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What Your Morning Risk Management Process Isn’t Telling You

Watch this edition of The Macro Show and see what your missing!

On August 28th Hedgeye CEO Keith McCullough hit on his biggest concerns for the near term and discussed how the volatility component is critical when analyzing the moves in the market.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

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Investing Ideas Newsletter

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

Investing Ideas Newsletter      - Volatility cartoon 09.02.2015

 

Below are our analysts’ updates on our thirteen current high conviction long and short investing ideas. Please note that we added the healthcare company Zimmer Biomet (ZBH) to the short side this week. In addition, we removed Virtu Financial (VIRT) from the short side and Hologic (HOLX) from the long side. We also feature CEO Keith McCullough’s updated levels for each below.  

LEVELS

Investing Ideas Newsletter      - z z levels

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 les

IDEAS UPDATES

ZBH

We added Zimmer Biomet to Investing Ideas on the short side Friday afternoon. Our Healthcare sector analyst team led by Tom Tobin will send subscribers a full stock report outlining our bear case this coming week, along with updated levels for ZBH. from Keith.

FNGN

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


Shares of Financial Engines continue to bounce around in the volatile market on fears that the company’s underlying 401K managed account offering will lose substantial subscribers as investor flee equities. While historically market volatility has dislodged some money from the firm’s asset-under-management, by definition the firm’s portfolio are efficient optimized and will outperform any headline gains or losses in the broader financial markets.

 

FNGN’s engines are constantly rebalancing along the efficient frontier using modern portfolio theory and hence are diversified amongst equities, fixed income, and cash. While FNGN’s subscribers might panic temporarily on overall lower market returns, they shouldn’t, because their performance will be better than benchmark averages. Our research shows that FNGN portfolio’s pick up lower volatility than many equity markets which give us comfort that long term, there is still a solid value-added service provided by the company to its client base.

 

FNGN’s optimized portfolio’s have side-stepped the volatility of equity markets and put up better returns than most stocks only behind the returns and volatility of an all bond portfolio. This means FNGN subscribers have well diversified portfolios as a result of their professional managed services from the company:

 

Investing Ideas Newsletter      - z z cast

PENN

 

The update below was written by our Gaming, Lodging & Leisure team.

 

Following our recent visit to Plainridge and meetings with senior management, we reiterate our positive Penn National Gaming thesis.  Stability in regional markets provides good earnings visibility while expected strong contributions from Plainridge and Jamul next year should provide a nice 2 year growth story.

 

As we highlighted in a separate note this week, ("August Just a Blip"), regional gaming likely cooled off in August following a strong July.  While that could provide some consternation as the states begin releasing August gaming revenues later this week, the YoY slowdown is more related to quantitative factors rather than the health of the regional gaming customer.  September should quickly provide evidence of that.

 

Incidentally, Penn National in Pennsylvania just reported slot revs down 4% for August. Confirmation of a weaker August as we forecasted. 

 

Bottom Line: The bull thesis on PENN appears very much intact.

GIS

The update below was written by our Consumer Staples team.

 

General Mills announced on Thursday that they have signed a definitive agreement to sell the Green Giant and Le Sueur vegetable businesses to B&G Foods (BGS) for $765mm in cash.  This news is no surprise. It has been widely rumored for the last six months. As we laid out in our GIS Black Book, management still has work to do to reshape the portfolio for future growth. In addition to divesting underperforming non-core businesses, acquiring growth will be crucial to revitalizing the company.

 

Investing Ideas Newsletter      - z z gis

  

While the news was largely expected by the market, it was good to see this deal finally close. We are expecting GIS to actively shape their portfolio for the foreseeable future. On whether it will be an acquisition or a divestiture, we are hoping for both, as they need to shed non-core assets and acquire high growth ones.  

 

GIS stated that they expect the sale to be dilutive to FY2016 EPS by ~$0.05-0.07 per share, excluding transaction costs and a one-time gain on the sale.  General Mills will provide additional details about the impact of the transaction when it reports 1Q16 results on September 22nd. As expected the company plans to use the net proceeds for share repurchases and debt reduction following the Annie’s acquisition last year.

LNKD

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

 

After speaking with company management and reviewing the 10-Q, we believe the recent sell-off in the stock is overdone. Most of LinkedIn’s wounds have been self-inflicted (soft guidance), not fundamental.  We suspect 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. And, with the worst case scenario already baked into consensus estimates, we suspect the worst is now behind them. 

 

Fundamentally, we continue to see LNKD’s investment into its salesforce as a prudent move given an improving selling environment from macroeconomic trends.  It’s quite possible that LNKD could see an acceleration in revenue growth within its core Talent Solutions segment by year end, which we believe would dispel many of the recent concerns in the name.  

ZOES

The update below was written by our Restaurants team.

 

Zoës Kitchen has officially entered the big leagues as the company and its stock price continue to grow exponentially. Despite the impressive financial performance, delivery, the stock has not been performing well recently due to reasons and market-related forces outside of the company’s control.

 

To be sure, the company remains on the Hedgeye Restaurants Best Ideas list as a long. In our eyes, ZOES represents the best growth story in the restaurants sector. We believe the present downturn in the stock represents a great buying opportunity for longer term investors. 

TLT | EDV | XLU | GLD

The "Growth Is Back" bulls didn’t like a trifecta of mediocre labor market data releases this week. The labor market peaks late cycle and the trend in key employment data suggest things are going from great to good (marginal changes matter):

 

Tuesday

The ADP employment report showed a sequential acceleration, printing +190K vs. +185K in July. But to be clear, this series peaked at over +200K additions in the first couple of months of 2015

 

Thursday

Initial jobless claims bottomed about six weeks ago. The trend in that series is moving back to the all-important 300K level. Remember, peak improvement in initial claims occurs around 7 months ahead of the economic cycle peak and coincident with or slightly ahead of the equity market peak.  To be sure, Initial Jobless Claims have been the single most consistent, lead labor market indicator for the economic cycle.

 

Friday 

While the headline NFP number was a bomb on Friday, printing +173K for Aug. vs. estimates for +215K, the trend is also turning. This series also peaked back in February on a YY rate-of-change basis

 

Don't forget Wednesday’s ISM-Manufacturing report. It was poor to say the least:

  • ISM Mfg. printed a -7% growth rate Y/Y for August (Yikes.)
  • Production/New Orders/Employment came in lower for August
  • The actual number was 51.1 which is obviously moving closer to the no growth 50-line
  • As you can see in the chart below ("doodling" is straight from the pen of Keith McCullough), the last five months of data has been awful from a rate of change perspective (see red circle)

Investing Ideas Newsletter      - z z ben

 

Why do we point to all of this growth-slowing data? Because it’s meaningful.

  • As we have mentioned repeatedly Central Banks take a reactionary policy response to the data. The market is becoming more efficient at getting in front of policy the longer we venture into this modern-day central policy experiment
  • When forward-looking growth expectations are taken down, the back end of the Treasury curve flattens (this is good for TLT and EDV)
  • In reaction to more dovish policy monetary policy measures, the market likes gold over dollars coming out of central policy events

 

The market sniffed out a shaky stock market this week and a slew of poor employment data:

 

Week-over-week performance:

  • S&P 500: -3.5%
  • U.S. Treasury 10-Year Yield: -8bps (TLT +0.34%)
  • Gold: -1.13%

 

On the small loss on the gold position, we had the catalyst out of Europe this week as the ECB pointed to lower forward-looking growth and inflation expectations. Mario Draghi also announced the expansion of the share limit on their QE program. The market took this as Euro bearish. The USD appreciated against the Euro, and Gold moved lower on Thursday.

 

We received a number of questions this week on why long-term Treasury positions haven’t gone up more with all of the current turmoil in equity markets. Our view is that growth continues to slow and our most important goal in this period of volatility is to advise people on how not to lose money. Our asset allocation remains one of cash, Treasuries, and a small gold position. Sure, it may be boring for now, but it’s better than being ruinous. Take a look at the less-than-stellar hedge fund returns in the month of August.

 

We're sticking with our game plan.

MCD 

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

 

McDonald’s is on the Hedgeye Restaurants Best Ideas list as a long.

 

The franchisees voted YES on the proposal to launch All Day Breakfast nationwide at all 14,318 U.S. locations. The vote confirmed on Tuesday, September 1st by the franchisee leadership council. This is a very important, monumental move by CEO Steve Easterbrook. It will define his legacy as the CEO that changed McDonald's (and the rest of the industry) for many years to come.

 

In 2016, if MCD (with all day breakfast and an improved value message) can drive same-store sales up by 5%, the system will generate $1.9bn in incremental system-wide sales.  Needless to say, a healthy McDonald’s will make life difficult for a number of others in the QSR space.

 

As noted in our survey we released on July 27th, it is evident that All Day Breakfast (ADB) will be a game changer for the company. Breakfast is the single most requested item by McDonald’s customers. Listening to the customer is a tried and true way to succeed.

 

Investing Ideas Newsletter      - z z mcd

 

MENU

Menu changes are coming as part of this initiative. MCD will have to remove some items from the previous menu to make way for ADB. They have already announced the removal of certain sandwiches and snack wraps and the simplification of the drive thru menu, but expect more to come on a region by region basis.  The company has said that they will be offering at minimum the Egg McMuffin, Bacon, Egg & Cheese Biscuit, Sausage Burrito, Hotcakes, Hash Browns and Fruit ‘N Yogurt Parfait.

 

KITCHEN CHANGES

As part of this move, operators will need to purchase separate grills and toasters. The grills will sit on rolling carts which will carry utensils used just for eggs to ensure the raw eggs do not contact any other food. The required investment will range from $500 to $5,000 per restaurant, depending on what equipment franchisees already have.  We would not be surprised to hear that corporate is helping to support the franchisees making this investment. 

 

TURNAROUND OUTLOOK

All Day Breakfast has the potential to be the “silver bullet” MCD will need to drive same-stores sales higher in 2016 and beyond.  This will undoubtedly drive incremental traffic, probably even from people that don’t normally go to McDonald’s. The momentum that they gain from this must be harnessed to turnaround customer perception. This is their time to shine and we are confident the system is ready to show off its bountiful improvements to bring back their lost customers and continue to serve their loyal ones.  ADB is coming sooner than we had thought, and we look forward to the November 10th analyst day in which we will assuredly be getting an early read on All Day Breakfast performance.

 

RH

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

 

Below is a look at our bullish outlook on Restoration Hardware across the three durations over which we analyze investment ideas and themes. 

 

TRADE

The Sept 10 print marks one of the few times we’ll expect ‘only’ an in-line print from RH. The timing of new product launches (Modern/Teen) has been well-telegraphed by management for 2H, not 2Q. Nonetheless, we’ll still be looking at 25-30% EPS growth.

 

TREND

The catalyst calendar looks solid for RH. Immediately following the print, we’ll see the launch of RH Modern and RH Teen. Then we’ll see four successive Design Gallery openings in Chicago, Denver, Austin and Tampa. Square footage will subsequently accelerate from a mid-single digit level to over 30%.

 

TAIL

We think RH will earn close to $11 per share in 3 years, which compares to the consensus at just over $6. The square footage component is well known, but we think people are missing…

 

  1. The productivity and market share that we’re likely to see from each new store
  2. How scalable this business model is without commensurate capital investment
  3. The leverage we’re likely to see as below-market real-estate deals being struck today begin to impact the P&L.

FL

The update below was written by Retail analyst Alec Richards.

 

To own Foot Locker at this price, you need to believe that the company can: 

  1. Grow square footage (which is capital intensive and risky)
  2. Comp mid-single digits for multiple years (unlikely)
  3. Drive gross margin meaningfully higher (Nike won’t allow that, and FL’s .com business is not margin accretive)
  4. Meaningfully leverage SG&A (but its’ sub-20% SG&A ratio is already the lowest in retail)
  5. And/or, significantly boost asset turns (but capex is rising and management noted that inventory turns are ‘tantalizingly close’ to their goal).

This went from being an average company driving 20-30% EPS growth with less capital, to one that has to spend more just to maintain a 10% earnings growth rate. We think we’re right in between those two stages now, and the ownership characteristics are probably very different as we move from one to the other.

 

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


Cartoon of the Day: Explosion Ahead?

Cartoon of the Day: Explosion Ahead? - Rate hike cartoon 09.04.2015

As Hedgeye CEO Keith McCullough wrote earlier this morning, "Fed, I dare you to hike into a #LateCycle slowdown. You'll blow this entire thing up."


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

FMHQ (Friday Morning Housing Quant)

Takeaway: NVR, one of our top two names for the quarter, continues to lead the group at +15.1% QTD and +10.3% on NTM earnings estimate revisions.

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: The broader Housing complex has been outperforming the Homebuilders QTD.  While the S&P 500 is down 6.8% QTD through mid-day, the ITB (+0.8%) and XHB (-1.8%) are mixed. The average and median QTD returns for the 11 homebuilders we include in our table, however, are down -6.0% and -4.4%, respectively. The best performing homebuilder this quarter is NVR with a +15.1% QTD gain. NVR was one of two builders we favored for 3Q15. The other was Toll Brothers, which is down -3.2% for the QTD. The worst performing builders this quarter include HOV (-34.2%) and BZH (-18.1%). 
  • Estimate Revisions: NVR continues to lead the pack in terms of NTM earnings estimate revisions over the last 3mos (+10.3%), followed by DHI (+6.6%) and LEN (+5.9%). At the other end of things, HOV and BZH have seen NTM estimates cut by -14.2% and -5.3% over the last 3mos. 
  • Housing Macro | Employment:  Employment growth within housing’s key demand demographic of 25-34 year olds was flat sequentially at +2.3% YoY while accelerating payroll growth in the 20-24 YOA bucket drove acceleration in the aggregate 20-34 YOA group. Resi Construction employment was also flat sequentially with year-over-year growth decelerating -60bps to +4.0%. There are a couple takeaways:  First, employment growth on both the supply and demand sides of housing continue to outperform the broader averages.  Second, tightening resi labor market conditions are finding flow through to price with earnings growth for residential construction workers and single-family GC’s running at a notable premium to the broader average. Hourly earnings grew +4.8% YoY in the latest month for resi construction workers while growing 2.2% YoY in the private sector in aggregate and +2.4% for NonSupervisory & Production workers (who the BLS estimates = ~80 of the labor force).

     

  • *Bonus Bullet:  Completely unrelatedly, this week’s Friday Morning Housing Quant devolved into the Friday Afternoon Housing Quant due solely to our spontaneous over-reminiscing about the Karate Kid (see this morning’s Early Look).

     

    A quick compilation for your holiday weekend enjoyment:

    The Crane Kick >> HERE

    Johnny’s Back! >> HERE

    Daniel is the Real Bully >> HERE

     

     

 

FMHQ (Friday Morning Housing Quant) - Buiider Quant 1 QTD with edits 

 

FMHQ (Friday Morning Housing Quant) - Buiider Quant 2

 

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

 

FMHQ (Friday Morning Housing Quant) - Compendium 090415

 

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

 

FMHQ (Friday Morning Housing Quant) - 20 34 YOA Employment

 

FMHQ (Friday Morning Housing Quant) - Resi Construction Employment

 

FMHQ (Friday Morning Housing Quant) - Resi Construction Earnings

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake


ZBH: We Are Adding Zimmer Biomet to Investing Ideas (Short Side)

Takeaway: We are adding Zimmer Biomet to Investing Ideas on the short side.

Please note that we are adding Zimmer Biomet (ZBH) to Investing Ideas on the short side today.

 

Our Healthcare sector analyst team (Tom Tobin and Andrew Freedman) will send out a detailed stock report outlining our bear case for ZBH next week.

 

ZBH: We Are Adding Zimmer Biomet to Investing Ideas (Short Side) - z zim



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%
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