Here's a video from deep in the Hedgeye vault (check out the old studio). Energy analyst Kevin Kaiser first lays out his short thesis on Kinder Morgan (KMI) with Managing Director Todd Jordan. While Kaiser's short KMI call was clearly a success, we think his hair was the real winner that day. Seriously, check out that flow.
"Did you understand the illusion of growth (inflation)?," wrote Hedgeye CEO Keith McCullough earlier today. "#Deflation risk dominated 2015 returns. Period."
Takeaway: Kaiser stuck to his guns on Kinder Morgan despite overwhelming (and uninformed) criticism.
In case you're new to this story, our Energy analyst Kevin Kaiser was relentlessly attacked for his analysis on Kinder Morgan, first put forth in 2013, by a wide array of supposed "experts." Yesterday, he was vindicated.
Here's an excerpt from today's Early Look written by Hedgeye's Darius Dale:
...Ranging from analytical critiques that at least attempted to poke holes in his analysis to thoughtless ad hominem attacks, the amount of pushback Kevin has received over the past 2+ years regarding his bearish research in the MLP space has been nothing shy of legendary. Maintaining conviction in his analysis was the only thing that allowed him to overcome the rash of criticism that accompanied being the lone bear on a few of the most beloved stocks and management teams in modern U.S. equity market history.
Below is a list of some of the more absurd criticisms levied at his call.
Disclaimer: This list is nowhere near comprehensive.
1) “It turns out we were stubborn and we were right, and Hedgeye was flippant and disrespectful and wrong. We chose to believe in Rich Kinder, and not in his critics, because we believed him when he always said his companies are "companies run by shareholders for shareholders." It looks like it wasn't worth waiting for the market to prove Hedgeye right -- because, alas, when it comes to Kinder Morgan and today's huge bid, it never, ever will be.” – Jim Cramer, “Cramer: Kinder’s Triumph,” 8/11/14.
2) “We proved the doubters wrong the first time around and I anticipate the same result this time... You sell. I’ll buy. And we see who comes out best in the long run.” – Rich Kinder, 1/15/2014.
3) “… Sometime on Tuesday, a 26-year-old man with a fancy title and very limited work experience is going to elaborate claims he made yesterday that the largest US midstream MLP, founded by an industry legend, is “a house of cards... This is modern “investing” at its most pathetic and absurd... There is no need to wait for next week’s presentation, because any credibility contest between Richard Kinder and Kevin Kaiser is unlikely to last long.” – Igor Greenwald, InvestingDaily, 9/6/2013.
4) “At $40 a share, there was little doubt that Kinder Morgan was overvalued, but even with the headwinds ahead of it, it's become seriously undervalued here at $21. And I'm recommending it, as well as buying it myself.” – Dan Dicker, 12/2/2015.
5) “Don't put too much stock in this latest bit of research from Kevin Kaiser and Hedgeye… in truth, the Kinder Morgan companies are well-managed, boast solid assets, and will play a big role in meeting America's future energy infrastructure needs.” – Brendan Mathews, Motley Fool, 9/12/2013.
6) “We believe that the issues raised by [Kaiser] are well known, transparent, and appropriately discounted especially to those following them a long time.” – Credit Suisse analyst John Edwards, 9/12/2013.
7) “Richard Kinder, the CEO of KMI, is a brilliant operator and a brilliant capital allocator. He is a self-made billionaire with a net worth of roughly $9B. This is a company with good economics, great management, and a reasonable valuation. The company is buying back its shares and its warrants. Kinder has come out and said that the company is undervalued.” – Glenn Chan, 1/30/2014.
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Takeaway: Housing demand in November was the strongest month YTD and the first week of December continues that trend.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Today’s Focus: MBA Purchase Applications
The momo in purchase demand continued in the latest week with seasonally adjusted weekly activity holding at 5-year highs and average monthly activity in November finishing at its highest level since mid-2013.
Purchase applications were flat sequentially (+0.05% WoW) at the 228.2-level on the Index with growth decelerating modestly to +28.4% YoY. On a quarterly basis, 4Q is tracking +2.8% QoQ and +24.2% YoY.
The read-through on this weeks data remains largely unchanged relative to the week prior (see: Purchase Apps | New Highs ...& Salt Grains):
Conclusion - The high-frequency data remains hostage to seasonal noise associated with imperfect peri-holiday statistical adjustments and we’re probably observing some measure of demand pull-forward associated with the impending policy rate increase. But, on balance, the 5-week streak of above trend demand suggests the uptick in purchase activity aptly characterizes the underlying reality– if not in magnitude, at least directionally.
About MBA Mortgage Applications:
The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis.
The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.
Joshua Steiner, CFA
Christian B. Drake
Takeaway: It perplexes us how enamored the street is with this name. But it doesn’t have the talent or plan to succeed. No buyer here.
We’re not surprised in the least by this LULU print. We remain convinced that this is a management team that is utterly clueless about what factors will create value for its shareholders. Consider the following points…
- This was the first EPS miss for LULU in 21 quarters. It won’t be the last.
- It was the first time the company failed to produce Cash From Operations since the First Quarter of 2008 – that’s 30 quarters.
- We had the pleasure of listening to a bunch of men talk about cost management, efficiencies, occupancy and air freight as a means to get the company’s Gross Margin back up to the low/mid 50s. Why does this matter? It is a womens apparel company that should be all about growth. Instead it’s run by men who are all about margin – something the street won’t pay for – at least we won’t. This has got to change (and the new female Head of Culture doesn’t count).
- Pushback we get here is that the Yoga category is getting saturated, which LULU has to battle. Ok fair enough. But UnderArmour got saturated in Football, and then proceeded to add another $15bn in market cap as it executed on the mother of all growth plans in the aftermath.
- Nike – which is 15x bigger than LULU is growing consistently and rapidly. Over the past 12 months, Nike added $2.25bn in revenue, while LULU added only $243mm, and grew at a slower rate than Nike. In other words, LULU’s top competitor is adding the equivalent of a LULU ever year. Under Armour’s growth rate is dwarfing LULU’s. Shouldn’t we be hearing about a tight plan to regain market share and rapidly accelerate market growth. We don’t think one exists.
Ultimately, we think LULU will miss again, and again. And then the ‘new’ CEO will likely be fired. Kills us to say that – he’s a nice guy. But just not right for that job in that culture.
Until then, LULU is marching towards $2.50 in EPS with the Street at $3.40. We still think it’s a short.
Prior Note on LULU from 9/10/15
LULU | In Search of TAIL
Takeaway: This qtr (2Q15) was a mess due to factors far beyond financials. LULU isn’t articulating a cogent plan – bc it probably doesn’t have one.
There’s one major reason why we think this LULU quarter was a huge let down -- and it’s not that inventories were up 23 days while Gross Margins missed by 200bps. Nor is it that LULU added $62mm in revenue year over year, but generated $1mm less in EBIT. It’s the reality that this company does not know what it wants to be. Virtually every statement out of management on the call had to do with near-term tactical branding, marketing and product plans. All that is fine. It matters on some level – and definitely matters to small scale moves in the stock in the coming quarters. But that’s what we call TREND (in HedgeyeSpeak that translates to 2-3 quarters out – the near-term modeling horizon). This is where LULU lives, unfortunately.
But LULU needs a change of address. This is an extremely powerful brand in a solid, yet increasingly competitive, space. LULU needs to not only be a great brand, but a great company. Then and only then will it be a great stock. We think management is coasting on the power of the brand, by tweaking a legacy operating plan, blindly opening stores, and hoping that nothing else goes wrong. Hope, however, is not a profitable growth process.
LULU needs to live in the TAIL (which we define as 1-3 years). What we need for real wealth creation with this stock is for a clear, concise strategy that insiders rally around and are paid handsomely to implement. People need to look to $4.00 in earnings power, and believe in it. It’s that same strategy that would result in its CEO standing up and saying things that will make Nike, UnderArmour and Athleta quake in their boots (which used to be the case) – not that they are using ‘Sports Psychology on the Pant wall’. Unfortunately, we truly think that LULU does not have a proactive process to grow its business.
Does The Company Have A Long Term Plan?
Somebody, please, ask virtually anyone in the company if they know their market share in stores and online within an hour’s drive of each store. [Note: our math shows it ranges from 2.5% (Long Island) to 26.7% (Burlington Vt) -- ping us if you want the data]. We don’t think they’ll tell you – because they probably don’t know.
How can a CEO stand up and give credible growth and profitability targets without knowing these basic building blocks? How can they articulate why they don’t have a wholesale model – something that could be a home run for LULU (i.e. sell where the consumer shops)? Even the CFO, who we have/had high hopes for, hasn’t created his own identity with the Street – as he’s following the same script of his predecessor who was pushed out.
All we get from the company as it relates to strategic initiatives are 1) Brand, 2) Community, 3) Innovation, and 4) Guest Experience. The only quantified metric is that LULU will return to a 55% gross margin – something that we don’t think is realistic without meaningful backing by the balance sheet (i.e. more capex to boost profitability). But more importantly, the market is highly unlikely to pay for a passive goal to return to peak profitability when LULU is in a different stage of its growth cycle.
This is a great Brand, for the time being. We really want to get behind this story due to the potential that can be unlocked. But without the backing of a great company – we think this stock is going anywhere but up. We’re glad we pulled the plug in March.
On Fox Business' Mornings with Maria today, Hedgeye CEO Keith McCullough discussed the developing industrial recession, commodity price deflation and the strengthening U.S. dollar, with CLS Holdings CEO David Puth and Fox Business’ Dagen McDowell.
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