The Economic Data calendar for the week of the 18th of January through the 22nd of January is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.
Takeaway: Current Investing Ideas: TIF, JNK, NUS, W, FL, WAB, MDRX, ZBH, FII, XLU, MCD, RH, GIS & TLT
Below are our analysts’ new updates on our fourteen current high conviction long and short ideas. As a reminder, if nothing material has changed in the past week which would affect a particular idea, our analyst has noted this.
Please note that we added the Allscripts Healthcare Solutions (MDRX) and Foot Locker (FL) to the short side of Investing Ideas last week. We will send a full research report to subscribers on Foot Locker early next week. Please note that we also removed Zoës Kitchen (ZOES). Hedgeye CEO Keith McCullough’s updated levels for each ticker are below.
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.
We added Utilities (XLU) on the long-side last Friday as the market continued to pummel everything we haven’t liked (high debt, high beta, and small-cap stocks leveraged to inflation expectations) – Utility stocks are low-beta, slow-growth bond proxies which is why they are by far the best relative performer YTD.
XLU is outperforming the S&P 500 by +7% and remains flat on the year. Friday’s large swath of data echoed what we have been saying for a while now on the deflationary risk of an industrial recession:
To exemplify the depth of the current industrial recession, we quoted the CEO of Fastenal, Dan Florness in his introduction to the company’s earnings call on Friday. This quote comes from a guy who’s in the trenches:
“In the first quarter of this year, 72 of our top 100 customers grew. In the second quarter, that dropped to 63. In the third quarter, that dropped to 56. In the fourth quarter, that dropped to 49. So in the fourth quarter, half our top 100 customers grew and half contracted. In the month of December, to amplify that a little bit, 41 of our top 100 customers grew and 59 contracted.
We sell across the continent and around the planet; most of our business is in North America. And we sell to a lot of different industries. And when you start looking through the list, a lot of names that you would recognize stand out and you can see the pain they're feeling in their business.”
More on the depressed state of the producer. Deflationary PPI continued its march downhill with December reported numbers:
As mentioned in last week’s newsletter, with growth continuing to slow and volatility breaking out to the upside across asset classes, we expect the unwinding of a record amount of corporate credit leverage to continue. We’d put that deleveraging in the third or fourth inning currently. Credit spreads will continue to widen.
That's why you're long TLT and short JNK.
To view our analyst's original report on Nu Skin click here.
Nu Skin (NUS) continues to be a best idea SHORT for us in the consumer staples sector. They were down at the ICR conference in Florida, but did not provide a webcast to their presentation.
We found this to be odd and deceiving. Upon reaching out to IR, they said they didn’t feel the need to webcast because they were just showing slides from a previous presentation. We heard the room was pretty empty.
To view our analyst's original report on Federated Investors click here.
What is the long-term thesis behind our Federated Investors (FII) long call?
Over the past 7 years, more than $1 trillion has been redeemed in money funds and reallocated to stock and bonds, sourcing the big bull market in risk assets. With the economic cycle eclipsing 72 months, we think it is time to get defensive.
In addition to improved profitability from even marginal rate hikes, this $1 trillion becomes a longer-term opportunity for all money fund markets as investors reallocate and back out of risk assets in the latter stages of this market/economic cycle.
With roughly 9% market share in industry money fund assets, FII will recapture these funds as they come back out of stock and bond markets. We have modeled +$200 billion in positive money flow for the money fund industry in 2016 and +$400 billion for 2017. This assumption reflects some conservatism allowing for some funds to remain outside the money fund channel.
To view our analyst's original note on Wabtec click here.
We believe freight rail equipment spending is just starting to enter a multi-year downturn. It’s a cyclical market, but Wabtec (WAB) shares remain priced for growth. WAB's peak margins also aren’t a great sign for longs. Here are two key charts:
To view our analyst's original report on Tiffany click here.
Tiffany (TIF) is scheduled to report holiday sales on Tuesday Jan 19th and at the same time should give preliminary guidance for FY 2016. We still think that earnings expectations for 2016 are 5-10% too high. The stock hit new 52-week lows mid-week then rallied slightly into the weekend.
We suspect the strength versus the down market may have been due to shorts covering into this sales announcement, booking some gains with the stock down 20% over the last month.
To view our analyst's original report on Wayfair click here.
Wayfair (W) presented at a retail conference this week, and as usual CEO Niraj Shah delivered a compelling message. However, we maintain our negative position on the company's business model as management is building the infrastructure for a total addressable market 5x larger than it really is.
Also, we firmly believe mono-channel does not work. Restricting sales to just the internet in this category is just as bad as a retailer who focuses 100% on physical stores.
Both are highly likely to fail over time.
To view our analyst's original report on Restoration Hardware click here.
On Restoration Hardware (RH), we’re as confident as ever that NEAR-TERM earnings expectations are completely in check, and that long-term earnings are too low. And we’re as sure as we can be that we’re not about to be blindsided by any kind of press release from the company about management, business trends, or promotions.
We’re now looking at historically peak short interest (33% of float), and the multiple setting a new historical trough (16x). Put another way, we’re talking a 16x multiple for a 40% EPS grower.
Obviously, the market thinks we’re wrong in our earnings math. We’re absolutely not ignoring a material slowdown in the economy or Hedgeye’s bearish Macro view. We simply think that RH should still do better than the consensus in that environment, and that’s what we’re focused on given the massive 40% correction since November, and 20% month-to-date in January.
In the end, we think the risk is isolated to the multiple, not the consensus earnings, and that’s what matters most at a 16x p/e with 33% short interest.
To view our original note on McDonald's click here.
McDonald's (MCD) is down just -2.5% YTD. That is impressive considering what the market is doing around it. This stock continues to be Howard Penney’s top idea in the Restaurants sector. Looking out into 2016 we are looking forward to them having a full year of All-day Breakfast and their McPick 2 menu.
Long investors should be looking forward to that too.
To view our analyst's original report on Zimmer Biomet click here. Here's an update from Hedgeye Healthcare analyst Tom Tobin.
"We listened to an upbeat CEO of Zimmer Biomet (ZBH) present at JPM this week. SYK also made some positive comments which resulted in a brief ortho rally this week. But it didn’t last.
I wasn’t surprised, or terribly concerned, about the short case unwinding here, and that turned out to be a good decision. ZBH’s CEO expressed a lot of optimism about the Biomet integration and the “cadence” of new products in 2016. I think what will be more impactful is the cadence of the US Economy which is already slowing into a rate cycle; not a good combo for employment and what is often a deferrable surgical case.
In terms of the narrative ZBH tells about the upside to their business longer term they used the chart below in their discussion. Up and to the right is good for the population of people over 65 years old, but pay attention to the scale.
The dates range from 2010 all the way out to 2050. If we take the next step and ask what the annual growth rate is in this chart, the answer is +1.9% per year. Since pricing is trending at -2.5%, adding 1.9% population growth yields 0% market growth.
With bundled payments emerging this year (CCJR) in knee surgery, and with more bundles coming next year from CMS, I don’t see that ZBH is in as enviable a position as they claim. Taken together, 1.9% volume, less -2% pricing, less bundled payment pressure, less US and global growth slowing, would mean they really have a difficult task in front of them to grow at all.
They’ll surely cut costs, and grow EPS, but that strategy does not typically yield an expanding multiple and good stock performance.
But we’ll see."
General Mills (GIS) led a $3 million funding round for kale chip maker Rhythm Superfoods. Although this is not a big deal and will most likely never make a strong impact to top or bottom line, it marks a changing in the tide for management thinking. They are making a distinct effort to delve deeper into the natural and organic category which will help them a lot in the long run.
Although the overall market has been atrocious year to date, down roughly -8%, GIS with its low beta, big cap, style factors has held in, down just -5%. We continue to like General Mills as a LONG, especially during the tumultuous times in the market.
We added Allscripts Healthcare Solutions (MDRX) to Investing Ideas this past week. Click here to read our analyst's full stock report.
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Takeaway: One Bright Spot In Retail Sales Print = Home Furnishings. WMT closing Super Centers. First time in 10 years.
One Bright Spot In Retail Sales Print - Home Furnishings
Headline miss ex. autos of 40bps with the discretionary bucket ex food, gas, and auto decelerating on a 1yr, 2yr, and 3yr basis. But, there was one bright spot and that was in Furniture and Home Furnishings which accelerated on a 2yr basis by 240bps against a tough comp in December of 2014.
Let's be clear as it relates to RH. We think the market opportunity for the company as it scales up its store base, expands its category collection and consolidates a highly fragmented market on the top end of the consumption period is much greater than the MSD category growth we saw throughout the year.
But, it does lend some support to category strength in spite of the commentary out of just about every CEO who competes in the space about the highly promotional/competitive environment. It's the 2nd positive data point we've seen since Holiday about strength in the category. Mastercard called out the category as the most positive in its 7.9% retail sales number.
If we look at it over a longer duration, Furniture and Home Furnishing sales are sitting 10% below its 2006 peaks compared to total retail sales which are 15% higher than 2008. We'd be much more concerned about the space if we were sitting at all time highs.
WMT - Walmart announces plans to close 269 stores globally -- 154 in U.S. and 115 abroad
Look at the WMT timeline in 2015 with the benefit of hindsight. Raise minimum wage across the employee base to $10, took earnings guidance to a point where we won't see 2015 earnings levels again until at least FY19. Now the company plans 269 store closures after a previously announced strategic review. 154 of those are in the US, with all of the 102 WMT Express doors being shuttered for good. That leaves 52 Super Center/ Neighborhood Market closures, the most in this economic cycle by far. In fact, WMT hasn't closed a Super Center since FY07 (calendar '06). If you want evidence that the US is at capacity from a square footage perspective, especially in the big box format look no further than this WMT release and, to a lesser extent, the 40 doors M intends to close which is 4x a normal year.
NKE - Nike Reaches $252 Million Deal to Extend Sponsorship at Ohio State
WSM - WILLIAMS-SONOMA LAUNCHES THE RESTAURANT COLLECTION IN PARTNERSHIP WITH FORTESSA TABLEWARE SOLUTION
AMZN - Amazon Receives Ocean Freight License to Ship Packages From China By Sea
AMZN - Amazon Opens New 3500 sq ft Pickup Location at UC Berkeley
VNCE - Vince Names David Stefko Chief Financial Officer
E-commerce fulfillment costs for retailers still rising as UPS, FDX, USPS raise rates
LOW - Lowe's announced today that it's getting ready to hire 46,000 seasonal employees to help with the busy spring and summer season.
TIF - Luxury brand sales are slowing in Hong Kong, Paris
A decline in tourism amid Paris attacks, volatile currencies and political tensions hurt spending in key shopping destinations
AdiBok - CCM Hockey reports 8% increase in equipment business in 2015, 18% sales growth over past 2 years
AdiBok - Designer Ronnie Fieg designs new Adidas shoes -- they are 'doomed'
Takeaway: We are adding MDRX to our Best Idea List as a Short with 30% downside from current levels
Allscripts (MDRX) is a tail Short with 30% downside from current levels.
ADDING MDRX TO BEST IDEAS AS A SHORT
We've schedule a call to review our short thesis for Thursday January 21st, 2016 at 11 AM ET. Contact for further information. An invite with dial-in instructions will be sent to subscribers ahead of the conference call.
We continue to spend a significant amount of time analyzing a dataset that shows us a highly detailed and large list of customers for each vendor down to the physician level. Our work so far has identified several large Allscripts customers who are at significant risk for replacement in coming years.
Now that we know who to target, the workflow is to reach out to speak with key people to confirm the data and collect additional anecdotes about current and future plans around vendor selection, a process that we began yesterday.
While we are only at the starting line with this data process, the information we’ve gathered has already given us greater conviction in our short call. These data sets are huge and we’ll be refining the analysis as we go, so look for more on this as we progress through 2016.
KEY THESIS POINTS
Based on our interactions with investors, it is clear that the Allscripts (MDRX) story is a contentious one and is partially reflected in the short interest. Below is a summary of what we believe to be both sides the debate. While many elements of the bull case are true, we think the fundamental reality is not accurately reflected in the current stock price.
Please call or e-mail with any questions.
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