market share than all of its main competitors combined:


Investing Ideas Newsletter      - z cast 2


Jonathan Casteleyn has no new update on Virtu Financial this week.


To view our analyst's original note on LinkedIn: CLICK HERE


We recently reviewed LinkedIn's 10-Q and spoke with IR; which collectively confirmed much of our thesis and takeaways from the 2Q15 earnings release. Most notably that its organic guidance cut was probably in excess of its fundamental prospects. 


What's new is that we learned that LNKD ramped up its salesforce again in 2Q15, which we believe is a prudent move given what we see as an improving selling environment.  Additionally, LNKD's recent Lynda acquisition may be growing faster than management initially led the street to believe when they announced the acquisition. 


More importantly, we got the sense that management realizes that it really messed up by low-balling guidance two quarters in row.  We don't think it will make the same mistake again on its next print. With the worst case scenario already baked into consensus estimates, we suspect the worst is behind them. 


The update below was written by our Healthcare Sector Head Tom Tobin. 

As the final days of August turn to autumn, we are looking forward to our next two fundamental updates for Hologic here in Investing Ideas  The global market's churn and worry has hit shares of HOLX. But with their business trends riding independent drivers, as long as the updates are solidly positive, we will be staying with our long.  


First we will see the August 3D Tracker data. After three less-than-stellar months, we are expecting a solid rebound.  


Second, the OB/GYN survey.  We have been growing concerned about the impact of the #ACATaper, or the expected deceleration that will follow one of the biggest one-time expansions of insured medical consumers ever.  Our survey has been signaling softness in some areas already.  The one we are keyed on is Medicaid patient volume in states that expanded Medicaid under the ACA.  But as always, we'll stay data dependent.  


Look for updates from us next week on these two important items.


The update below was written by our Restaurants team.


After the close yesterday, Zoe's Kitchen reported impressive 2Q15 numbers. If the street wants to point to one blemish, due to the continued success of the business and stock price appreciation, ZOES had to roll forward a few public company expenses as they are no longer labeled an emerging growth company under the JOBS Act. This is part of entering the big leagues. It is more a positive than a negative in our view.


ZOES reported revenue of $54.5mm a 30% increase YoY, narrowly beating consensus estimates of $54.0mm. Comparable restaurant sales increased 5.6% versus consensus estimates of 5.2%. The 5.6% was built up by a +1.3% increase in traffic, a +3.5% increase in product mix and +0.8% increase in price. ZOES had impressive performance all the way down the P&L leading to EPS of $0.05 beating consensus estimates by a penny.


Investing Ideas Newsletter      - z zoes


ZOES opened seven new company-owned restaurants in the quarter, bringing the total company-owned restaurants to 148, with three franchised locations. Through August, they have opened seven additional restaurants bringing the total to 158.  


Looking forward, management revised their guidance up slightly. Management is now projecting Restaurant sales between $220mm and $224mm up slightly from the previous $218mm to $223mm. Comparable restaurant sales growth is expected to be in the range of 5.0% to 6.0% bringing up the low end of previous guidance between 4.0% to 6.0%.


Listening to this management team talk makes us feel even more confident in the success of this company. They simply get it, the team environment cornered in everyone working toward the same goal together is culminating in great success. This story is nowhere near over and we expect to see continued strong performance from this company.


What a week.


As we outlined through various channels, we expect that high levels of volatility are here to stay for the foreseeable future.


Before we added exposure to Gold mid-week we had no allocation to U.S. equities or commodities. We decided to sit-out the 268 point round trip in the S&P 500.


The biggest shift this week that we’ll call out is a bullish to more neutral intermediate-term view on the U.S. dollar which is why we added GLD to investing ideas in replace of UUP.


To be clear, if growth continues to slow we want to be long of bonds (that view hasn’t changed in a year and a half).


For evidence, headline Q2 GDP was revised this week and macro tourists cheered on a big positive revision (based on the Q/Q SAAR number which is the incorrect way to view real growth in our opinion):

  • On a Q/Q SAAR basis, GDP was revised higher to +3.7% Y/Y vs. +2.3% on the first print
  • On a Y/Y basis, it was revised +40bps to +2.7% for Q2

The positive revision was due to higher Investment spending (NonResi + Inventories). Note that an inventory build contributing to GDP isn’t necessarily a great thing for the economy. The positive inventory change for Q2 only makes it a harder comp for Q3 (for that component of GDP) where Y/Y aggregate GDP comps get tougher also.


We look at GDP on a Y/Y basis. Any one quarter is compared to the 2 and 3 year average GDP prints in that same quarter. We now have the probable range of GDP for Q3 in the following range, and it’s ugly:


A)     HIGH: Q3 2015 GDP (E) 1.5%

B)      LOW: Q3 2015 GDP (E) 0.1%


Because the market is currently sniffing a dovish policy shift from the Fed, we decided to take down our USD exposure and add some gold. Remember, as we outlined 2 weeks ago, consensus was positioned for a rate cut (short gold and oil and long dollars). The risk embedded in a disappointment, which we called out, is now unfolding.


From an asset allocation perspective here is the set-up:

  • Growth slowing: Long bonds and low-beta yield chasing sectors (TLT, EDV, XLU)
  • Shift to more dovish policy: long of GOLD as the shift weakens the value of the USD

We re-iterate the same view we’ve had since the beginning of 2014:


Growth is slowing, and deflation remains a real risk (central bankers can’t solve this by talking down the currency). The fed will continue to push out the dots on “policy normalization.”

The picture below is a chart of the December 2015 Fed Funds futures implied rate. At the beginning of 2015, the market expected the mid-point of the fed funds upper and lower bound would be at 0.40%. Now the market isn’t expecting much more than no rate hike by December. That’s quite a turn around from the “June liftoff” talk in Q1.    


Investing Ideas Newsletter      - z qq 08.28.15 Dec. Fed Funds Futures Implied Rate


To view our original note on McDonald's: CLICK HERE


We recently tried out the "Create Your Taste" experience at the newly remodeled McDonald’s location in Midtown East on the corner of 58th street and 3rd Ave. Walking into the newly remodeled MCD, we were greeted by the brand new self-order kiosks with attentive staff there to assist you. Customers were very interested in using the kiosks, and everyone using them seemed to be having an easy time with it.


Investing Ideas Newsletter      - z mcd


The whole process from creating your own burger to getting your food was simple and seamless. The self-order kiosk is easy to follow, you can order from the entire menu and pay from the kiosk. We decided to build a custom burger, in which you scroll through different screens selecting from a wide variety of cheeses and toppings. I must note however that they were out of a select number of topping items, as they are working out the kinks since just starting the Create Your Taste two weeks ago. After paying, you take an electronic GPS enabled disk to your table so that the server can locate you within the restaurant. The ordering process was a pleasant experience and I would say will lead to increased checks as it is very simple to just click on additions rather than staring at the big board at the main register. As you can see from our receipt above, the total came to $10.88 definitely not the average check that a MCD customer is used to.


As we ordered we sprung up a conversation with a couple of staff members to get a read on how the staff likes the new system. The two people we talked to had overwhelming positive reviews of how the kiosks increase efficiency in the restaurant, specifically the kitchen, and allow for orders to be entered quicker. When asked specifically about the Create Your Taste, they said they love the concept and haven’t experience any major difficulties with it.


It was time to head to our table, we found a comfortable spot upstairs kind of in the corner to test out the GPS location ability on the disk we picked up at the kiosk. The server found us with no problem, total time from payment to food on the table was about 9 minutes, which is right in the middle of their 8-10 minute range. Although they didn’t fill up our drink as they said they would, everything else was presented very well. The food was still warm and everything tasted good.


For it being only two weeks into the process we were very impressed by the efficiency and mastery the staff is already displaying. We plan to head back to the same McDonalds location and check on their progress.


To view our analyst's original note on Restoration Hardware: CLICK HERE

Williams-Sonoma (WSM) reported 2Q15 results on Wednesday. Here are the two most important read-throughs as it relates to our top long idea in the retail space -- Restoration Hardware -- which will report earnings in two weeks.


  1. Top line – though every concept decelerated sequentially on a 2yr basis except for PB Kids (flat) the company beat lowered expectations by 200bps or $19mm. 25-50% of this was due to the guided port strike revenue issues ($5-$10mm) which didn’t materialize during the quarter (sandbag?). That’s good news for RH who a) isn’t reliant like WSM on seasonal merchandise and b) product flow should start to normalize.
  2. West Elm continued to hum along with a 15.7% comp in the quarter. To be fair that was a 90bps deceleration sequentially in the underlying trend, but it’s been a fairly good barometer for RH over the past few quarters and the current consensus numbers assume that West Elm outperforms RH in the numbers the company will report in 2 weeks. West Elm has only outcomped RH twice since 2012 in 1Q14 and 2Q14 when the company changed up its source book strategy. We expect to see a bifurcation in growth trends as RH top line growth accelerates in back half of the year as it rolls out Modern and Teen.

Investing Ideas Newsletter      - z wsm comp


The update below was written by Retail analyst Alec Richards.


We have been actively talking about Foot Locker as one of our better short ideas since the start of the year. The long-term (TAIL) call was crystal clear to us then, as well as the risks to the business model that are not being priced in to the stock.


But we were less certain on near-term drivers to bridge the TRADE call with the TAIL.


However, now we think the intermediate-term picture is much more clear. At least from where we sit. And we think that returns will head lower by the end of this year (retail stocks rarely go up when returns go down).  


All in, if we’re wrong in our analysis, we think the upside is $75 (15x $5). If we’re right, we think it can revisit $50-$55 (12-13x $4.00), at least 3 to 1 downside to upside.


Our Gaming, Lodging & Leisure team is going to furnish a new update following their recent meeting with Penn National Gaming's management. They note that the stock has held up quite well despite increased market volatility. The bullish thesis on shares of PENN remains intact. Regional revenues remain strong in addition to the 2-year growth story, etc. Stay tuned.




The Week Ahead

The Economic Data calendar for the week of the 31st of August through the 4th of September is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead  - z 44 77 08.28.15 Week Ahead

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

McCullough: These Are Scary Levels

This is a complimentary excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here and subscribe if you're serious about staying ahead of the consensus herd.

*  *  *  *  *

...As I look at what I call the downside of the “probable range” in Global Equity markets this morning, for the first time in my career I don’t think I want to be right.


McCullough: These Are Scary Levels - z caution


That’s a tough thing for me to write because the goal of the game is to be right. We’ve spent the last 7-8 years trying to evolve the Global Macro risk management #process to the point where many aren’t unprepared for this. Unfortunately, many are.


Rather than depress you with words, let me just show you the numbers my models showed me:


  1. SP500 has immediate-term downside of -8.3% to 1822
  2. Russell 2000 has immediate-term downside of -6.3% to 1080

McCullough: These Are Scary Levels - z 57

FMHQ (Friday Morning Housing Quant)

Takeaway: Defensive positioning within homebuilders has paid off in 3Q. DHI and NVR are the only two builders with positive MTD performance.

Our FMHQ (Friday Morning Housing Quant) tables present the state of the publicly traded homebuilders in a visually-friendly, quantitative format that takes about 60 seconds to consume. 


Quick Quant Takeaways: 

  • Performance Roundup: Housing continues to outperform the market YTD as XHB (+6.0%), ITB (+6.8%) and S5HOME (+10.6%) are running +9-14% ahead of the S&P 500 (-3.5%). The Best builders YTD are DHI (+19.9%), NVR (+18.4%) and MTH (+15.6%), while the laggards are HOV (-58.1%) and BZH (-14.7%). Interestingly, in spite of a rough August all around, the strongest MTD performances have also come from DHI (+2.1%) and NVR (+1.3%), while HOV and BZH have led decliners (-14.4% and -13.9%, respectively).
  • Insider Buying (Within Last 6mos): PHM (2), NVR (1) and KBH (1). That said, there's been no insider buying in the sector since April.
  • Estimate Revisions: NTM earnings estimates in the last 3mos have been revised higher for NVR (+10.3%), DHI (+7.3%) and LEN (+4.7%). At the other side of the spectrum, NTM earnings estimates are down for HOV (-39%) and BZH (-5.6%). NTM revenue, meanwhile, saw the biggest positive revisions at KBH (+4.9%), LEN (+4.8% and DHI (+1.6%), while the biggest declines were at MDC (-4.6%) and HOV (-3.0%).
  • Housing Macro | ↑Income Growth:  This morning’s Household Income and Spending figures for July showed aggregate Disposable and Salary & Wage Income growth accelerating on MoM/YoY/2Y Ave basis.  The trend in the aggregate household P&L continues to be one of improvement as solid monthly labor market gains and positive mix in hiring have continued to drive rising income growth.   While the rising savings rate has muted the translation to actual consumption growth, it’s hard to characterize rising incomes and rising savings as fundamentally negative developments and, for housing, that duality remains supportive of rising headship rates and housing consumption broadly (see last table below).  



FMHQ (Friday Morning Housing Quant) - HB Quant 1 with edits


FMHQ (Friday Morning Housing Quant) - HB Quant 2


FMHQ (Friday Morning Housing Quant) - HB Quant 3 with edits


FMHQ (Friday Morning Housing Quant) - Compendium 082715


FMHQ (Friday Morning Housing Quant) - U.S. Eco Summary Table


FMHQ (Friday Morning Housing Quant) - HH Income   Spending Summary Table 




Joshua Steiner, CFA


Christian B. Drake

HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket?

Takeaway: With the VIX's closing level spiking as high as 40 intra-week, exchange volume across the board rocketed higher.

Weekly Activity Wrap Up

With the VIX's closing level spiking as high as 40.7 in the 5 days ending August 27th, exchange volume followed suit and rocketed higher. U.S. cash equity volume averaged 11.2 billion shares for the week, after trending at just 6.7 billion shares per day for the first 7 weeks of the third quarter. Growth in U.S. stock trading for the third quarter is now running at +28% Y/Y and +15% Q/Q respectively. U.S. equity options activity averaged an astounding 29.0 million contracts this week (with the 3Q average prior to the most recent 5 days having averaged just 17.4 million contract per day). Year-over-year growth in U.S. options is now tracking at +20%. U.S. futures activity, which had been comping negatively for much of the third quarter, is now positive after this week's volume ramp. U.S. futures activity hit 31.0 million contracts this week (the combination of CME Group and ICE Futures U.S. activity) compared the the 3Q average prior to the past 5 days of just 17.2 million contracts. Our Best Idea in the sector continues to be the CME Group (CME) with $5 per share in earnings power and a $140 per share fair value in our view.


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon1


U.S. Cash Equity Detail

U.S. cash equity trading finished the week at 11.2 billion shares traded which is blending to a 7.3 billion daily average thus far for the 3rd quarter of 2015. This is +28% year-over-year growth for U.S. stock activity. The market share battle for volume is mixed. The New York Stock Exchange/ICE's share of third-quarter volume grew to 25% from 24% in the prior week. Additionally, NASDAQ's share grew to 19% from 18% in the prior week but remains 100 bps lower than last year, a -4% decline.


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon2


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon3


U.S. Options Detail

U.S. options activity remains significantly higher, both quarter-over-quarter and year-over-year. 29.0 million contracts traded this week which is blending 3Q15 activity to 18.9 million contracts per day, up +25% quarter-over-quarter and +20% year-over-year. The market share battle amongst venues continues to be one of losses at both the NYSE/ICE and NASDAQ. NYSE has lost 400 basis points of share year-over-year settling at just 18% of options trading currently. NASDAQ has shed 300 basis points of share, good for a -15% loss from last year as ISE/Deutsche Boerse and BATS mop up volume and share.


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon4


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon5


U.S. Futures Detail

CME Group volume came in this week at 25.5 million contracts. That blends 3Q15 volume to a 14.5 million average level, a +7% year-over-year expansion. Additionally, CME open interest, the most important beacon of forward activity, continues in strong fashion. 103.3 million CME contracts are pending, good for +23% growth over the 84.1 million pending at the beginning of 2014, although a contraction from the prior week's +25%.


Activity levels on the futures side at ICE hit 5.5 million contracts this week, with 3Q15 blending to a 4.4 million daily average. Even with this week's volume ramp, 3Q15 year-over-year growth remains negative at -2%. ICE open interest this week tallied 72.8 million contracts, a -3% contraction versus the 75.2 million contracts open at the beginning of 2014. That marks a deterioration versus the prior week's -2% level.


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon6


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon8


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon7


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon9


Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon10


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon11


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon12


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon13


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon14


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon15


Sector Revenue Exposure

The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon19 3




 We recently presented our investment thesis on the Exchanges. To summarize,

  • Long CME:  Financially oriented CME Group (CME) is enjoying a long awaited boom in activity, as trader counts and open interest in Treasuries, Eurodollars, and FX products are swelling. The decade long concentration on trading energy and commodities is over and with steeply shaped forward curves and more profitable opportunities, financial products are seeing rapid adoption. 
  • Short ICE: We see collateral damage from the ongoing rapid price decline in energy and commodity markets. As a result, these important products at ICE will be less active than the Street expects, as commercial hedging and speculative energy trading dries up.

We think CME has $5 per share in earnings power in the out year and the stock will revisit near $140. As outlined in our presentation deck and replay below, a CME long position can also be paired with a short ICE position, with favorable fundamental exposures on each side of the trade.


Separately, recent IPO Virtu (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. Shares of VIRT are currently on our Best Ideas list as a short with a fair value in the mid-teens (30-40% downside).


Hedgeye Exchange Black Book Replay HERE

Hedgeye Exchanges Black Book Materials HERE


HEDGEYE Exchange Tracker | Exchange Traded Volume...A Missile or a Rocket? - XMon20


 Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA





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