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Best Ideas Call REPLAY | WisdomTree (WETF) - Not So Smart Beta

Takeaway: We hosted our latest deep dive BlackBook presentation yesterday on WisdomTree. The call replay and relevant materials are enclosed.

Click HERE to watch the replay of this presentation. 

Best Ideas Call REPLAY | WisdomTree (WETF) - Not So Smart Beta - WETF BlackBook invite

Click HERE to listen to the audio replay. Click HERE to access the assosciated slides. 

 

The Wisdomtree business is a very good one that has been smartly launched to gather assets in the market share shift from mutual funds to ETFs. That being said however, expectations are sky high for this small cap company and the stock has substantial growth to backfill to grow into its near 30x forward earnings multiple. We are currently forecasting earnings over -20% below the Street for 2017 and see downside risk in shares.

 

Our main contention is that the important international hedged equity products have a beta construction weakness and actually underperform local benchmarks in local currency:

 

Best Ideas Call REPLAY | WisdomTree (WETF) - Not So Smart Beta - WETF 2

Best Ideas Call REPLAY | WisdomTree (WETF) - Not So Smart Beta - WETF 3

 

The proposition then becomes that this benchmark underperformance has to be made up by the firm's rolling currency hedge. Historically, the hedge has consummed the local underperformance however this is risky considering that across cycle there are more instances than not of local currency exposure actually stabilizing foreign equity returns:

 

Best Ideas Call REPLAY | WisdomTree (WETF) - Not So Smart Beta - WETF 4

Best Ideas Call REPLAY | WisdomTree (WETF) - Not So Smart Beta - WETF 5

 

The foreign FX products require liquid and favorable interest rate differentials in the non deliverable forward (NDF) market, which mean that only a few currencies and hence geographies qualify for FX hedged products. Currently only the UK pound, the Euro, the Yen, and the Swiss Franc would be available for FX hedged products. Thus, because the company already has product in the Yen and Euro, the firm has likely already launched it most successful funds in our view:

 

Best Ideas Call REPLAY | WisdomTree (WETF) - Not So Smart Beta - WETF 6

Best Ideas Call REPLAY | WisdomTree (WETF) - Not So Smart Beta - WETF 7

 

There is a lot of wood to chop to backfill the Street's high growth expectations. The stock sports nearly a 30x P/E before evening thinking about that Consensus is some 20% too high for 2017.

 

Best Ideas Call REPLAY | WisdomTree (WETF) - Not So Smart Beta - WETF 8

Best Ideas Call REPLAY | WisdomTree (WETF) - Not So Smart Beta - WETF 9

 

 

Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 

 

 


FL | THIS IS BAD

Takeaway: e-commerce trends appear to be bifurcating further between Nike and FL as we head into year-end. FL remains Best Idea Short.

Please…somebody explain to us how the charts below are not really bad for FL. Specifically, the online data we track – from a number of sources such as Alexa, Compete, Google, and Comscore as well as our own analysis – shows a continued slowdown in Foot Locker’s online business since the end of the third quarter. This is not just an industry thing, or a category thing. We’re seeing Nike’s web traffic explode to the upside (‘explode’ is a strong word, but when you see the chart you’ll get what we mean), UA and AdiBok tracking well, suggesting that the share shift from traditional retailers to the Brands is taking hold. While the data looks quite ugly for FL, we want to reiterate that this is a fat-tailed transition that won’t play out entirely in a single quarter. But, the negative on-line trends for FL that reared its head in 3Q seems to be carrying into 4Q.

 

As a reminder, FL is at the top of our Best Ideas Short List. While our short thesis goes far beyond a few unfavorable data points, the question around timing has been a big issue for people who agree with our TAIL call, but can’t quite get there over the near term. For many reasons, we think that $4.20 will likely prove to be the high water mark in this economic cycle, and the consensus estimates in years one through three are high by $1-$2 per share. We think that emerging competition from its top vendor, Nike (≈80% of sales), will stifle growth, and leave the company with an earnings annuity somewhere around $3.50-$3.75 per share. Is that worth $64? Not a chance. Not for a company that is Nike’s best off-balance sheet asset. And definitely not when the Street is in the stratosphere approaching $6.00 in EPS (#NoWay). 

 

Importantly, we think people generally misunderstand why the rate of growth between Nike and Foot Locker will be slowing materially. It’s not because Nike hates its largest customer. It’s not because the ‘basketball cycle’ is rolling over (the basketball cycle actually does not exist, at least in the way people think). It is slowing because Nike has largely tapped out its growth inside higher-end US distribution, and simply has to turn to its own DTC platform – which finally exists after nearly a decade of investment. Yes, it used the cash flow from US wholesale growth to fund growth around US wholesale when the time arises. It’s as simple as that. And yes, the time has arisen.  

 

DETAILS

 

TRAFFIC RANK (EX 1): This is primarily made of Alexa data, which shows the year-year change in the web rank for footlocker.com. “Web Rank” is simply a relative measure of footlocker.com’s total traffic by week relative to the average company on the web. Looked at in isolation, the data for a given quarter is rather useless, but on a year/year basis, it becomes quite relevant. Note that FL’s e-commerce growth fell to +29% in 3Q versus +40% in 2Q – marking the first time in two years we saw growth below 30% in this business. The trend in the chart below accurately captured that slowdown. 

 

EXHIBIT 1

FL | THIS IS BAD - FL YOY Traffic Rank Index Change

 

SEASONALITY: It’s important to look at the seasonality of traffic. After all, each retailer has its own cadence on a week to week basis. Our point is that you can’t compare FL vs DKS, as the seasonality of the sporting goods business is different from mall-based athletic retailers. Exhibit 2 shows that we should have seen a notable seasonal upswing in October of 2015, but we really didn’t see much of anything. Just a flatline. The gap between this year and last year is exceptionally tight right now. Too tight.

 

EXHIBIT 2

FL | THIS IS BAD - FL 2014 15 Indexed Traffic Rank

 

BRANDS vs RETAILERS: Exhibit 3 shows the performance (web traffic) of FL vs. a composite of the brands. While all major brands are on a healthy trajectory, Nike makes up for the biggest upswing. Needless to say, look for Nike to put up a big e-commerce number when it reports next week.  Nike will still talk about how they still love their wholesale model, which they do. But that does not mean that they won’t grow around it to put up results shareholders demand.

 

Looked at a different way, Exhibit 4 shows that the traffic spread is growing at an accelerating rate and is sitting at historical peak.

 

EXHIBIT 3

FL | THIS IS BAD - Compete T3M Visitation Trends  FL vs Brands 

 

EXHIBIT 4

FL | THIS IS BAD - Compete Visitation Spread  FL vs Brands

 


Real Conversations: A Paradigm Shift In Private Equity

Is the cloistered world of private equity opening up to more modest investors? In this recent Real Conversations interview, Hedgeye CEO Keith McCullough sits down with former Goldman Sachs partner Lawrence Calcano, a managing partner of the private equity platform iCapital Network. Calcano discusses how his firm’s technology offers private equity funds to wealth managers, registered-investment advisors and family offices who wouldn’t otherwise have enough scale to access them. 


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Cartoon of the Day: Meow!

Cartoon of the Day: Meow! - Deflation cartoon 12.17.2015

 

"Investors who haven't understood our #Deflation call (for the past 18 months) got sucked into yesterday's transitory stocks market rally," Hedgeye CEO Keith McCullough wrote earlier today.


Meltdown: Jobs Market In U.S. Energy States

Takeaway: Energy jobs are sliding off the cliff into the abyss. Our energy tracker spread broke to a new higher high in the latest week.

Editor's Note: Below is an excerpt from an institutional research note from our Financials team today with an update to their previous note on energy-dependent state jobless claims. For more information on how you can become a subscriber please send an email to sales@hedgeye.com.

 

Meltdown: Jobs Market In U.S. Energy States - Oil cartoon 12.08.2015

 

The jobs market in energy states remains in accelerating meltdown. With energy companies set around year end to lose the last remaining cushion of their previously established hedges, job cuts in the 8 states with the most energy-dependent economies (AK, LA, NM, ND, OK, TX, WV & WY) are blowing out versus the rest of the country.

 

The chart below shows that in the week ending December 5, the spread between the indexed series of claims in energy states versus the indexed series of claims in the country as a whole increased from 47 to 51. That is the largest the spread has been since our analysis' May 2014 starting point. 

 

Meltdown: Jobs Market In U.S. Energy States - Claims18 large

 

Last week, we were asked why we didn't include the state of Colorado in our 8-state basket. Our response was that our basket was borne out of this article, which showed the 8 states with the highest energy-related employment as a % of total as of 2011.

 

We were then sent an interesting paper detailing the exposure of Denver to the oil and gas industry. In a nutshell, 11% of downtown Denver's workforce is employed in the oil and gas industry at an average level of compensation roughly 3x the rest of the workforce. From 2005-2014, one-third of the new jobs created in the downtown Denver area were oil and gas jobs. The point here is that while these 8 states represent some gauge of the fallout from energy's collapse, there are many other areas that are being impacted.

 

Apart from the carnage in energy claims, national claims data continues to show that the economy is late stage and the Fed's rate increase yesterday is unlikely to extend the duration of the recovery. 


INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES

Takeaway: Energy jobs are sliding off the cliff. Our energy tracker spread broke to a higher high in the latest week.

Below is the breakdown of this morning's labor data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims1 2 normal

 

ENERGY JOBS

The jobs market in energy states remains in accelerating meltdown. With energy companies set around year end to lose the last remaining cushion of their previously established hedges, job cuts in the 8 states with the most energy-dependent economies (AK, LA, NM, ND, OK, TX, WV & WY) are blowing out versus the rest of the country. The chart below shows that in the week ending December 5, the spread between the indexed series of claims in energy states versus the indexed series of claims in the country as a whole increased from 47 to 51. That is the largest the spread has been since our analysis' May 2014 starting point. 

 

Last week we were asked why we didn't include the state of Colorado in our 8-state basket. Our response was that our basket was borne out of THIS article, which showed the 8 states with the highest energy-related employment as a % of total as of 2011. We were then sent an interesting paper detailing the exposure of Denver to the oil and gas industry. In a nutshell, 11% of downtown Denver's workforce is employed in the oil and gas industry at an average level of compensation roughly 3x the rest of the workforce. From 2005-2014, one-third of the new jobs created in the downtown Denver area were oil and gas jobs. The point here is that while these 8 states represent some gauge of the fallout from energy's collapse, there are many other areas that are being impacted. If you'd like a copy of the paper (PDF) just let us know.

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims18 normal

 

Apart from the carnage in energy claims, national claims data continues to show that the economy is late stage and the Fed's rate increase yesterday is unlikely to extend the duration of the recovery. 


THE BIG PICTURE

Some might argue that, as the first chart below shows, a cycle usually has significant track left following its first rate hike. However, while the Fed announcement this week marks the first increase in the fed funds rate this cycle, the Fed has actually been tightening policy for some time, ostensibly since late 2013 when it began tapering QE3. The Fed actually quantifies the effect of the current cycle's non-traditional policy action and the tapering thereof in the second chart below with a measure called the Wu-Xia Shadow Fed Funds Rate (HERE). The Shadow Rate is basically the rate the Fed has set by implementing non-traditional policies. The following chart shows that we have been in a rising rate environment since April, 2014 and the effective Fed Funds rate has risen ~300 bps to 0% from -3%. This is one of the main reasons why a) growth is now slowing and b) the cycle is late stage.

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims13 normal

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims12 normal

 

The Data

Initial jobless claims fell 11k to 271k from 282k WoW as the prior week's number was not revised. The 4-week rolling average of seasonally-adjusted claims fell -0.25k WoW to 270.5k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -7.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -8.3%

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims2 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims3 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims4 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims5 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims6 normal  1

 

INITIAL JOBLESS CLAIMS | ENERGY CARNAGE CONTINUES - Claims7 normal  1

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


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