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Investing Ideas Newsletter

Takeaway: Current Investing Ideas: TIF, JNK, NUS, W, FL, WAB, MDRX, ZBH, XLU, MCD, RH, GIS & TLT

Investing Ideas Newsletter - Fed Chairmen cartoon 02.03.2016

 

Below are our analysts’ updates on our thirteen current high conviction long and short ideas. If nothing material has changed in the past week which would affect a particular idea, our analyst has noted this. 

 

Please note that we removed Federated Investors (FII) from the long side of Investing Ideas this week. 

 

In case you missed it, click here to watch McCullough's "Macro Overlay" sent exclusively to subscribers on Friday where he covers the profit cycle and our U.S. Recession and Currency War Macro themes. 

 

Updated levels for each ticker follow below.

LEVELS

Investing Ideas Newsletter - 2 5 2016 6 25 20 PM

 

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.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

IDEAS UPDATES

TLT | XLU | JNK

To view our analyst's original report on Junk Bonds click here and here for Utilities

 

Down go growth expectations and down goes the yield curve. That's the latest from Macro markets this week and it plays right into our long Long-Term Treasuries (TLT) and short Junk Bonds (JNK) Investing Ideas.

 

The U.S. 10-Year yield declined another -9bps this week which helped boost TLT +1.1% on the week. In a healthy environment, bonds as an asset class go up in tandem, but JNK lost -0.9% on the week despite a falling yield curve.

 

That’s because we’re NOT in an “all is good” environment. Credit spreads widen in turbulent times. This widening is the alpha-generating opportunity in long TLT, short JNK.

 

In our view, it’s not whether things are “good” or “bad” that matters ... it’s whether things are getting better or worse on the margin. Checking in on earnings season thus far (308 of 500 S&P 500 companies had reported at the time of publishing the chart below), earnings have gone from bad in Q3 2015, to worse in Q4 2015:

  • SALES: down -4.7% Y/Y so far this earnings season
  • EPS: down -6.4%
  • NEGATIVE EARNINGS GROWTH SECTORS: Energy, Materials, Industrials, Consumer Staples, Financials, Info. Technology, Utilities
  • POSITIVE EARNINGS GROWTH SECTORS: Consumer Discretionary, Healthcare, and Telecom

Investing Ideas Newsletter - 02.05.16 chart

 

... And here's what happens when earnings peak and start to roll over. It's just one more chart, among many other indicators that paint the #GrowthSlowing picture. 

 

Investing Ideas Newsletter - 02.05.16 Corporate Profits

 

On the Jobs Report front, labor market data is one of those indicators that also paints the #GrowthSlowing picture. Looking at Friday’s bomb of an NFP report, the point we can’t emphasize enough is that whatever the number could have been (and it was awful on the surface), the year-over-year rate of change in the data series has peaked and is now declining.

 

Here's the reality of the U.S. labor cycle:

  • Non-Farm Payrolls (NFP) peaked at +2.34% year-over-year growth in FEB of 2015
  • Friday’s NFP report (January) slowed to +1.8% year-over-year growth
  • Most employment data is the most lagging of #LateCycle economic data you can measure anyway

As mentioned above, the bond market understands #GrowthSlowing. So do Utilities (XLU), which is why XLU is leading S&P sub-sector performance in 2016. XLU is up +7.6% versus down -8.0% for the S&P 500. Stick with it on the long side.  

MDRX

To view our analyst's original report on Allscripts Healthcare Solutions click here

 

Summa Health System, one of the largest integrated health systems in Ohio, made the decision to move to Epic in 2014.  Summa operates 5 hospitals, with 2,000+ beds and a physician organization of 400+ providers. The Epic implementation began with the physician offices in the middle of 2015, with the hospitals slated for transition in 2016/2017. On the ambulatory side, this was a sizeable loss for eClinicalWorks, who had been the main EHR vendor for their physician organization.  On the acute care side, Allscripts, Quadramed, CPSI, Medhost and McKesson will all be replaced with Epic.

 

The importance of this example is that Allscripts Healthcare Solutions (MDRX) has publically announced six new domestic Sunrise Clinical EHR contracts over the last 2-years, for a total of approximately 1,020 beds. Allscripts will lose 979 beds from two hospitals in 2017, as a result of a decision made by one health system.  If we add the loss of Monroe Regional (238 beds), a Sunrise Client we identified as switching to Epic this year, then total bed losses climb to 1,217.  

 

While Allscripts has gained traction internationally during this period, over the long-term, we don't believe it will be enough to offset the domestic decline, which represents more than 90% of revenue.

NUS

To view our analyst's original report on Nu Skin click here.

 

Nu Skin (NUS) is set to report 4Q15 earnings after the close on February 11. We will send subscribers an update on our thinking next week.

 

To be clear, we do not expect any change to our core short thesis

WAB

To view our analyst's original report on Wabtec click here

 

With earnings coming up on February 18, the market is set to get incremental information into Wabtec's (WAB) operations. Of particular interest will be an update on the acquisition of Faiveley. WAB’s now lower share price may make the deal less attractive to the controlling family.

 

On the broader short thesis, typically, in its more profitable US freight operations, WAB only gets a short lead time to new demand. While we expect demand to decline significantly in 2016, the company is likely to lack visibility.

 

Bottom line is we continue to see WAB as caught in a long-term downswing in rail-related capital spending.

 

Investing Ideas Newsletter - wab

TIF

To view our analyst's original report on Tiffany click here.

 

The street's EPS expectations for Tiffany have come down to $3.87 for FY 2016, 24% below where they were a year ago. Given the recent slowdown in sales and the increasing likelihood of a recession, these numbers still look optimistic.

 

Unlike department stores and clothing retailers, TIF can't try to blame the record warm weather for weak 4th quarter sales in the US. That's why we’re still 5% below the street in 2016. 

 

Investing Ideas Newsletter - 2  5 16 TIF Comp 

W

To view our analyst's original report on Wayfair click here.

 

Wayfair will be presenting at an internet and tech conference next week.  In its time as a public company, W has hit the conference circuit pretty hard, as it should. CEO Niraj Shah tells the Wayfair story pretty convincingly. Last year, W did 8 conferences and next week's will be number 2 in 2016.  Most retail companies do 2-4 in a year, if any.

 

We’ll likely hear more of the same from W next week, mostly likely that the TAM (total addressable market) for W will approach $90bil. Our work shows it will be less than half of that. The problem is that the company is investing today to capture a slice of the market that we don’t think will materialize.

RH 

To view our analyst's original report on Restoration Hardware click here

 

We expect Restoration Hardware to continue to play offense. That includes continuing to execute on its real estate strategy as it expands its real estate presence in key markets across the US. Here’s a look at a few of the new markets, not yet announced, but that we have uncovered by scouring the Internet.

 

Three stores: Kansas City, Palm Beach, and Corte Madera, together make up  ~165,000 square feet of retail space.  That’s good for 16% growth over the current square footage. 


RH is the only retailer in this space looking to upsize its current sq. ft. footprint, giving it favorable deals in the current retail real estate market. New store openings to date have met or exceeded expectations. The beauty of RH’s real estate play, is that rent per square foot on the new space is about 25% what it was in the legacy stores. That allows for big time leverage on a sales base 3x a legacy store.

 

In the old stores, RH could only show 10% of its assortment, while in the newer format stores, the company is showcasing better than 75%. Our work suggests that consumers are much more reluctant to purchase what they can’t see.

 

Investing Ideas Newsletter - 2 5 2016 RH stores 3

ZBH

To view our analyst's original report on Zimmer Biomet click here. 

 

Healthcare analyst Tom Tobin has no update on Zimmer Biomet this week but reiterates his short call. The core thesis remains still firmly intact:

  • "Employment growth slowing and fears of a recession will certainly dampen investor appetite for what is viewed as an elective procedure."
  • "Our team's long-term view calls for slowing/declining unit volume and deteriorating pricing. The impact to gross margins should be significant with very little spending flexibility within the organization."   

MCD

To view our analyst's original report on McDonald's click here

 

WHAT WILL PROPEL THE NEXT LEG OF GROWTH?

 

Many investors are already asking this question. The fact that we are only two quarters into the turnaround, reveals the negative bias still surrounding McDonald's (MCD).

 

In addition to their current slate of initiatives – All Day Breakfast, McPick 2 and Menu simplification – management has a pipeline of initiatives that will drive the business forward.

 

The Mobile app seems like it could be a strong contributor to growth; so much so, management built incremental sales into their model based on sales expectations driven by their digital platform. In just three months since MCD launched the app, there have already been 7 million downloads. At the moment, they are merely testing response rates with low price offers with plans to greatly expand the capabilities over time.

 

Experience the Future and continued modernization of the portfolio will be a key aspect of the turnaround. Bringing their system into the current generation from a look and functionality standpoint will be very beneficial to performance.

 

Experience the Future is in about 130 restaurants and five markets in the U.S. Throughout 2016 and 2017, they plan to further penetrate two to three of those markets with the concept to further test its effectiveness. Other modernization/improvement initiatives that will drive growth include; remodels, digital menu boards, dual lane drive-thru’s and self-order kiosks.

 

While MCD had a rough trading day on Friday, we continue to like it long term given the style factors that we continuously remind you of: big-cap, low-beta and liquidity.

FL 

To view our analyst's original report on Foot Locker click here.

 

The online data we track from a number of sources 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 (along with Under Armour and Adidas) explode to the upside on a relative basis to FL, 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. In other words, it won’t play out entirely in a single quarter. But, the negative online trends for FL that reared its head in 3Q seems to be carrying into 4Q.

 

Investing Ideas Newsletter - 2 5 2016 FL Visit Spread

GIS

No new update on General Mills this week, but the company remains one of analyst Howard Penney's top Long ideas in the Consumer Staples space. As we have continued to say, it boasts style factors ideal in turbulent times; high market cap, low beta and liquidity. While GIS is down year-to-date, it's held up very well against the broader stock market. GIS is down -4% versus down -8% for the S&P 500 in 2016.

 

As we have noted in previous updates, GIS has been picking up steam, as the company is working to improve merchandising and advertising on core business. One of the initiatives is making a distinct effort to delve deeper into the natural and organic category. That will certainly help them a lot in the long run. More to come.


Under 60 Seconds: LinkedIn’s Earnings Report

Hedgeye highlights three key points from LinkedIn's disastrous quarter courtesy of our Internet & Media analyst Hesham Shaaban.


YELP | Thoughts into the Print (4Q15)

Takeaway: 2016 is unattainable, but not sure what mgmt has up its sleeve with guidance. Either way, we’re short until mgmt guides to reality

KEY POINTS

  1. 2016 IS UNATTAINABLE: Consensus is still not factoring attrition into its estimates, so it doesn’t understand the burden of new account growth necessary to hit those numbers.  In short, YELP needs to maintain its current new account growth rate every quarter from now through the end of 2016, and that’s assuming historically low attrition rates.  That’s highly improbable unless it accelerates its sales rep hires in excess of revenue growth guidance, and that alone might be a major red flag for the street.
  2. MACRO COULD MAKE IT WORSE: Remember that YELP caters to a relatively fragile customer base that doesn’t have economies of scale and is hostage to its local economics.  If we are moving into a recession as our Macro team suggests, it’s going to be that much tougher to sell into that environment, especially since Local Advertising spend typically declines in excess of national spend in a recessionary environment (see notes in first slide below), and would likely exacerbate its account churn.
  3. WHAT’S UP YOUR SLEEVE? Just because YELP can’t hit 2016 estimates doesn’t mean it won’t guide to them.  We saw that last year when YELP guided to 53% revenue growth (Eat24 included), then subsequentally cut its growth forecast to 44% two quarters later.  This time around, there’s no telling what mgmt will do here, especially since it has a history of doing whatever it can to disguise the issues at its core.  Either way, we suspect YELP really needs to show something on this release to drive its stock materially higher from here.  We’re staying short till mgmt guides to something more reasonable than what consensus is asking of them.

 

YELP | Thoughts into the Print (4Q15) - YELP   2016 Local Slide

YELP | Thoughts into the Print (4Q15) - YELP   mgmt lie slide

 

 

Let us know if you have any questions or would like to discuss in more detail.

 

Hesham Shaaban, CFA


@HedgeyeInternet 


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Investing Ideas Macro Overlay: U.S. Recession, Profit Cycles and Currency Wars

On today's Macro Overlay, Hedgeye CEO Keith McCullough distills his top 3 macro concerns and ranks our current Investing Ideas.

 

 


Cartoon of the Day: Lipstick On A Pig

Cartoon of the Day: Lipstick On A Pig - jobs pig cartoon 02.05.2016

 

Today's jobs report showed a 151,000 non-farm payroll number, well under what was predicted by Wall Street economists. We're not surprised. As Hedgeye CEO Keith McCullough and our Macro team continues to reiterate, jobs growth peaked in February of last year. It's a classic #LateCycle indicator.


HEDGEYE Exchange Tracker | Up and To The Right

Takeaway: Open interest at CME registered an all-time high of 111.2 MM contracts and the company has solid guidance across the board this morning.

CME Group (CME), one of the few stocks that sits on our Best Ideas list as a long, put up a decent fourth quarter earnings print this morning with a slight revenue and earnings beat. Not that we put much weight on what happened last quarter but trends into the new operating period are looking even better. The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, this week at over 111 million contracts. January activity for the Merc is averaging 18.2 million contracts per day, up 16% year-over-year. Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials. 

 

HEDGEYE Exchange Tracker | Up and To The Right - CME group

 

 

Weekly Activity Wrap Up

1Q16TD average daily volumes (ADVs) in cash equities and futures continued to rise this week. Cash equity volume for the week came in at 9.3 billion shares traded per day, bringing the 1Q16TD ADV to 9.3 billion, up +34% Y/Y. Futures activity at CME and ICE came in at 24.7 million contracts traded per day this week, bringing the 1Q16TD ADV to 24.1 million, up +21% Y/Y. Additionally, CME is currently at an all time high in open interest of 111.2 million contracts, which should push volume higher going forward. Options did not have as strong a week, coming in with 16.9 million contracts traded per day, bringing the 1Q16TD ADV down to 18.7 million, although that still registers +23% Y/Y growth. 

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon1 2

  

U.S. Cash Equity Detail

U.S. cash equities trading came in at 9.3 billion shares per day this week, bringing the 1Q16 average so far to 9.3 billion shares per day. That marks +34% Y/Y and +31% Q/Q growth. The market share battle for volume is mixed. The New York Stock Exchange/ICE is taking a 24% share of first-quarter volume, which is consistent with the prior quarter and year-ago quarter, while NASDAQ is taking a 19% share, +65 bps higher Q/Q but -84 bps lower than one year ago.

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon2

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon3

 

U.S. Options Detail

U.S. options activity came in at a 16.9 million ADV this week, bringing the 1Q16TD average to 18.7 million, a +20% Y/Y and +17% Q/Q expansion. In the market share battle amongst venues, NYSE/ICE has been trending downward at a moderate pace, but at an 18% share it is +106 bps higher than the year-ago quarter. Meanwhile, NASDAQ's recent declines bring it -418 bps lower than 1Q15. CBOE's market share is down -148 bps Y/Y but has improved recently; its 27% share of 1Q16TD volume is up +130 bps from 4Q15. BATS and ISE/Deutsche have been taking share from the competing exchanges, with BATS up to a 10% share from 9% a year ago and ISE/Deutsche taking 16%, up from 13% a year ago.

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon4

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon5

 

U.S. Futures Detail

17.9 million futures contracts traded through CME Group this week, bringing the 1Q16TD average to 18.1 million, a +21% Y/Y and +37% Q/Q expansion. Additionally, CME open interest, the most important beacon of forward activity, currently sits at an all-time high of 111.2 million CME contracts pending, good for +22% growth over the 91.3 million pending at the end of 4Q15, an improvement from last week's +17%.

 

Contracts traded through ICE came in at 6.8 million per day this week, bringing the 1Q16TD ADV to 6.1 million, +21% Y/Y and +27% Q/Q growth. ICE open interest this week tallied 68.1 million contracts, a +7% expansion versus the 63.7 million contracts open at the end of 4Q15, an improvement from +5% last week.

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon6

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon8

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon7

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon9 

 

Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon10

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon11

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon12

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon13

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon14

HEDGEYE Exchange Tracker | Up and To The Right - XMon15

 

Sector Revenue Exposure

The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:

 

HEDGEYE Exchange Tracker | Up and To The Right - XMon19 3

 

 

Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

  

  

 

 Joshua Steiner, CFA

 

 

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%
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