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CORRECTION: Stock Report: Gold (GLD)

Takeaway: We added Gold to Investing Ideas on Friday, August 28th.

Editor's note: In the second paragraph below, the original version inadvertently read "...consensus was positioned for a rate cut." We apologize for the error. Of course, we meant rate "hike."

 

CORRECTION: Stock Report: Gold (GLD) - z banner HE GLD T 9 2 15

THE HEDGEYE EDGE

From an asset allocation perspective, when growth is slowing and inflation is tracking well below target central bank levels, the dogmatic policy response is to ease.

 

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

 

Aside from the week-to-week policy whispers (you’ll get more of it tomorrow at the ECB meeting), remember that the modern day Fed has never normalized policy into a late-cycle slowdown. This has been somewhat baked into market expectations over the last few weeks. But many Fed members remain hell-bent on hiking the federal funds rate this year. It’s possible that they, and actual market participants, will be disappointed.     

 

As our CEO Keith McCullough wrote yesterday, our core long ideas right now are:

  1. Long the Long Bond
  2. Long Gold
  3. Long Cash

Gold loves down Dollar and down rates. Period.

TIMESPAN

 

INTERMEDIATE TERM (TREND) (the next 3 months or more)

  • Inflation expectations have crashed 
  • Relative central bank policy around the globe has exacerbated a strong dollar deflationary environment
  • The Fed won’t sit on its hands. They’ll either “kick the can” or hike into a late-cycle slowdown which could spiral into QE4 which would crush the dollar.

 

We always model a high and a low range estimate in the Hedgeye Predictive Tracking Algorithm Model for any country’s GDP. For Q3, here are those two scenarios:

 

A)     HIGH: Q3 2015 GDP (E) 1.5%

B)      LOW: Q3 2015 GDP (E) 0.1%

 

Notice that this range of Hedgeye estimates (should it even be remotely correct) is country miles apart from the 3.7% Q/Q SAAR. A deceleration even using that methodology is probable.

 

Cue the cowbell.

 

 

LONG TERM (TAIL) (the next 3 years or less)

Cyclical and secular headwinds are matching up at the same time for a deadly combination. Our expectation is that global central banks will all drive interest rates right to zero (devalue until it’s over).

 

After that, we’ll see what happens.

 

Read a history book. You will want some gold when it all ends. 

ONE-YEAR TRAILING CHART

CORRECTION: Stock Report: Gold (GLD) - z chart HE GLD C 9 2 15


Stock Report: Gold (GLD)

Takeaway: We added Gold to Investing Ideas on Friday, August 28th.

Stock Report: Gold (GLD) - z banner HE GLD T 9 2 15

THE HEDGEYE EDGE

From an asset allocation perspective, when growth is slowing and inflation is tracking well below target central bank levels, the dogmatic policy response is to ease.

 

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

 

Aside from the week-to-week policy whispers (you’ll get more of it tomorrow at the ECB meeting), remember that the modern day Fed has never normalized policy into a late-cycle slowdown. This has been somewhat baked into market expectations over the last few weeks. But many Fed members remain hell-bent on hiking the federal funds rate this year. It’s possible that they, and actual market participants, will be disappointed.     

 

As our CEO Keith McCullough wrote yesterday, our core long ideas right now are:

  1. Long the Long Bond
  2. Long Gold
  3. Long Cash

Gold loves down Dollar and down rates. Period.

TIMESPAN

INTERMEDIATE TERM (TREND) (the next 3 months or more)

  • Inflation expectations have crashed 
  • Relative central bank policy around the globe has exacerbated a strong dollar deflationary environment
  • The Fed won’t sit on its hands. They’ll either “kick the can” or hike into a late-cycle slowdown which could spiral into QE4 which would crush the dollar.

 

We always model a high and a low range estimate in the Hedgeye Predictive Tracking Algorithm Model for any country’s GDP. For Q3, here are those two scenarios:

 

A)     HIGH: Q3 2015 GDP (E) 1.5%

B)      LOW: Q3 2015 GDP (E) 0.1%

 

Notice that this range of Hedgeye estimates (should it even be remotely correct) is country miles apart from the 3.7% Q/Q SAAR. A deceleration even using that methodology is probable.

 

Cue the cowbell.

 

 

LONG TERM (TAIL) (the next 3 years or less)

Cyclical and secular headwinds are matching up at the same time for a deadly combination. Our expectation is that global central banks will all drive interest rates right to zero (devalue until it’s over).

 

After that, we’ll see what happens.

 

Read a history book. You will want some gold when it all ends. 

ONE-YEAR TRAILING CHART

Stock Report: Gold (GLD) - z chart HE GLD C 9 2 15


Sorry Buds, ‘This” Is Not Just Like ‘That’

 

Hedgeye CEO Keith McCullough got unusually animated during RTA Live this morning when discussing central banks, economic cycles and the flawed analysis many people (who should know better) make when analyzing the two.

 

Subscribe to Real-Time Alerts today for access to this and all other episodes. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.

 


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Cartoon of the Day: Thwap!

Cartoon of the Day: Thwap! - Volatility cartoon 09.02.2015

Baseball Hall of Famer Dizzy Dean famously said, "It ain't braggin' if you done it." It's in this spirit which we convey the fact that Hedgeye has been warning our subscribers about the huge risk, volatility, and related market implications of growth slowing around the globe. It was this reality which played the lead role in the recent stock market carnage and sent stocks plunging. It has been a contrarian call all along. Our team of analysts made it.

 


HSY | THE CURRENT SET UP IS LEANING LONG

There is a lot to like about the Hershey Company and there are some current issues the company is facing that need to be addressed.

 

The three biggest issues the company is facing:

  1. 2H15 Domestic CMG volume performance looks aggressive but achievable
  2. Putting the Shanghai Golden Monkey acquisition in the rear view mirror
  3. Long-term growth model is under pressure from international pressures

 

That being said the Hedgeye Consumer Staples Dashboard is flashing positive as many of the company’s issues are being priced in:

  1. HSY has underperformed the SPX and XLP by 7.0%and 8.8%, respectively
  2. HSY is at the bottom quartile of revenue and earnings revisions
  3. HSY is trading at 78% of its 5 year P/E vs 85% for the group
  4. Short Interest is at 3%
  5. 83% of the Sell-Side have holds or sells on the stock

 

HSY | THE CURRENT SET UP IS LEANING LONG - CHART 1

 

Snacking today is not just natural & organic or better-for-you; there is an indulgent side as well. HSY has a big advantage in this market with a lot of room to grow as they extend into other areas of snacking, such as premium jerky and macadamia nuts.

 

STOCK PRICE PERFORMANCE

The stock hit a 52-week high in January of 2015 at around $111 per share, and is now trading well below that now at $87.08.

HSY | THE CURRENT SET UP IS LEANING LONG - CHART 2

 

SELL-SIDE SENTIMENT

HSY is not a well-liked stock on the street right now, especially evident by the downward trend in the stock since January. Only 17% of the analysts have it rated as a buy, 72% rate it as a hold and 11% as a sell.

HSY | THE CURRENT SET UP IS LEANING LONG - CHART 3

 

INDULGENT SNACKING

Evident by the chart below provided by Nielsen, Chocolate is a global leader in snacking even when put up against healthier options. This chart further drives home our point, snacking is not just about being healthy, it’s about enjoying yourself.

HSY | THE CURRENT SET UP IS LEANING LONG - Chocolate snacking

 

Indulgent snacking is increasing the number of claimed benefits to attract consumer trials. Claims such as fiber, energy, and vegan are leading the charge and driving consumption.

HSY | THE CURRENT SET UP IS LEANING LONG - snacking trending

 

LACKLUSTER PERFORMANCE

We believe that a majority of the poor stock performance can be attributed to the poor financial performance in the U.S. business as of late. Additionally, China as a whole has been struggling while only 5% of sales, managements continued investment in the region could be alarming investors. In 2Q15 overall company volumes declined -3.6%, largely attributable to price increases in the U.S. along with the aforementioned softness in the China segment. Management is adamant about turning this performance around through strategic marketing and distribution gains. We believe in the return to growth in the U.S., but remain skeptical about China in the near term.

 

STEPPING OUTSIDE OF THEIR COMFORT ZONE  

While management stepped out of their comfort zone with the acquisition of Krave Pure Foods, it’s still snacking and we believe they are well positioned to take advantage of this brand. Jerky is one of the fastest growing premium snack segments, and this shows that Hershey is willing to venture outside of confectionary products. Another category they entered this year is nut products, with the acquisition of Mauna Loa Macadamia Nut Corp closed in February 2015. Another small acquisition, but a great tuck in brand providing additional scale outside of chocolate.

 

This detail on management’s interest in snacking outside of confectionary is encouraging given how many assets are available in the space. There are plenty of smaller assets out there, but if HSY wanted to make a bigger splash, one company that comes to mind is Diamond Foods (DMND). With roughly $881mm in sales through the LTM April period, it is roughly a tenth of the size of HSY. Quick math, taking into account $90mm in synergies, the deal would be $0.11 dilutive in year one and $0.01 accretive in year two. Beyond the financial aspects of the deal, fundamentally we believe this to be a great growth driver for the company in the long term as they expand their snacking portfolio.

 

MANAGEMENT’S GUIDANCE APPEARS ACHIEVABLE

Management’s revised outlook for the full-year 2015 appears to be achievable, calling for net sales growth of between 3.0% to 4.0% on a constant currency basis.  For the full year, the company expects gross margin expansion of 135 to 145 basis points as solid North America gains, driven by price realization, are partially offset by international softness related to the aforementioned higher direct trade rate and obsolescence in China. Additionally, as stated in June, the company expects to achieve approximately $10 million to $15 million in savings related to its business productivity initiative. The company expects adjusted earnings per share-diluted to be in the $4.10 to $4.18 range, an increase of 3% to 5% on a percentage basis versus 2014, including dilution from acquisitions and divestitures of around $0.20 per share.

 

 RISKS

A continued slowdown in Chinese consumption of chocolate could hamper the recovery in the region. Commodity price pressures in cocoa and their expansion into jerky with Krave, a heavy user of beef could increase the volatility of their ingredient basket. A shift in consumer preferences away from indulgent snacking would adversely affect HSY; we see this risk and a very low possibility. Overall the risks in our eyes are manageable, and already priced into the stock.

 

More to come as we further explore this company. Please call or e-mail if you want to talk through the idea.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 

 


McCullough: Sure, Ford's Sales Are Hot. Its Stock? Not So Much | $F

Earlier today on Fox Business, Hedgeye CEO Keith McCullough discussed the rise in auto sales with Maria Bartiromo, along with FBN's Sandra Smith, Dagen McDowell and Cheryl Casone.


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