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: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more