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YELP | We All Must be Really Dumb (3Q15)

Takeaway: Mgmt must have thought we all wouldn’t notice that it used Display as a scapegoat for deterioration in its core…Great quarter guys

KEY POINTS

  1. DISPLAY HEADFAKE INDEED: We thought this might be a remote possibility, but should have known better with this mgmt team.  The source of the 3Q beat was entirely Brand Advertising (aka Display); it missed everywhere else.  Note that YELP annouced on its last call that is planning to shutter that segment by year end, and also provided 2H15 Display revenue guidance of $10M (tranlated to -56% y/y decline vs. -8% in 1H15).  YELP actually produced $9M in Display revenue in 3Q15 alone, which was as acceleration in growth from 2Q15 levels.  YELP also refused to provide an update to Display Guidance for 4Q15.  So the only reason why YELP was able to guide inline for 4Q was because it sandbagged 2H15 Display guidance on the 2Q release, which consensus baked into 4Q estimates...Great quarter guys.  
  2. DETERIORATION AT THE COREYELP has missed consensus Local Ad revenue estimates for the past last 3 quarters.  While YELP was able to essentially maintain both new LAA growth and attrition rates at 2Q levels, Local Ad revenue growth still decelerated to 36% from 43% in 2Q15 (vs. 51% in 1Q15, and 60% in 4Q14).  That’s because attrition is exerting more pressure across its model.  The more accounts YELP enters any period with, the more it will lose, and the more brand new accounts (and sales reps)  it needs compensate.  The one positive is that YELP was able to ramp its salesforce to plan in 3Q (+35% y/y), but its still struggling to drive new account growth in excess of the rate that it's hiring reps.
  3. NOW WHAT? We'll be monitoring consensus estimates from here since the 2016 guidance release remains our next short catalyst.  As it stands now, YELP would need to maintain its new LAA growth rate from now through the end of 2016 with historically low attrition rates in order to hit consensus Local Ad Revenue estimates.  But we're not expecting YELP's Display headfake to completely evade the sell-side; especially since mgmt dodged two direct questions on the matter.  That said, there's a chance the sell-side may disproportionately cut 2016 Local Ad estimates off this print, which could accelerate an exit on our short position, albeit temporary since YELP remains a secular short until it blows up its model.

 

YELP | We All Must be Really Dumb (3Q15) - YELP   LAA New Net Lost 3Q15

YELP | We All Must be Really Dumb (3Q15) - YELP   LAA New vs. Sales 3Q15

YELP | We All Must be Really Dumb (3Q15) - YELP   Scen 4Q15 4Q16

 

 

Let us know if you have any questions, or would like to discuss further.   

 

Hesham Shaaban, CFA


@HedgeyeInternet 


REPLAY: An Inside Look at Healthcare Earnings with Hedgeye's Tom Tobin

MUST-SEE tv IF YOU'RE A HEALTHCARE INVESTOR...

 

In case you missed it... Our Healthcare analysts Tom Tobin and Andrew Freedman dissected the latest healthcare earnings, offered their updated insight and took viewer questions live this morning on a number of key names.

 

Our Healthcare Team’s #ACATaper theme is in full effect... Mednax (MD) (one of our favorite names on the short side) reported earnings this morning and missed $722.3M vs $730M consensus, coming in right in line with our model.

 

Zimmer (ZBH) another one of our top short ideas reported this morning as well. Americas Knee growth for ZBH was down -1.8% in Q3. ZBH weakness reflects competitive share losses likely attributable to salesforce disruption due to merger with Biomet, as well as weaker demand for TKR. 

 

 


The Macro Show Replay | October 29, 2015

 

 

 

 


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Client Talking Points

FED

The side by side statement (OCT vs. SEP) removed the Global Macro Risk that is #Deflation and, in doing so, perpetuated that risk via a hawkish move in the USD. The Fed also added the domestic risk that is labor #Slowing, so now rate hawks are going to get completely whipped around if we’re right on a GDP bomb this morning.

#DEFLATION

U.S. stocks rally on rates up, Financials up? Great. Australia and Indonesia (levered the wrong way to #Strong Dollar Deflation) closed down -1.3% and -3.0% overnight; Russia leads losers in Europe -2%, and Oil failed @TREND resistance backing off -1.2% to $45.

FINANCIALS

If we’re still right on #LateCycle GDP Slowing, easiest move to make this morning is to short the Financials (XLF, KRE, JPM) and buy Utilities and Treasuries (XLU, TLT, etc.) – this is the 8th or 9th time in 2015 they’ve “rallied” the 2yr to 0.75% and failed, FYI.

 

**Tune into The Macro Show at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 66% US EQUITIES 4%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 30% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

What week it was for MCD shareholders! Shares finished the week up 7.3%. We have been saying all along that the third quarter of 2015 would be the inflection point for the McDonald’s (MCD) turnaround. After this print, it appears that the heartache is finally over at McDonald’s, as this quarter marks the first good quarter the company has had in two years.

 

From here, the upside in the stock price lies with the growth of All Day Breakfast, additional G&A cuts, national value offering implementation, reimaging of restaurants, commodity deflation, especially in beef and increased operational efficiencies, among others. In addition, the REIT is a potential driver of incremental value but not crucial to the long-term success of this call. With Steve Easterbrook at the helm we are confident this company will be better managed than it has been in a long time.

RH

RH unveiled a full floor of Modern product in their New York Flatiron store this week. The new concept sits on the first floor of the 21k sq. ft. store and marks the 3rd property in RH’s fleet (along with Denver and Atlanta) to carry the new product line.

 

Fundamentally and financially, we’re about to see growth at RH go on a multi-year tear. We think this stock is headed to $300 over the next 2-3 years. We’ve been patient for the catalyst calendar to begin, and the waiting is finally over.

TLT

As devaluation and global currency war jockeying from central bankers around the world continues, the acknowledgement of growth slowing continues to push yields lower. The long-bond was up on Thursday, after the ECB meeting, despite an easing-fueled rip in equities. The bond market doesn’t believe in the growth storytelling and we expect it to continue.

 

Remember that Down Euro Devaluation is a global TIGHTENING event because the world’s biggest asset price #deflation risk is that the world’s inflation expectations (commodities, debt, etc.) are DENOMINATED IN DOLLARS. That has implications for gold (risk to being long), but we want to get through the Fed meeting and GDP data next week before we pivot on a gold view. Stay tuned.

Three for the Road

TWEET OF THE DAY

REPLAY: "Fed Day Live" with Keith McCullough https://app.hedgeye.com/insights/47167-replay-fed-day-live-with-keith-mccullough… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

The happiness of your life depends upon the quality of your thoughts; therefore guard accordingly.

Marcus Aurelius

STAT OF THE DAY

U.S. venture capital firms raised $4.4 billion for 53 funds during the third quarter of 2015, a decrease of 34% compared to the number of funds raised during the second quarter of 2015, and a 59% decrease by dollar commitments, according to the Fundraising Report by Thomson Reuters and the National Venture Capital Association (NVCA).  


CHART OF THE DAY: How the #Fed (Consistently) Overestimates #GDP

 

CHART OF THE DAY: How the #Fed (Consistently) Overestimates #GDP - 10.29.15 EL chart

 

Editor's Note: Below is a brief excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here if you'd like to subscribe and get ahead of the consensus.

 

"... As you can see in today’s Chart of The Day, “Serial Over-Optimism”, the US Federal Reserve has overestimated US GDP growth by approximately 100 basis points every year since Ben Bernanke had the courage to act on economic models that don’t work.

 

What’s 100 basis points?

 

  1. Uh, the difference between 1% and 2% GDP growth
  2. The Difference between a 10yr Bond Yield of 2.0% and 3.0%" 

The Fed's Crisis Is Finally Here

“If there is any period one would desire to be born in, is it not in the age of Revolution?”

-Ralph Waldo Emerson

 

Emerson was a 19th century essayist and poet from Boston, MA best known for leading what they called the “Transcendentalist” movement. It was a New Englander thing that probably resonates with many Americans (and other humans who think for themselves) today.

 

Transcendalists believed that “institutions ultimately corrupted the purity of the individual.” They believed people were at their best when they were “self-reliant” and able to think independently of government and its propaganda.

 

That’s why the aforementioned passage from Emerson is such a progressive one. On revolution against the Establishment, it’s a time “when the old and the new stand side by side… when the glories of the old can be compensated by the rich possibilities of the new era.”

 

Back to the Global Macro Grind

 

At this stage of the Fed’s forecasting game, I don’t hope that you see the mediocrity in this un-elected institution that decides the fate of what used to be free-market moneys every day. Instead, I pray that you understand the risks associated with their market moving forecasts.

 

The Fed's Crisis Is Finally Here - rate hike cartoon 10.28.2015

 

As you can see in today’s Chart of The Day, “Serial Over-Optimism”, the US Federal Reserve has overestimated US GDP growth by approximately 100 basis points every year since Ben Bernanke had the courage to act on economic models that don’t work.

 

What’s 100 basis points?

 

  1. Uh, the difference between 1% and 2% GDP growth
  2. The Difference between a 10yr Bond Yield of 2.0% and 3.0%

 

I know. I know. Let’s not get caught up in the details.

 

Instead, after the almighty Fed changed their forecast, albeit subtly, yesterday – let’s analyze where the Fed could be wrong (again):

 

  1. In the side by side statement (OCT vs SEP), the Fed removed the bearish concerns about the Global Economy and…
  2. Added the latest concerns (#LateCycle US Employment) embedded in the most recent US jobs reports slowing

 

This, of course, comes:

 

A)     After the US Dollar stopped going up AFTER the slowing US jobs report (that they didn’t forecast) and…

B)      Countries, Currencies, and Commodities took a break from crashing, for 3 weeks

 

So, after dynamically adjusting their latest forecast for everything they missed calling for to begin with:

 

  1. The US Dollar and interest rates went straight back UP again yesterday
  2. And everything Global #Deflation is falling in Country, Currency, and Commodity land this morning

 

Yep. Look at the overnight reaction to a more “hawkish” Fed:

 

  1. Australian Stocks (levered to Commodity #Deflation) down -1.3%
  2. Indonesian Stocks (levered to EM and FX risk) down -3.0%
  3. Russian Stocks (levered to Oil #Deflation) down -2.1%

*hint: the world’s leverage bubble (including inflation expectations) is denominated in Dollars

 

Oh, and after, “rates ripped” (5 basis points on the 10yr) on the Fed’s latest proclamation of lagging indicator faith, Bond Yields, globally, are falling (again) this morning ahead of another slowing US GDP report.

 

So, what if the Fed’s US domestic admission of #GrowthSlowing continues to be “data” driven like it has this week (New Home Sales, Durable Goods, and Consumer Confidence reports all slowed, again, sequentially) and the US Dollar rises as rates fall?

 

Oh, boy. That is the mother of all #Deflation Risk signals. So stand ready, side by side. Because the biggest risk of this entire “600 rate cuts globally” experiment is already here. It’s the Fed’s forecast that could very well perpetuate the next market crisis.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.99-2.11%

SPX 2004-2099
RUT 1136--1182
USD 96.02-98.63
EUR/USD 1.08-1.11
Oil (WTI) 42.97-47.32

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Fed's Crisis Is Finally Here - 10.29.15 EL chart


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