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Cartoon of the Day: REPENT!

Cartoon of the Day: REPENT! - RussHELL cartoon 01.13.2016

 

"Russell 2000 #Crash continues today at -22% vs. July Old Wall #Bubble high," Hedgeye CEO Keith McCullough wrote earlier today


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


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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.


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

 

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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!

 


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