Investing Ideas - Levels

Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction investing ideas.


Have a great weekend.


Investing Ideas - Levels - z levels 1

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 less

Anything longer than 3 years is unpredictable.

In case you missed it..."Fed Day Live" with Keith McCullough

Hedgeye CEO Keith McCullough and macro analyst Darius Dale hosted a LIVE + INTERACTIVE online event offering market commentary following the latest FOMC statement. McCullough also distilled the biggest global economic risks and explained how to position your portfolio going forward.



The Week Ahead

The Economic Data calendar for the week of the 2nd of November through the 6th of November is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - 10.30.15 Week Ahead

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Investing Ideas Newsletter

Takeaway: Current Investing Ideas: TIF, JNK, W, WAB, ZBH, GLD, MCD, RH, LNKD, ZOES, GIS, EDV & TLT

Investing Ideas Newsletter - rate hike cartoon 10.28.2015

It was (another) strong week for our Investing Ideas recommendations.


Below are our analysts’ updates on our thirteen current high conviction long and short ideas. As a reminder, if nothing material has changed in the past week which would affect a particular idea, our analyst has noted this. We will send CEO Keith McCullough’s updated levels for each ticker in a separate email. 



To view our original note on McDonald's click here.


Last week was a big week for McDonald’s (MCD), as they reached the inflection point we were predicting. Post earnings, the next catalyst for the stock is going to be the November 10th analyst meeting.


The meeting will be an opportunity for management to shed more light on the progress of all day breakfast, additional G&A cuts and the potential of doing a REIT.


Our Restaurants team remains bullish on the name, and they look forward to giving you some material updates after the meeting.


To view our analyst's original report on LinkedIn click here.


LinkedIn (LNKD) shares soared approximately 14% this past week (versus a 0.36 decline for the S&P 500) after the company reported strong 3Q results and 4Q guidance coming in ahead of the Street's expectations. 


Most notably was an acceleration in organic Talent Solutions growth, which not only vindicates management for its 1Q15 salesforce account transition, but puts to rest concerns that the Lynda acquisition was a decoy for deteriorating core fundamentals.


However, we wouldn’t be chasing this print today. The next catalyst on the horizon is its 2016 guidance release in February. We’re not 100% sure we want to stay long into that event simply because this management team is notoriously cautious with its guidance, particularly the initial release.


Stay tuned for an update.


To view our analyst's original note on Wabtec click here.


The downcycle in freight rolling stock is just getting started. Wabtec (WAB) pretty much confirmed that on the earnings call last week.


For those who have listened to WAB earnings calls since Executive Chairman Albert Neupaver took over, the change in tone is immediately apparent. In generating the sales miss this quarter, WAB actually drained the order backlog, with a book-to-bill of 0.84. The freight book-to-bill was a minor train wreck – worse than what was posted in a quarter during the financial crisis.


We continue to expect 2016 EPS to move sub $4.00. This past earnings announcement is only the first minor readjustment.


Investing Ideas Newsletter - WAB


To view our analyst's original report on Wayfair click here.


The common perception with Wayfair (W) is that it is a play on the millennial furnishings shopper. Millennial consumers are defined as the 15-34 age bracket. These shoppers grew up with a smartphone in tow, i.e. they are more comfortable shopping online. Based on the e-commerce visitation trends, however, it doesn’t appear that has a particular advantage with this subset. 


The chart below shows how Wayfair stacks up against and pier1 on weighting of visitation by age and compared to the internet average. Wayfair skews high in the 55 to 65+ demographic, and is right in line with pier1 in the 18 to 34 age range. To get to the 60mm+ household addressable market, Wayfair will have to spend aggressively on ad cost to get eyeballs since it has zero physical presence in this market.


Investing Ideas Newsletter - 10 30 2015 W age dist


To view our analyst's original report on Tiffany click here.


The common perception seems to be that “just because Tiffany (TIF) blew up earlier this year, it can’t blow up again.” We disagree. It actually blew up twice this year. And we think there will be another. We didn’t like TIF into the last print, and we definitely don’t like it on the way out. The company lowered back half guidance, which we expected to see, but we’re not sure if $0.10 is enough off of 2H14’s $2.27 base. We’re inclined to think ‘no.'


Tiffany's quarter is just ending and ecommerce traffic trends have not looked strong in the quarter. YY Traffic Rank (which measures unique visitation and page visits/user) has deteriorated since mid-August. E-commerce only accounts for 6% of sales at TIF, but it’s a good barometer for brand relevance. And, the trends headed out of 3Q look particularly weak.


Investing Ideas Newsletter - 10 30 2015 TIF traffic


To view our analyst's original report on Restoration Hardware click here.


Restoration Hardware (RH) shares gained 5.8% this past week. The margin story here is explosive. Margins are sitting below 10% today, and we think they will be above 16% in 3 years. The key reason is that expense leverage on these new properties is like nothing we’ve ever seen (i.e. RH pays only 10% more for square footage that’s 300% larger).


In addition, the company does not have to proportionately grow its sourcing organization with the growth in its store base OR its category expansion. 


Our estimate is that the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we’re getting to a stock in excess of $300.


To view our analyst's original report on Zimmer Biomet click here. 


Zimmer Biomet Holdings (ZBH) reported numbers and calmed the concerns across the Street with positive commentary about 2016 growth. We did not hear any questions from largely bulge bracket sellside firms that called into question the consistent deceleration in their US Knee growth. 


Management reported -1.8% growth in America’s knee growth, largely driven by the very small percentage of sales in Latin America seeing substantial declines, and a flat US market. Our view is that ZBH is heading into a very tough operating environment where the tailwinds from the Affordable Care Act wane (#ACATaper) and growth slows materially.


Investing Ideas Newsletter - 10 30 2015 knee chart


The added headwind of the new Medicare global payment model (CCJR) which will hurt pricing and volume, will only make matters worse. Our view is that $90 was too low for ZBH, declining recently along with the rest of the healthcare equity market, dubbed #Reformaggon stocks. $105 is probably where $ZBH belongs given the deterioration in the fundamentals so far in 2015.


However, the reflation in the equity price from a disaster-low is not an “All Clear” signal. It’s an opportunity to re-assess (we still like the short) for both the longs and the shorts. 


We’re continuing to speak to surgeons about case volumes and device pricing through the remainder of the year. We’ll continue to update our #ACATaper charts, looking for signs that we remain on course with the thesis.  


Click below to view an update from our Healthcare team this week.

Investing Ideas Newsletter - 10 30 2015 HC video


To view our analyst's original report on Junk Bonds click here


You got your chance to buy long-term bonds again at the end of the week as the “rate hike in 2015” was teased yet again from Janet Yellen on Wednesday. Interest rates moved higher on the week and gold was tagged for a loss after reaching week-to-date highs pre-meeting. Bottom Line: The market took the statement as hawkish and the language put global deflation back on the table.


Looking at the statements side-by-side, they removed the sentence that “global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near-term.”


Don’t buy the central planner's failed attempt at arresting economic gravity. Let’s dissect an important week of economic data.

Investing Ideas Newsletter - Economic growth cartoon 10.20.215

Our forecasts for domestic economic growth continue to be more accurate than the consensus. We anticipate economic growth will get a lot worse from here. That is why you want to own long-term bonds (TLT, EDV).

  • Real GDP growth slowed to 1.5% on a quarter-over-quarter seasonally adjusted basis. That was actually right at the top end of our range going into it (remember that the mainstream Q/Q annualized number is unpredictable)
  • On the Y/Y numbers, growth decelerated for a 2nd straight quarter to 2.0% from +2.7%
  • Consumption growth was a huge contributor to the number vs. the manufacturing side of the economy which continues to slow. However, take a look at the important chart below. We’re already past peak consumption growth. Consumption growth was positive on an absolute basis but remained rate of change negative with Q3 representing the 2nd quarter of deceleration off of the Q1 2015 peak
  • Both residential and nonresidential Investment decelerated sequentially and inventories contributed almost -1.5% bps to the headline number
  • Personal Income decelerated to +0.1% for Sep vs. +0.3% in August. The expectation was for a +0.2% print
  • Personal spending decelerated to +0.1% from +0.4%. The expectation was also for +0.2% print.
  • Core PCE printed flat at +1.3% Y/Y for Sep. vs. Aug. on a Y/Y basis. That number missed expectations for a +1.4% print

Investing Ideas Newsletter - 10.30.15 Consumption Growth


General Mills (GIS) continues to be one of our top ideas in the Consumer Staples sector. Sector head Howard Penney loves the name for its characteristics during the current macro driven market. Big-cap, low-beta, and their line of sight at growing the top line in a meaningful way, are contributors to our LONG thesis.


There has not been much notable news on GIS as of late. This week they did provide an update, as part of a previously announced project, that they will be closing manufacturing facilities in the UK and New Zealand. If completed these actions will eliminate 285 positions and incur restructuring charges of $47 million to $52 million. Management expects these actions to be completed by the end of FY2017.


Again, this was a pre-announced project so it was only a matter of time until this actually hit the newswire. GIS pruning its manufacturing footprint is a critical step in their effort to become more nimble globally. 


Nothing has changed at Zoës Kitchen (ZOES). We still love the management team and the concept of the restaurant. But due to the macro-driven market, high beta, low-cap names such as ZOES have fallen out of favor.


If you are a "buy and hold" type of investor this is a name you want to be in for the long run, especially at these values. This company has a long runway of growth which we believe is only just in the beginning stages. 

Cartoon of the Day: Zombie Economy

Cartoon of the Day: Zombie Economy - Economic growth cartoon 10.20.215


Are you prepared for a deepening of the global earnings and industrial recessions? Hedgeye Macro analysts Christian Drake and Darius Dale sent a detailed note to institutional subscribers on Thursday afternoon laying out our #SlowerForLonger (growth) thesis. Here's the key takeaway:


"Our forecasts for domestic economic growth continue to be proven most accurate and we continue to anticipate things will get a lot worse from here."



HEDGEYE Exchange Tracker | Comping the Comp

Takeaway: 2 of 3 categories remain in contraction Y/Y although we expect futures to turn to positive territory soon as the Grexit marked last October.

Weekly Activity Wrap Up

All three categories remain in negative growth territory Q/Q, although cash equities, with a 7.1 billion 4Q15TD ADV, are positive Y/Y at +2%. Options activity is averaging 16.5 million contracts per day so far in the quarter, a -5% contraction year-over-year and a -9% contraction versus 3Q15. Futures had their best week so far this quarter, coming in with 19.4 million contracts per day, however, the 17.5 million 4Q15TD ADV is -6% lower than last quarter and -9% lower than 4Q14. In October of last year, the potential Greek exit from the European Union drove outsized activity which will have normalized by mid-November. We expect both ICE and CME to have better comps at that point and think that CME especially will finish 2015 strongly (see our most recent CME note here).


HEDGEYE Exchange Tracker | Comping the Comp  - XMon 1


U.S. Cash Equity Detail

U.S. cash equity trading came in at 7.4 billion shares traded per day this week. That brings the fourth quarter average to 7.1 billion shares traded per day, a +2% Y/Y expansion but -3% Q/Q contraction. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of fourth-quarter volume, a +3% year-over-year increase, while NASDAQ is taking a 19% share, a -8% year-over-year decline.


HEDGEYE Exchange Tracker | Comping the Comp  - XMon 2


HEDGEYE Exchange Tracker | Comping the Comp  - XMon 3


U.S. Options Detail

U.S. options activity came in at a 17.1 million ADV this week, bringing the 4Q15TD average to 16.5 million, a -5% Y/Y and -9% Q/Q contraction. The market share battle amongst venues continues to be one of losses at the NYSE/ICE, which has lost -9% of its share year-over-year settling at just 18% of options trading currently. Additionally, CBOE's market share has been falling recently and now sits at 26%, -14% lower than 4Q14. NASDAQ, on the other hand, is starting the quarter strongly, increasing its market share by +13% compared to 3Q15, bringing itself only -2% lower than the 24% share it held a year ago. BATS' share has been falling recently but at 8% in 4Q15TD it remains +27% higher than in 4Q14. Finally ISE/Deutsche's 15% share in 4Q15TD remains consistent with 3Q15, which brings it to +10% Y/Y growth.


HEDGEYE Exchange Tracker | Comping the Comp  - XMon 4


HEDGEYE Exchange Tracker | Comping the Comp  - XMon 5


U.S. Futures Detail

CME Group volume came in this week at 14.1 million contracts per day and is averaging 12.8 million for the fourth quarter, a -14% Y/Y and -11% Q/Q contraction. However, CME open interest, the most important beacon of forward activity, currently tallies 101.7 million CME contracts pending, good for +9% growth over the 93.7 million pending at the end of 4Q14, an expansion from the prior week's +7%.


ICE had its best week so far in 4Q15TD with 5.3 million contracts traded per day. Additionally, at 4.7 million contracts traded per day in 4Q15TD, activity has grown +7% Y/Y and +10% Q/Q. ICE open interest this week tallied 67.5 million contracts, a +14% expansion versus the 59.4 million contracts open at the end of 4Q14, consistent with the prior week.


HEDGEYE Exchange Tracker | Comping the Comp  - XMon 6


HEDGEYE Exchange Tracker | Comping the Comp  - XMon 8


HEDGEYE Exchange Tracker | Comping the Comp  - XMon 7


HEDGEYE Exchange Tracker | Comping the Comp  - XMon 9 


Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.


HEDGEYE Exchange Tracker | Comping the Comp  - XMon 10


HEDGEYE Exchange Tracker | Comping the Comp  - XMon 11


HEDGEYE Exchange Tracker | Comping the Comp  - XMon 12


HEDGEYE Exchange Tracker | Comping the Comp  - XMon 13


HEDGEYE Exchange Tracker | Comping the Comp  - XMon 14

HEDGEYE Exchange Tracker | Comping the Comp  - XMon 15


Sector Revenue Exposure

The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:


HEDGEYE Exchange Tracker | Comping the Comp  - XMon19 3



Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA





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