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Investing Ideas Newsletter

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

Investing Ideas Newsletter - FED cartoon 11.25.2015

 

Happy Thanksgiving Investing Ideas subscribers!

 

We hope you are enjoying your holiday. We have much to be grateful for.

 

It was a big week for our Macro team, with a batch of new economic data confirming our #GrowthSlowing theme (see update on TLT and JNK below). On a related note, we thought you would appreciate the following research piece, "What's Driving Our Bearish Forecasts for Domestic and Global Growth?" It was written by our Senior Macro analyst Darius Dale and recently sent to institutional subscribers. It's an insightful read which lays out our bearish outlook for the U.S. and global economy. 

 

Please note that we added Federated Investors (FII) to the long side and Nu Skin (NUS) to the short side this past week. Our Financials analyst Jonathan Casteleyn and Consumer Staples analyst Howard Penney will send subscribers a full research report next week.   

 

Below are Hedgeye CEO Keith McCullough’s updated levels for each ticker and our analysts' updates on our high conviction ideas. 

LEVELS

Investing Ideas Newsletter - 11 27 2015 2 40 23 PM

 

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

macro UPDATES

TLT | JNK

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

 

All of this week’s domestic economic data came pre-Thanksgiving. Revisions to Q3 GDP and personal consumption on Tuesday were followed by personal income, spending, and core PCE on Wednesday.

 

The rough state in the manufacturing sector needs no further documentation for Investing Ideas subscribers. But it’s the consumption side of the economy that is arguably most important, as its 69% of U.S. GDP. From a rate-of-change perspective, consumption growth decelerated in October, and consumer confidence is waning along-side it. (That's why Growth Slowing=Long TLT)

 

To be clear, the consumption side of the economy had been a point of strength over the last several months. We’re not calling for a crash in household consumption, but the comps (comparison vs. prior reporting period) are important in rate-of-change analysis.

 

The next four quarters of comps for Real PCE growth are the most difficult since Q3 2008 while the next four quarters of comps for CPI are the easiest since the four quarters ended in 4Q11. Simply put, both are headwinds for the consumer and we expect that the consumption component of the economic equation will continue to decelerate. 

 

Let’s review the pre-Thanksgiving economic data:

 

1) Personal Consumption Expenditures (Real PCE) decelerated to +2.7% Y/Y for October after increasing +3.1% in September

 

Investing Ideas Newsletter - 11.27.15 Real PCE

 

2) The Conference Board Consumer Confidence reading dropped to 90.4 from 99.1 in September and is now decelerating on a trending and quarterly basis in addition to this week’s sequential bomb.

 

Investing Ideas Newsletter - 11.27.15 Consumer Confidence

 

We look at every data series on a rate of change basis and then contextualize each series within longer term economic cycles. As you can see in the chart below, upon dissecting the Conference Board Reading for consumer confidence, when confidence begins to break down it happens rather quickly AND it happens at the end of the cycle when growth is slowing, not when it’s accelerating:

 

Investing Ideas Newsletter - 11.27.15 Consumer Confidence Chart2

 

That's why we think the recent round of data bolsters our 2016 recession call. But you won't hear that from anyone else on Wall Street.

LNKD

Editor's note: We added LinkedIn to Investing Ideas on August 3rd. Since then shares have risen over 25% while the S&P 500 has fallen 0.15%.To view the original report on LinkedIn click here. 

 

Our Internet & Media Sector Head Hesham Shaaban has no new update on LinkedIn (LNKD) this week. 

MCD

Editor's note: We added McDonald's to Investing Ideas on August 11th. Since then shares of McDonald's have risen over 16% compared to a 0.2% return for the S&P 500. To view our original note click here.

 

As Restaurants Sector Head Howard Penney wrote right around the time we added McDonald's (MCD), "We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. We are going to be looking at a much different company 1-3 years from now."  

 

"Urgency has been instilled from the top down by new CEO Steve Easterbrook," according to Penney. "This ship is in gear and headed north. 2015 will be the last time this stock is below $100."

WAB

Editor's note: We added Wabtec to Investing Ideas on the short side on September 11. Our call continues to work out very well for subscribers. Since its addition, the stock has fallen 14%. To view our analyst's original note click here.

 

Our Industrials analyst Jay Van Sciver maintains that Wabtec (W) was a beneficiary of both resources-related capital spending (international freight railroads) and the congestion of the U.S. rail system in 2014.  With rail speeds increasing and mining capex falling through the floor, those supports should gradually be removed from this richly-valued stock.

 

The end markets do not look promising for Wabtec. Freight car orders are coming off their all-time highs as backlog does the same per Railway Supply Institute data. Class 1 Railroads are curbing capex spending in the face of slowing freight volumes.  U.S. railroads are now putting equipment into storage.

tif

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

 

Hedgeye Retail Sector Head Brian McGough is staying short Tiffany (TIF) in the wake of the company’s 3Q results. While the market might be blowing off this ugly print, we’re not. TIF will miss again. Simply put, in the absence of 2016 guidance, the consensus will remain too high – likely in the range of $4.30-$4.40. We’re clocking in about $0.30 lower. Is that a huge miss? No. But...

 

1) we also don’t assume a material worsening in the economy in our model, which could push numbers closer to $3.50.

 

2) After last holiday’s blow-up, the Street was at $4.45 for FY15, and now is at $4.02. Not a huge earnings miss by our standards – yet the stock is down 28% year to date.  There’s no reason we can’t, and won’t, see that again.

 

Ultimately, while we have no doubts in the quality of the management team, the reality is that there are no obvious margin levers to offset the declining growth profile in the business, especially amidst increased late cycle risks. The price has come off, but so have earnings. It is trading near a peak multiple on our numbers (18x) on peak margins (21%), and peak earnings that are not likely to grow for 2-3 years. 

W

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

 

Retail Sector Head Brian McGough reiterates his short call on Wayfair (W).

 

As we’ve been saying, Wayfair's total addressable market is much smaller than many investors believe. People (including management) are using numbers like $90bn as an addressable market. That’s just flat-out wrong. We’ve done extensive research on this one, and when all is said and done, we think that the end market is no more than $30bn.

 

To put that into context, that suggests that Wayfair has about a 10% share of its market. That’s 2-3x the share of players like RH and IKEA. There’s absolutely no reason why this should be the case. 

RH 

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

 

Retail Sector Head Brian McGough reiterates his bullish call on Restoration Hardware (RH).

 

We believe that RH is to Home Furnishings what Ralph Lauren is to Apparel and what Nike is to Athletic Shoes. That’s a meaningful statement given that RH has only 3% share of a $140 billion relevant market. 

 

RH is the preeminent brand in the space. We think that RH is in second inning of a game that may ultimately prove to be a double header. We believe 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 see a stock in excess of $300.

ZBH

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

 

Regardless of one's politics or what they think about Affordable Care Act (ACA) the simple reality is that the ACA massively expanded government spending on healthcare. It literally brought millions of new medical consumers into the system. Since its passage, the U.S. Medical Economy has witnessed the largest inflow of new medical consumers (35 million), from exchanges and Medicaid, in the last 30 years. These new consumers carried with them above normal per capita spending.

 

The result? More than $120 billion of new money pumped into the system in a mere 18 months.

 

Let’s put those enrollment figures into historical context. The next best year for increases in the number of insured medical consumers occurred back in 1996 when the U.S. added 3.2 million people to the insured population. In other words, the United States just added 10 times that number in just 18 months!

 

Nothing in history even comes close.

 

In other words, the Affordable Care Act was essentially a massive one-time stimulus — injected squarely into the healthcare sector’s bottom line — and its slowly drying up. Imagine 35 million newly-insured consumers rushing to take advantage of cheaper medicine. The law essentially pulled forward significantly pent-up demand for healthcare. 

 

As you may have already guessed, this is bad news for Zimmer Biomet (ZBH).

GIS

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 this 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. 

ZOES  

"Zoës Kitchen (ZOES) was never a one or two quarter call for us," Hedgeye Managing Director Howard Penney recently wrote.

 

Given the high multiple nature of the stock, it is ultra-sensitive to the volatile market. This stock does not contain style factors that the market likes right now (high-beta, low-cap), so we expected a turbulent ride, but you must stay strong and buy on the dips.

 

This latest quarter for instance was a perfect example. There was nothing wrong with it, besides the comp number missing slightly, and the stock fell 9% immediately in after-hours trading. People that sell on these headlines create great buying opportunities. As Penney wrote following the head-scratcher of a sell-off, "we would be buyers of ZOES on any big down day."

 

Case in point? Shares surged 10% this past week, while the S&P 500 was flat.


Cartoon of the Day: The Rate Hike Is Near

Cartoon of the Day: The Rate Hike Is Near - Rate hike cartoon 11.27.2015

 

Below is an excerpt from a note written by Hedgeye CEO Keith McCullough and sent to subscribers earlier this morning:

 

"This isn’t a typo – rates are down -5bps this week on the 10yr to 2.21% and the Yield Spread continues to compress as every major #LateCycle consumer data point slows. (see consumer confidence and personal consumption data for details); Swiss 10yr new lows at -0.39% this morning too."


Hedgeye's Howard Penney Reiterates His Shake Shack Short Call | $SHAK

Takeaway: SHAK shares still have significant downside ahead.

Hedgeye's Howard Penney Reiterates His Shake Shack Short Call | $SHAK - burger

 

For the record, veteran Hedgeye Restaurants analyst Howard Penney has been bearish on Shake Shack (SHAK) since it went public in February.  In a "mince-no-words" moment back in May, he wrote:

 

“The Shake Shack charade is over. And I mean over and done. It’s just a matter of time.”

 

Back when those prescient words succinctly outlined our short call six months ago, shares of the burger chain were approaching what would ultimately be their all-time high. Since then, SHAK is down 35% and off 51% from its May high.

 

Here’s the chart. It's not pretty:

 

Hedgeye's Howard Penney Reiterates His Shake Shack Short Call | $SHAK - shak chart 2

 

Penney has maintained his short call on SHAK since originally penning his thoughts back in March. Here are a few interesting excerpts from his March research note:

 

“For the most part, the SHAK growth story (business model) is predicated on the view that what works well in NYC will work well in the rest of the world… The bull case for the stock centers on the brand’s unique beginnings and its “cult-like” status, which sets it apart from other better-burger operators… We’ve seen many “cult-like” companies come and go and the vast majority of these stories have ended poorly.”

 

In other words, the company management has extrapolated its initial success in New York City to a growing base of locations in other cities. But outside Manhattan, Penney continues, its average restaurant generates significantly slimmer margins because the brand awareness isn’t as strong.

 

“The SHAK bears, such as us, argue that new units in dispersed markets typically experience lower average unit volumes and opening-related inefficiencies, such as higher labor costs. In addition, we question whether or not there has been enough investment in G&A to have the necessary resources to work through these inefficiencies by the second or third month.

 

The bottom line is that, for us, there is a very good probability that SHAK begins opening up some new units that fall short of the Street’s expectations.”

 

Here's Penney and analyst Shayne Laidlaw in their most recent SHAK research note:

 

"... Instead of taking the conservative approach of building out its new units with a geographic concentration that allows for SHAK to maintain economies of scale and building brand awareness, management has gone the route that has been the death of nearly every concept that has tried."

 

Bottom line? We haven't changed our thinking on the stock. Penney sees 40% downside from here.

 

Look out below.


Daily Trading Ranges

20 Proprietary Risk Ranges

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NUS: Adding Nu Skin to Investing Ideas (Short Side)

Takeaway: We are adding Nu Skin (NUS) to Investing Ideas.

Editor's Note: Hedgeye Managing Director Howard Penney will send subscribers a full research report next week explaining our bearish thesis on the stock. In the meantime, below is a note written by CEO Keith McCullough.

NUS: Adding Nu Skin to Investing Ideas (Short Side) - nuskin

 

"... Nu Skin recently released detailed information surrounding VitaMeal sales and profitability. The new information they provided conflicted with the information they gave shareholders on the 3Q15 earnings call. 

 

Clearly, by putting out this new information, management is trying to calm the skeptics about the issues surrounding VitaMeal. Unfortunately, the new information sheet provided by the company only raised more questions about VitaMeal than it answered. 

 

Now one of the biggest concerns we see coming out of this new information is where did all the money go?  Which is arguably a bigger issue than we saw rising out of the VitaMeal controversy originally. Now, the original concerns are still there, they are just further compounded by this additional question.

 

Howard Penney reiterates the SELL call, on green.

KM"


[UNLOCKED] Keith's Daily Trading Ranges

Editor's Note: We've made some enhancements to Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough.

 

Subscribers now receive risk ranges for 20 tickers each day -  the last five are determined by what's flashing on Keith's radar screen and what tickers subscribers are asking about. Click here to subscribe.

 

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.29 2.18 2.23
SPX
S&P 500
2,025 2,109 2,088
RUT
Russell 2000
1,139 1,203 1,188
COMPQ
NASDAQ Composite
5,018 5,182 5,116
NIKK
Nikkei 225 Index
19,287 20,049 19,786
DAX
German DAX Composite
10,826 11,384 11,320
VIX
Volatility Index
13.92 20.11 15.19
DXY
U.S. Dollar Index
99.19 100.21 99.83
EURUSD
Euro
1.04 1.07 1.06
USDJPY
Japanese Yen
122.02 123.73 122.58
WTIC
Light Crude Oil Spot Price
40.18 43.64 43.20
NATGAS
Natural Gas Spot Price
2.21 2.39 2.29
GOLD
Gold Spot Price
1,060 1,080 1,070
COPPER
Copper Spot Price
1.98 2.16 2.04
AAPL
Apple Inc.
111 120 118
AMZN
Amazon.com Inc
635 688 675
PCLN
Priceline.com Inc.
1,213 1,312 1,240
VRX
Valeant Pharmaceuticals International, Inc.
66.61 95.40 87.45
DIS
Walt Disney Co.
115 122 118
MCD
McDonald's Corp.
110 115 113

 

 


China, Oil, Yields

Client Talking Points

China

China got smoked for a -5.4% drop in Shanghai (-1.9% in Hong Kong) after reporting that Industrial Profits slowed to -4.6% y/y (vs. -0.1% prior) and that they have sketchy brokers – reminder: Chinese demand is not bouncing.

Oil

Black Friday sales in WTI and Gold, deflating another -1.7% and -0.7%, respectively – don’t forget that with the Fed hell bent on raising into a slow-down that USD Up (rates down this week) #Deflation Risk remains as obvious in late November as it was in late July.

Yields

That wasn’t a typo – rates are down -5bps this week on the 10yr to 2.21% and the Yield Spread continues to compress as every major #LateCycle consumer data point slows (see consumer confidence and personal consumption data for details); Swiss 10yr new lows at -0.39% this morning too.

Asset Allocation

CASH 68% US EQUITIES 3%
INTL EQUITIES 5% COMMODITIES 0%
FIXED INCOME 18% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MCD

MCD is reducing G&A by $500 billion compared to the $300 million target announced in May the vast majority of which they expect to realize by the end of 2017.

 

Expectations going forward are for system sales to grow faster than G&A. The incremental savings are primarily derived from savings coming from a more heavily franchised and less G&A intensive structure; streamlining of corporate and former Area of the World organizations and realizing greater efficiencies through the global business services platform. The G&A savings represent roughly a 20% reduction off of the G&A 2015 base of $2.6 billion.

 

Another big shift is that MCD is now aiming to refranchise 4,000 restaurants by the end of 2018, with mostly all of them to take place in the high-growth and foundational segments.

RH

Below are two callouts from this Thursday's Willams-Sonoma (WSM) third quarter earnings print as it relates to Restoration Hardware (RH). RH will report earnings in early December.

 

West Elm – i.e. the only concept within the WSM family of brands that is growing square footage put up a 15.7% comp in the quarter which equated to a 40bps acceleration on a 2yr basis sequentially. The concept has always been a good bellwether for RH from a directional standpoint. The consumer/concept are much different. West Elm productivity is in the $800/sq.ft. range compared to RH at $3,300 (inclusive of e-comm) in the same size box. But it’s the only concept growing square footage. We are modeling a divergence in 3Q15 as RH pushed its growth into 2H from 1H with the release of two new concepts this Fall (Modern and Teen).

GM – was down 110bps in the quarter, with merch margins relatively flat offset by dilution from International franchise growth and increased shipping expense as WSM continues to iron out its inventory position from the West Coast port contract dispute. It's important to mention the contract dispute because it was resolved nine months ago (and yet the company still talks about it). On the shipping front, new rate hikes at FedEx and UPS haven’t hit the P&L, so this was all self-inflicted. Each of the negative drivers on the GM line appear to be unique to WSM and shouldn’t be contagious to a name like RH. 

TLT

The long bond position is taking some heat with the rate hike fears, but that’s why you’re short JNK on the other side of it. Deflation and increasing rate hike expectations are the nemesis of poor credit. As mentioned last week, it’s called spread risk, and this leverage is fueled by low rate policy.

 

Since the Fed turned hawkish, bonds are down, rates have risen, and deflation has re-commenced. Admittedly, long-term treasuries haven’t worked. TLT is down -2.0% over the last month; BUT, if you’ve followed us with our short JNK call, that’s down -3.4%.

Three for the Road

TWEET OF THE DAY

This has been one of the busiest weeks of US and Global economic data in Q3

@KeithMcCullough

QUOTE OF THE DAY

"To be the man, you have to beat the man!"

-Ric Flair

STAT OF THE DAY

Brett Farve threw for 71,838 yards during his NFL career.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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