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FL: Adding Foot Locker to Investing Ideas (Short Side)

Takeaway: We are adding Foot Locker to Investing Ideas today.

Stay tuned. We will send out a full analyst report outlining our high-conviction short thesis early next week.

 

In the meantime, here is a brief excerpt from a research note sent to institutional subscribers from Retail analyst Brian McGough on FL:

 

"We remain confident that Foot Locker will prove to be one of the best multi-year shorts in retail. The company is likely to earn about $4.20 this year, which we think will prove to be the high water mark in this economic cycle.

 

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 $61? 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)."

 

FL: Adding Foot Locker to Investing Ideas (Short Side) - footlocker


ZOES: We Are Removing Zoës Kitchen From Investing Ideas

Takeaway: Please note we are removing Zoës Kitchen (ZOES) from Investing Ideas

Shares of Zoës Kitchen (ZOES) have had a tough run since we added it to the long side of Investing Ideas this summer. While we've had more than our fair share of winners here, sometimes you have to acknowledge when it's time to move on.

 

The underperformance boils down to style factors. ZOES is a high beta, low cap name both of which are out of favor. According to Hedgeye CEO Keith McCullough, “I don’t want our individual subs wearing a small cap exposure into a recession, no matter how good the story is.” And, as he noted recently in the Early Look

 

  1. High Beta Stocks lost another -8.9% week-over-week and are -17.6% in the last 6 months
  2. Small Cap Stocks lost another -6.9% week-over-week and are -17.3% in the last 6 months 

 

ZOES is caught in this perfect storm.

 

Bottom Line: While our veteran Restaurants analyst Howard Penney remains very bullish on the long-term growth prospects of Zoës Kitchen, with the Russell 2000 currently in #Crash mode, the macro environment is turning a blind eye to the company at the moment.

 

ZOES: We Are Removing Zoës Kitchen From Investing Ideas  - zoes


FLASHBACK | McCullough: 'The Most Obvious Slow-Moving Trainwreck I've Ever Seen In My Career'

Don't say he didn't warn you. 

 

During this recent exchange on Fox Business, Hedgeye CEO Keith McCullough colorfully explains why we remain bearish on both the stock market and economy. For the record, we've been bearish on U.S. equities since July.


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Lazard (LAZ) | Value Trap - Best Ideas Call REPLAY

Takeaway: We hosted a Best Ideas conference call yesterday on our ongoing Short recommendation on Lazard (LAZ). Our replay is enclosed.

Best Ideas Video Replay Below

 

Best Ideas Call Replay HERE

Best Ideas Call Materials HERE

 

1.) Our main contention is that the Street is ignoring warnings signs of a high water mark in M&A including rising private equity participation levels and also all-time highs in consideration value. Both metrics last peaked in 2007. In addition, the constant rise of corporate credit costs from mid-2015 to current day has widely referenced Moody's indices higher by over 100 basis points. Our research shows that a move of this magnitude has historically impacted M&A by -20% on an annual basis.

 

Lazard (LAZ) | Value Trap - Best Ideas Call REPLAY - chart 2

 

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2.) The firm's asset management business is the crown jewel of emerging market (EM) and non-U.S. international investing and the company is riding the wave of successful new product introductions in strategic equity and infrastructure. That being said the firm's EM exposure is under-stated and we estimate that 55% of assets-under-management, and not the stated 30%, is a more accurate picture of the company's absolute EM exposure (when going fund by fund and including products in Global and Multi-regional). Lazard Asset Management has never sidestepped an EM melt-down, experiencing both negative growth and also market depreciation. In the '02-'05 EM cycle, the division experienced over -4% decay rates and market depreciation in various years of up to -10%. 

 

Lazard (LAZ) | Value Trap - Best Ideas Call REPLAY - chart7

 

Lazard (LAZ) | Value Trap - Best Ideas Call REPLAY - chart8

 

Lazard (LAZ) | Value Trap - Best Ideas Call REPLAY - chart9

 

3.) Street estimates are unbelievably complacent in our view with numbers that completely ignore the hyper-cyclicality of the advisory and asset management businesses. If you "give" the firm the best of all worlds, the 2015 M&A revenue environment; the record restructuring revenue environment of 2009; and the high water mark in asset management in 2014, those revenues tally $2.68 billion creating EPS of $3.79. The Street currently is at $2.78 billion in top-line for 2017 on EPS of $4.01 with '18 at $2.82 billion and $4.40. For 2016, we think the company will earn under $3 in earnings, some -20% below the Street. Our base case estimate is the stock is worth $30 per share on 10x our $3 EPS estimate for '16. Our bear case if M&A activity rolls over by -20%, is a $22 stock at $2.20 in earnings at a 10x multiple.

 

Lazard (LAZ) | Value Trap - Best Ideas Call REPLAY - chart10

 

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Lazard (LAZ) | Value Trap - Best Ideas Call REPLAY - chart12

 

Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


FLASHBACK: Why We Advised Short Twitter | $TWTR

Takeaway: Just because we like using Twitter, doesn't mean we like the stock.

There's a good chance if you're reading this right now you came here via Twitter. For the record, we are power users of Twitter here at Hedgeye and remain big fans of its platform. That said, we've arguably been the biggest bear on the stock since it went public in 2013.

FLASHBACK: Why We Advised Short Twitter | $TWTR - twitter cartoon 04.29.2015

Fast forward to today... Twitter (TWTR) is hitting all-time lows. It's down over -50% since our Internet & Media analyst Hesham Shaaban made his original short call before the IPO.  

 

Here's a flashback to 2013 where Shaaban lays out his original bearish thesis. (It was a while ago, when Wall Street was still bullish, and we still had the old school HedgeyeTV set design). You can also click here to read an excerpt from his most recent institutional research note on TWTR.

 

Enjoy!

 


[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown

Takeaway: All active categories except muni bonds saw outflows in the 5 days ending Dec 30th while investors favored passive products and money funds.

Editor's Note: This is a complimentary research note which was originally published January 7, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

 

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Most active products finished 2015 with a dull thud in the 5 days ending December 30th. All categories but tax-free bonds saw outflows during the last week of the year. Domestic equity funds again bled out another $2.9 billion in the final week of the year, ending 2015 with their worst annual outflows on record, losing -$172.2 billion. This compares to the +$144 billion subscription for equity ETFs as the shift from active to passive continued last year. In fixed income, taxable bond funds lost -$6.8 billion in the last week as investors digested the new more active Fed policy. Taxable bonds in aggregate had a rare annual redemption in '15 losing $40 billion last year. Since 2007, only 2013 resulted in an annual redemption in the taxable bond category.

 

Finally, with markets shuddering, investors seeking safety shored up +$16 billion in money market funds, bringing the 4th quarter money market inflow to +$90.1 billion following the +$54.4 billion in subscriptions during the 3rd quarter. 2015 finished with the first annual money fund inflow since 2008 with an annual tally of +$26 billion in cash being moved to the sidelines. The first annual cash increase this cycle is reminiscent to the cash builds of 1999 and 2006 with investors having overallocated to risk assets and then reversing to safety. Overall there is a $1 trillion opportunity for leading cash managers to collect lost funds that have been allocated to stocks and bonds over the past 7 years.


[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown - ICI1 large 1 13

 

In the most recent 5-day period ending December 30th, total equity mutual funds put up net outflows of -$6.0 billion, trailing the year-to-date weekly average outflow of -$1.5 billion and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund withdrawals of -$3.1 billion and domestic stock fund withdrawals of -$2.9 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 8 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net outflows of -$4.6 billion, trailing the year-to-date weekly average outflow of -$462 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds contributions of +$2.2 billion and taxable bond funds withdrawals of -$6.8 billion.

 

Equity ETFs had net subscriptions of +$5.5 billion, outpacing the year-to-date weekly average inflow of +$2.8 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$1.9 billion, outpacing the year-to-date weekly average inflow of +$1.0 billion and the 2014 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:

 

[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown - ICI2

 

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[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown - ICI4

 

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Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown - ICI12

 

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Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown - ICI7

 

[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors seeking safety contributed +3% or +$171 million to the long treasury TLT ETF.

 

[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown - ICI17

 

[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$2.2 billion spread for the week (-$520 million of total equity outflow net of the -$2.7 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$741 million (more positive money flow to equities) with a 52-week high of +$20.5 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown - ICI11 


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