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An Unmistakable Crashing Sound

Biotech stocks (IBB) moved into full-blown crash mode on Friday. The sector is down-22% from its July peak. It’s now down another -3% this morning.

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An Unmistakable Crashing Sound - zz ibb 99


These former high-fliers have officially joined China, Germany, Spain, Oil, Emerging markets, etc, etc in what has become the most visible, slow-moving-train-wreck I have witnessed in High Beta in my career.


(Oh. Nearly forgot. Latin American Stocks (MSCI) are down -27.3% in last 3 months.)


In related news, our fearless IMF prognosticators just cut their global growth forecasts (again) as macro markets continue to crash.


> Houston, we have a problem…

> Wall Street, we have a problem…

> Beijing we have a problem…

> Frankfurt, we have a problem…

> Madrid, we have a problem...


An Unmistakable Crashing Sound - Global economy cartoon 12.16.2014


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Editor's Note: This is an abridged, brief excerpt from our morning research. Incidentally, we made the contrarian, global growth slowing macro call and its related market implications. Click here to learn more about it and how you can become a subscriber to our world-class research.

Retail Callouts (9/28): RH - Finally Tapping One of Many New Markets

Takeaway: RH - Finally Tapping One of Many New Markets (Milwaukee, WI). Marathon winner's Nike shoes struggle to make it through the race.

RH - Finally Tapping One of Many New Markets (Milwaukee, WI)


RH currently operates in 62 markets in the US (as we define them). All but 3 by our math could support a store over 20k sq. ft. and 38 could support a store 40k sq. ft. or lager. But, what gets lost in the conversation sometimes is the new market opportunity.


By our math there are 19 markets in the US and Canada with spending and demographic characteristics on par with RH's current portfolio and of those markets 10 could support an Atlanta sized full line design gallery and another 7 could support a Houston/Greenwich sized store.


One of those markets is Milwaukee, where it looks like RH will be opening a new 27k square foot store. Most likely a 2017 or 2018 event. It’s a market where the company previously operated (closing its mall location in 2012) and by our math could support a store as big as 45k sq. ft.


Retail Callouts (9/28): RH - Finally Tapping One of Many New Markets - 9 28 chart1


NKE, Adidas - Marathon Runner Eliud Kipchoge's Nike shoe insoles came apart in the beginning of the Berlin Marathon.  He still won the race, but fell short of his goal of a world record.



Truth be told, Nike running shoes were originally designed to fall apart after crossing the finish line. Less materials, less glue and adhesives = lighter shoe and significantly less weight carried over the course of a few thousand strides. But the picture below is certainly not what Nike had in mind.  Didn't Eliud wear-test them first? It seems like he pulled this pair right out of the box, which is unusual for a runner on a big race. The whole thing is just weird. And Adidas probably loved that the gaffe happened in its back yard.

Retail Callouts (9/28): RH - Finally Tapping One of Many New Markets - 9 28 chart2


WBA - Walgreens automated pharmacy system went down last Tuesday following planned maintenance, the problem was fixed on Friday.  Pharmacists had to manually fill prescriptions during the outage.



WFM - Whole Foods is cutting 1,500 jobs (1.6% or workforce).  Company expects some of the displaced workers to find a job from 2,000 open positions the company currently has.



ROST - Ross stores continuing aggressive store openings, 8 new openings over 2 weeks.



APP - American Apparel receives delisting warning from NYSE.  NYSE states "financial condition has become so impaired that it appears questionable, as to whether the company will be able to continue operations and/or meet its obligations as they continue to mature"



CONN - Appliance and Furniture retailer Conn's is on track to open its 100th store next month.


Monday Mashup

Monday Mashup - CHART 1



9/23/15 WHAT’S IN STYLE?







Monday, September 28

K | Announced that it has acquired Mass Food Group, Egypt’s Leading Cereal Company for approximately $50mm (ARTICLE HERE)

WFM | Announced a plan to cut 1,500 positions (ARTICLE HERE)


Thursday, September 24

DMND | Rumored that Diamond Foods is working with Credit Suisse to sell itself


Wednesday, September 23

POST | Acquiring Willamette Egg Farms, the business is expected to contribute $80mm in sales and $15mm of adjusted EBITDA (ARTICLE HERE)


Tuesday, September 22

GIS | Delivered 1Q16 bottom line results that were above consensus estimates. Although, overall top line numbers came in short of expectations; the U.S. Retail division beat both internal and external expectations. Although it is just one quarter, we remain optimistic on the name long term (HEDGEYE NOTE HERE)



Food and organic stocks that we follow underperformed the XLP last week. The XLP was up +0.6% last week, the top performers on a relative basis from our list were Amira Natural Foods (ANFI) and Diamond Foods (DMND) posting increases of +31.2% and +8.8%, respectively. The worst performing company on a relative basis on our list was Lifeway (LWAY), which was down -13.2%.

Monday Mashup - CHART 2



The XLP has fared better than most other sectors in the YTD time period and as of late especially. In the last five trading days while the SPX was down -1.4%, the XLP was actually up +0.6%, outperformed only by XLF (Financials) and XLU (Utilities).

Monday Mashup - CHART 3



From a quantitative perspective, the XLP is bearish on a TRADE and TREND duration.

Monday Mashup - CHART 4


Food and Organic Companies

Monday Mashup - CHART 5

Monday Mashup - CHART 6

Monday Mashup - CHART 7

Monday Mashup - CHART 8


Keith’s Three Morning Bullets

IMF cutting global growth forecasts (again) as macro markets continue to crash:


  1. USD – a one-day move higher (off the lows) in USD and rates does not a credible rate hike make – no follow through so far on that w/ Yen actually +0.2% vs USD this morning (Nikkei doesn’t like that, down another -1.3%)
  2. RATES – bond market doesn’t believe Yellen – neither does the growth data; 0.69% 2yr and 2.16% 10yr both remain bearish TREND signals for yields as Utilities (XLU) continue to breakout (+1.2% in a down tape last wk, +2.9% in the last 3 months)
  3. CRASHES – Biotech stocks (IBB) moved into crash mode on Friday (-22% from the July peak) joining China, Germany, Spain, Oil, Emerging markets, etc. in what is the most visible slow-moving-train-wreck I have seen in High Beta in my career; Latin American Stocks (MSCI) -27.3% in last 3 months


SPX immediate-term risk range = 1; UST 10yr 2.07-2.21%


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw



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We are adding ConAgra Foods (CAG) to the Hedgeye Consumer Staples Best Ideas list as a LONG.


We don’t believe there is another Consumer Staples name that has been more of a chronic underperformer than CAG.  CAG has underperformed the S&P 500 by 38% of the last 20 years.  Over the past 5, 3 and 1 years the stock has outperformed the S&P 500, up 13%, 13% and 28%, respectively.  A significant part of the recent outperformance is due to the announcement of the new CEO and Jana taking a significant stake in the company. 



ConAgra operates at margin levels well below the competition. A lot of this has to do with the businesses they are in, Private Label, Frozen and some lower end center-of-store items. But there is upside here. The new CEO spoke to upgrading the brands appearance through package design and improving the quality of the food, both of which will go a long way to helping the company attain higher price points at retail.


Recently, the disaster Ralcorp acquisition has finally led to Jana taking a significant position (with board representation).  In February 2015, the CAG Board announced that it hired Sean M. Connolly as its new CEO.  The new CEO’s resume and industry contacts are the right combination to reshape this company into a premier food company once again.  The alignment of the CEO, Board and activist shareholder forms a strong combination to take control of a struggling company to create significant upside for shareholders.   



  • Leveraged balance sheet Over the last five years, the company’s failed acquisition of Ralcorp and its generous dividend and share repurchase program has increased the debt on the balance sheet.
  • Too shareholder friendly The Company has paid out 78% of operating cash flow in dividends and share repurchases.
  • Under invested in the business – Over the last eight years the company has seen a steady decline in capital spending as a % of sales.  
  • Significantly lower margins than competition –the company has a lot of upside as they improve the quality of their portfolio over time.
  • Little international exposure – The Company has not invested in its international operations.




Given the poor performance of this company over the last 20 years, another boiler plate restructuring will not give investors much confidence.  The company needs a bold program that will shake the company down to its core foundation.  The divestiture of the Ralcorp Private Brands business is just the beginning to this turnaround story. At the annual shareholders meeting on Friday, CEO Sean Connolly spoke briefly about the changes to come. He spoke to sweeping changes across the company from the structure to how they work.  He gave little details at the annual meeting, saying that the company plans to tell employees the details first, and if everything goes well, that will be by the end of this week.


Reading between the lines of his statements, big changes are coming.


He went on to say “will Illinois have a presence in our future, likely yes, will Omaha have a presence in our future, absolutely yes.” Illinois is where their consumer foods business is headquartered and Omaha is where the majority of their R&D and Quality operations are located. Sean went on to say, “Lamb Weston will continue to play an important role in our retail business.” Additionally, he spoke to accelerating the business internationally, (mainly China) where they serve predominately quick service restaurant chains.


Some of the key words from his comments at the annual meeting:

“Embrace bold change”

“Bold action”

“More focused company”

“Disciplined and focused”

“Pledged to be transparent”

“To stay competitive we must change”



We don’t know exactly what CAG will decide to do, except for the fact that the sale of the private brands business is well underway. In our opinion, there is little risk of this deal not going through given the relative quality of the business, and the distressed asset price that it will most likely go for. Rumored acquirers at this point include Treehouse (THS) and former owners Post Holdings (POST). Given POST’s balance sheet right now and other acquisitions there are still working on integrating, we view them as an unlikely acquirer. Treehouse looks to be in the lead from our vantage point as they would be able to reap a lot of synergy and scale benefit.


It’s clear that job cuts are coming next, how deep they will go is unknown. There are plenty of case studies from their fellow CPG companies that the consulting companies working with them know what works most effectively. Some form of zero-based budgeting (ZBB) will most likely be implemented as well.


Now, for the rest of the portfolio.


From Sean’s commentary during the shareholder meeting we would say for now, commercial foods is safe. But he left the door open for Naperville, Illinois being less than important to the company in the future. We believe there is going to be a pruning of the portfolio. Our suggestion would be to divest lower tier non-strategic brands from the portfolio to focus energy and capital on the most important ones. When looking at their portfolio there is not much to get excited about, center-of-store, frozen aisle type items. But there is still value there brands like Healthy Choice, Marie Callender’s, Hunt’s, Alexia, etc. still hold great value. This company clearly needs to focus on frozen and possibly expand within that aisle. Shed some can businesses like Ro Tel and Ranch Style that are not on-trend and aren’t top tier brands but could still hold some value to potential buyers.



If management wanted to go big, they could get creative and do a Reverse Morris Trust (RMT). In this scenario we believe you would have to spin off the frozen assets or possibly the whole consumer foods segment and merge with a company like Pinnacle Foods (PF) or B&G Foods (BGS). This would be the most tax efficient and also the most transformative.


We believe the days of value destruction are over at CAG.  There is significant room for margin improvement at CAG and we believe that the combination of a new CEO with an aggressive core shareholder creates a stock we want to own in this market.  In the coming weeks we will expand on our thesis and where the biggest opportunities are. 



Only 36% of the analysts have a buy on CAG! Seems as though everyone is waiting to see what happens next. Given the confidence we have on how the turnaround will unfold, the time to go LONG is now.




Short interest is slightly above its five year average of 1.6%, currently at 1.8%.




Below is the 5 year EV/NTM EBITDA chart. Although this company looks expensive, and has risen in valuation a lot over the last five years, it is still slightly undervalued compared to its peer set. We strongly believe that with the upcoming transformation this company will work into this valuation and beyond.






Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw





CHART OF THE DAY: Bearish Market Beta (Eating Alpha, Alive)

Editor's Note: This is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. You should subscribe. We're pretty sure you'll thank us later.


...When money managers are forced to chase performance, stocks (and their style factors) accumulate a lot of consensus beta risk. Bearish market beta then starts to eat that alpha, alive.


If you look at the US Equity Style Factors that did the worst last week, they continue to look a lot like what we’ve been trying to keep you away from for the last 3 months:


  1. High Beta Stocks were down another -3.0% week-over-week (-15.5% in the last 3 months)
  2. Small Cap Stocks were down another -2.9% week-over-week (-13.9% in the last 3 months)

*Mean performance of the Top Quartile of SP500 performance vs. Bottom Quartile for the given style factor


CHART OF THE DAY: Bearish Market Beta (Eating Alpha, Alive) - z cod 09.28.15 chart

Rate Hiking

“Getting to the top is optional. Getting down is mandatory.”

-Ed Viesturs


Thinking about hiking? Some people love (d) the idea. You know, hiking into a global and local slow-down. Sounds like a great idea, until the stock market goes down on that news too.


Since Janet Yellen has no experience hiking interest rates, I thought I’d channel some of the wisdom of the only American to have reached the top of all 14 of the world’s greatest mountain peaks – Ed Viesturs.


The Fed should have been raising rates when US economic growth was accelerating (mid-2013 to late 2014). It missed its window to act objectively. The bond market hasn’t believed Yellen can raise rates (all year-long). And it doesn’t today either.

Rate Hiking - 3  yield Godot 07.27.2014

Back to the Global Macro Grind


After crashes across many macro markets continued last week, the IMF decided to fade Janet this morning and cut their Global Growth forecasts (again) for both 2015 and 2016.




Yes, as in > 20% declines from the cycle/bubble peaks (there have been 3 major ones to climb going back to 1). While being long at the top of Biotech #Bubble was optional, getting drawn-down (-22%) since July’s peak was mandatory.


While the SP500 tried having a rate hike party on last Friday’s open, neither the Russell 2000 nor the Nasdaq were buying into the hype/hope, at all. They looked a lot more like Chinese, German, and Emerging Market stocks – not good.


Rate hike or no rate hike? Who cares – stocks are now going down on both.


In US stock market terms, here’s how the week-over-week looked within the context of the last 3months:


  1. SP500 -1.4% week-over-week, -8.1% in the last 3 months
  2. Russell 2000 -3.5% week-over-week, -12.5% in the last 3 months
  3. Nasdaq -2.9% week-over-week, -8.3% in the last 3 months
  4. Healthcare (XLV) -5.7% week-over-week, -12.1% in the last 3 months
  5. Basic Materials (XLB) -4.0% week-over-week, -18.9% in the last 3 months
  6. Utilities (XLU) +1.2% week-over-week, +2.9% in the last 3 months


That’s the first time that Healthcare (led by the Biotech crash) has been worst with Utilities first, in a long time. That’s mainly because everyone owns Healthcare now, and there was a lot of performance chasing to that relative strength top.


When money managers are forced to chase performance, stocks (and their style factors) accumulate a lot of consensus beta risk. Bearish market beta then starts to eat that alpha, alive.


If you look at the US Equity Style Factors that did the worst last week, they continue to look a lot like what we’ve been trying to keep you away from for the last 3 months:


  1. High Beta Stocks were down another -3.0% week-over-week (-15.5% in the last 3 months)
  2. Small Cap Stocks were down another -2.9% week-over-week (-13.9% in the last 3 months)

*Mean performance of the Top Quartile of SP500 performance vs. Bottom Quartile for the given style factor


The alternative to chasing “reflation” beta (Energy, Industrials, Basic Materials, etc.) and/or wicked high #Bubble beta (Social Tech, Biotech, Technical “Charts”, etc.) has been:


  1. Long-duration Bonds
  2. Low-Beta Stocks
  3. Stocks with liquidity (and low-beta) that look like bonds


Yes. I sound like I am repeating myself this morning. Because my competition, who has been long “reflation” and rates rising (Industrials and Financials) is repeating themselves too. And I’ll keep doing that until #LateCycle stops slowing.


Back to the concept that a rate hike “is just 25 basis points” and “we should just do it”, only people who don’t do Global Macro can be complacent about what an abrupt #StrongDollar move does during an economic slowdown (hint: it’s deflationary):


  1. Emerging Market Stocks (MSCI) were -5.3% last week, crashing -20.5% in the last 3 months
  2. Latin American Stocks (MSCI) were -8.6% last week, crashing -27.3% in the last 2 months
  3. UST 5yr-forward Break-Evens dropped -11bps to 1.09%, crashing -61bps in the last 3 months


With “inflation” expectations crashing, the Fed would definitely have to stretch way outside of its mandate/framework to reach for the top of those “rate hike” expectations in December.


On the growth front, you’re one more rate of change slowing US jobs report and/or a big Q3 GDP slowdown away from the bond market (and stock markets, worldwide) reminding you that taking rates down is mandatory as the cycle slows.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.07-2.21%

RUT 1122-1160
EUR/USD 1.10-1.14

Gold 1130-1160


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Rate Hiking - z cod 09.28.15 chart