Below are our analysts’ updates on our twelve 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. Hedgeye CEO Keith McCullough’s updated levels for each ticker are below. Please note that we removed Gold (GLD) this week.
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
To view our original note on McDonald's click here.
Post earnings, the next catalyst for McDonald’s (MCD) is going to be next week's 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.
It was another good week for LinkedIn (LNKD). LNKD shares were up another 4% this week. LinkedIn reported strong 3Q results and 4Q guidance coming in ahead of the Street's expectations on Oct. 29th. In just two weeks, the shares are up 19%.
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.
Since Wabtec (WAB) reported, we have gotten some additional information in the 10-Q, as well as in GBX’s fiscal year-end report and other industry reports.
WAB’s quarter still looks poor because of Freight segment implied order rates that were well below sales and weaker non-PTC aftermarket demand. Unfortunately, the 10-Q does not provide much granularity on the cost side. We expect 2016 rail car build rates to move lower, if OEMs behave rationally.
To view our analyst's original report on Wayfair click here.
Wayfair (W) reports its 3rd quarter earnings on Tuesday 11/10. E-comm traffic trends for the company looked particularly strong in the quarter and we are modeling a top-line beat for the print.
Could W build from $2bn in revenue to $5bn over 3-4 years? Yes, it could. Given its solid balance sheet and minimal working capital requirements, there’s no reason why that can’t happen.
But don’t forget the bigger picture call on this name. The whole time it will likely continue to lose something in the vicinity of $100mm/yr. Two core reasons for this are:
- Mono Channel does not work. Restricting sales to just the internet in this category is just as bad as a retailer who focuses 100% on physical stores. Both are highly likely to fail over time.
- TAM is limited. The categories that W needs to grow its business profitably skew to the higher-end consumer who is focused on aesthetic and assortment. W’s consumer is focused on Price. The competitive set there is not pretty. Of the $323bn home furnishings market, we think that just $20bn is relevant for W, a number much lower than what management and the bulls are counting on.
To view our analyst's original report on Tiffany click here.
Here is an excerpt from Hedgeye CEO Keith McCullough commenting on Tiffany's (TIF) downward move on Friday:
"On the macro market overall, this one-off Waldo of a NFP report (last month was revised down to 137,000) is doing exactly what I thought it might - scaring the market into the idea that the Fed could very well hike into a slowdown, and cause a recession...
Don't forget how assets, and their #Deflation risks, are priced in US Dollars. A rate hike = #StrongDollar Deflation of anything commodity/debt linked, in Dollars."
58% of TIF's sales come from products that contain diamonds. Nearly all of TIF's sales come from products that contain either Gold, Silver, or Platinum. There are few retail stocks that could see more risk in this current late cycle economy than TIF. Next year's estimates are sitting at $4.54. We think an optimistic number is $4.25. If our Macro team's bearish call plays out according to plan, TIF will be lucky to earn $4.00.
To view our analyst's original report on Restoration Hardware click here.
Restoration Hardware (RH) hit all-time highs this week, but this story is far from over. We think RH will earn close to $11 per share in 3 years, which compares to the consensus estimate of just over $6. We estimate that the stock is worth $300.
The square footage component is well known, but we think people are missing…
- The productivity and market share that we’re likely to see from each new store,
- How scalable this business model is without commensurate capital investment,
- The leverage we’re likely to see is below-market real-estate deals being struck today and that should begin to impact the P&L.
Additionally, this week RH opened its first dedicated Modern store on Beverly Boulevard in LA. The 18,000 square foot store will feature product exclusively from the new Modern line. It’s likely that RH will test a few of these standalone Modern concepts in appropriate markets, think LA, Miami, and New York.
It’s also likely that the concept will prove to be viable as a stand-alone. The punch line there is that RH has a number of new concepts which it has already unveiled, and some yet to be announced that could justify a standalone door, meaning we are likely to see less legacy store closures than most on Wall Street think.
RH Modern LA Store
To view our analyst's original report on Zimmer Biomet click here. Below is an update from Healthcare analyst Tom Tobin:
While our negative thesis is playing out in typical, slow motion fashion in the data, the stock action across Healthcare has been far more volatile.
For Zimmer Biomet Holdings (ZBH), this meant trading from a high of $121.84 in March to a low of $88.77 in October. Fundamentally, trends did not deteriorate nearly as fast, so on the margin a bounce to $108 is to be expected. Looking forward we are seeing the data to support that medical consumption slows dramatically as we grind into 2016.
Today’s employment report is beginning to show signs of weakness in Healthcare employment trends. For context, we have been able to map growth in Healthcare employment to the sales growth across the S&P 500 Healthcare Index, and the trend has been extremely strong, so strong that the month over month gain in June 2015 was 2.9 standard deviations above the average since 2007. Since it can’t get any higher than 3, we’d call that a peak and be pretty comfortable saying so.
Earlier this week, we updated a few of our #ACATaper charts and saw the first indication that the elevated consumption of the newly insured is finally rolling over. Lastly, when HCA and the other hospitals reported Q315 admissions numbers, they are all showing signs of slowing. The slowing impact is catching up to ZBH as we’ve noted before; US Knee Revenue declined -1.8% in 3Q15.
This afternoon I am speaking with a radiologist to cover a number of topics. As it relates to ZBH, the #ACATaper should be particularly painful for imaging. MRI, CT, mammography, are all highly concentrated in the age group where the ACA had it’s biggest impact. If we are right on the #ACATaper, I would expect to hear scan volume is slowing, which will also mean anything else that accelerated 2H14 and 1H15, knee replacement surgery included, will be slowing even further the next several quarters.
TLT | EDV | JNK
To view our analyst's original report on Junk Bonds click here.
Jobs report Friday was eventful to say the least.
To sum things up, the expectation for a Fed rate hike was pulled forward which is why we are removing GLD. More deflation from a stronger USD with rates moving higher in the near-term (NOTE: A stronger USD vs. potential more cowbell from Draghi) is NOT good for gold. It is good for a JNK short position.
Current policy makers remain fixated on the jobs market, and this Friday’s report was good on the surface. Here’s the rundown:
- The U.S. added +271K to non-Farm payrolls in October which blew out the expectation for +185K additions (last month’s awful print was revised even lower to +137K additions). Remember that the estimates are useless as the number is near impossible to predict. Keep that in mind.
- Unemployment Rate moved lower to 5.0% for October from 5.1% in September
- Wage growth was a positive surprise as Avg. hourly earnings printed a +2.5% growth rate for October vs. an expectation of +2.3%. The growth rate in September was +2.2%
So, again, on the surface it was a positive report. However, as we’ve emphasized, consumption and labor market strength are staples of an economy that is late cycle. Don’t take our word for it. It’s in the data:
To borrow a small section of the rhetorical Q&A from this morning’s Early Look where we outlined the correct way to analyze the labor market:
A: The NFP number in October needed to match the rate-of-change peak in payroll growth recorded in February. Not going to happen.”
The number was good, but a bucking of the trend in the late-cycle NFP series is unlikely to be optimistic.
The house view is that bonds work either way (rate hike or not). Growth continues to slow, and a rate hike has the potential to pull-forward a recession and flatten the yield curve. In the event this happens, you’ll be happy you held onto your long-bond position.
On the gold front, more deflation and higher rates is not a recipe for a long gold position. Even if the Fed doesn’t hike in December, the deflation risk for the next month, as the world re-positions up for a rate hike, could continue pressuring gold prices. It’s best to stay out of the way.
If you haven’t bought into the #slower-for-longer view, the market is giving you the chance to buy bonds at another lower high… For the 5th time this year. Again, we don’t expect you to take our word for it which is why we show you the data. See the chart below.
There has not been much notable news on General Mills (GIS) as of late. 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.
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.