Sonic Corp (SONC) is on our Hedgeye Restaurants Best Ideas list as a SHORT.


On Monday September 14, 2015, SONC announced Same-Store Sales (SSS) growth for fiscal year 2015 of 7.3% as well as the date of their earnings call, which will be Monday, October 19, 2015.




The company announced that system-wide SSS for 4Q15 were 4.9% versus consensus estimates of 5.5%. For the full fiscal year 2015 as previously stated system-wide SSS were 7.3% versus consensus estimates of 7.9%. The comp reflects 6.9% SSS growth at company drive-ins and 7.3% SSS growth at franchise drive-ins. These numbers show an initial slowdown from SONC’s recent strong performance, and as MCD regains its leadership position we expect this to become more apparent.


SONC is facing some tough comps in fiscal year 2016 especially in the first and second quarters. Management is expecting SSS growth for the system in the range of 2% to 4% for FY16 which aligns well with consensus estimates currently at 3.2% for the FY16. The company plans to open 50 to 60 new franchise drive-ins in FY16, in addition they have initiatives in place to improve margins by 75 to 125 basis points at their drive-ins.


Nothing from this release makes us feel less confident about our short position on the name. We believe that comps will erode over the next 12-18 months as MCD takes back market share that it has given up over the last few years.




Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw




China and #EuropeSlowing

Client Talking Points


We put up a thorough update on China last night – don’t forget a big percent of the Chinese equity bubble was built on incessant expectations for incremental #cowbell – post the -3.5% drop in the Shanghai Composite overnight, the Chinese stock market is right back to its lows as growth continues to slow.


Getting uglier, one day at a time, with the IBEX flashing another negative divergence this morning -0.6% and down -11.4% in the last month vs. DAX -8% month-over-month (ZEW cut in ½ in SEP to 12.1 vs. 25 in AUG on “EM Demand”). Reminder that we signaled Spain as the 1st major European equity market to make lower-lows as 10YR Spanish Yields rise, +11 basis points month-over-month.


Got Dovish Fed expectations? Jon Hilsenrath (Wall Street Journal) was all about the hikes 3-6 months ago – now the articles are about anything but hikes and why the Fed is boxed in. Down Dollar again this morning and rates down small – still a big question mark if the Fed eases and provides realistic economic commentary on why, but Oil should like that +1% after holding $43.


**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

MCD is one of Sector Head Howard Penney's favorite names. He thinks McDonald's is finally emerging from the doldrums and is doing everything they need to do to fix the company domestically.


Penney believes there is not only a huge inflection point coming for the profitability of the company, but also for their sales. He thinks this means Wendy’s, Jack In the Box, Sonic will suffer a bit as MCD begins to take its market share back.


Bottom Line here? September regional gaming revenue growth should accelerate meaningfully from August and provide a catalyst for the stock. Our bull thesis on PENN appears very much intact.



In a higher volatility, growth-slowing environment, you want low-beta exposure (stocks that move less than the market) and a larger allocation to long-term Treasuries.


In the recent Macro Overlay video series exclusively for Investing Ideas subscribers, Keith rank-orders our top investing ideas positions from a fundamental macro and style factor perspective (low-beta, big cap liquidity, slower growth):


  1. Treasuries (TLT)
  2.  “Something that looks like Treasuries” (EDV)
  3. Gold (GLD)
  4. Low-Beta, Big-Cap liquidity: McDonalds
  5. Low-Beta, Big Cap Liquidity: General Mills

Three for the Road


FX: if you ask the Yen (+0.5% vs USD this am), the Fed is going to be dovish on Thursday




What use could the company make of an electric toy?

Western Union, when it turned down rights to the telephone in 1878


Advertising spending on print magazines is forecasted to drop 1.8% this year to $17.4 billion.

The Macro Show Replay | September 15, 2015


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September 15, 2015

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Our Latest Thoughts On C-H-I-N-A

The hyperlinked presentation below contains a detailed update to our cyclical and secular Growth/Inflation/Policy outlook for on the Chinese economy. The key conclusions are as follows:


  • Section One – Correction or Collapse? (slides 4-32): China’s secular growth outlook is likely more dour than the average “China bear” is willing to admit, which implies the recent margin-fueled melt-up in Chinese equities was little more than a bubble that is likely to continue popping amid reduced state-backed intervention. Conversely, the secular outlook for capital markets reform in China is supportive of expectations for much higher share prices over the intermediate-to-long term. These conflicting forces have been anything but a fair fight given how much what is left the “Beijing Put” has proven to be impotent of late.
  • Section Two – Asset Class “Re-Rotation” Risk (slides 33-61): Our analysis continues to pick up on a positive inflection in the Chinese property market. To the extent this nascent recovery is sustained, we expect two things to occur: 1) mainland Chinese investors are likely to continue to flow capital back into real estate in lieu of stocks, at the margins; and 2) Chinese economic growth is likely to show stabilization for at least 1-2 quarters. The former is an obvious headwind to the Chinese equity market(s) and the latter is key risk in terms of reduced expectations for fiscal and monetary stimulus.
  • Section Three – RMB Internationalization Impact (slides 62-72): Ahead of next year’s [likely] rebalancing, Chinese policymakers have lobbied strongly in favor of the yuan to be included in the IMF’s Special Drawing Rights (SDR) basket. Regardless of any success with this initiative, we believe Chinese policymakers are serious regarding their pledge(s) to accelerate capital account reform. We believe an incrementally deregulated Chinese capital account has the potential to be a lasting positive influence upon both the Chinese and global economy – IF spillover risks are curtailed via effective safeguards. The extent to which Chinese authorities are willing to defend the CNY from bearish speculators remains to be seen.
  • Associated Investment Implications: Over the long term, we think H-Shares represent an active opportunity on the long side but do not view the current juncture as an appropriate time to buy given the elevated spillover risk resulting from a continued and necessary meltdown in the A-Shares. Longer term, however, we think both markets are poised to trade materially higher amid the confluence of key capital markets and capital account reforms. Meanwhile, China’s secular growth outlook should continue to impart deflationary pressure upon commodity prices and the nominal exchange rates of commodity-producing nations. Please note that we do not currently have any active investment ideas in/around China, having closed all positions on 8/21 (CLICK HERE for more details).


CLICK HERE to download the associated PDF.


Please feel free to engage us with questions, comments or concerns.


Have a wonderful evening,




Darius Dale


Cartoon of the Day: Poison?

Cartoon of the Day: Poison? - rate hike poison cartoon 09 14.2015


Hedgeye CEO Keith McCullough in today's Early Look:


...And while the “dots” on a rate hike continue to be pushed out (anyone remember they were “supposed to hike” in June?), Mr. Macro Market’s most immediate-term message to the Federal Reserve (Fed Fund Futures < 30% probability of a SEP hike) is don’t do it (again).


What if they do? You know, “just to get off of zero because it’s time”, or something like that...


Early Look

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