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This Week In Hedgeye Cartoons

Our cartoonist Bob Rich captures the tenor on Wall Street every weekday in Hedgeye's widely-acclaimed Cartoon of the Day. Below are his five latest cartoons. We hope you enjoy his humor and wit as filtered through Hedgeye's market insights. (Click here to receive our daily cartoon for free.)

 

1. Juggling Bull (2/19/2016)

This Week In Hedgeye Cartoons - juggling bull 02.19.2016

 

"We need to suck every last permabull into believing that the "bottom is in", then kaboom," Hedgeye CEO Keith McCullough wrote earlier this week. 

 

2. Crash Test Dummies (2/18/2016)

This Week In Hedgeye Cartoons - Stocks crash test dummies cartoon 02.18.2016

 

The stock market is headed for a crash. 

 

3. The Three Little Pigs (2/17/2016)

This Week In Hedgeye Cartoons - central bank cartoon 02.17.2016

 

Central bankers have become concerned about recent tumult in financial markets. They should be. Macro markets continue to signal economic growth is slowing.

 

4. The Dying Cartel (2/16/2016)

This Week In Hedgeye Cartoons - OPEC cartoon 02.16.2016

 

News of OPEC's death might not be an exaggeration.

 

 


Ahead Of Primary, South Carolina Democratic & GOP Party Chairs Weigh In

 

Before the primary voting in South Carolina, Hedgeye and Potomac Research Group hosted an exclusive 60-minute conference call with South Carolina Democratic Chair Jamie Harrison and Republican Chair Matt Moore to give their outlooks on how each race is developing in their state.  Here are some highlights.


FCC Proposal Should Worry Disney, Verizon, Charter

 

In this HedgeyeTV video excerpt, Potomac Research Group Senior Telecommunications & Cable analyst Paul Glenchur discusses FCC proposed rules on set-top boxes and how that will affect cable operators, telecoms and major cable programmers with Hedgeye Internet & Media analyst Hesham Shaaban.


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

The Week Ahead

The Economic Data calendar for the week of the 22nd of February through the 26th of February is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.

 

CLICK IMAGE TO ENLARGE.

The Week Ahead - 02.19.16 Week Ahead


Investing Ideas Newsletter

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

Investing Ideas Newsletter - Stocks crash test dummies cartoon 02.18.2016

 

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. Hedgeye CEO Keith McCullough’s updated levels for each ticker are below.

 

Please note that we added Darden Restaurants (DRI) to the short side of Investing Ideas this week.

LEVELS

Investing Ideas Newsletter - Investing ideas levels

 

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

  

Long-Term Treasuries (TLT) and Utilities (XLU) remain our two best fixed income and equity vehicles to play #Lower-For-Longer on growth and interest rates as the market gets more and more skeptical about the central bank dogma.

 

Over the past week we’ve heard central bank cowbell across the globe. First came BOJ members calling for “greater cooperation among G7 partners in order to ‘soothe’ market jitters.” Then ECB members chimed in saying the “ECB is ready to do its part.”

 

Wednesday? More of the same from the Fed. In the FOMC minutes release, we heard that inflation was expected rise to two percent "over the medium term," accompanied by a gradual rise in policy interest rates…

 

Investing Ideas Newsletter - 02.19.16 10 yr yield

 

If you’ve watched markets recently, they no longer believe in the central planning hoopla. The NIKKEI failed to hold its short-lived gains and the yen went up on the week, not down despite the sound of monetary cowbell. Meanwhile, the Euro went up on the week, not down despite verbal devaluation.

 

With the market losing faith in the central planning policy backstop, investors continue to yield to top-down market signals and the direction of the data. To be clear, the data continues to deteriorate and volatility continues to break-out.

 

The yield spread (10-year Treasury yield minus 2-year Treasury yield) has compressed 24 basis points this year, and TLT is up 8.6% vs. the S&P 500 which is down -5.2%. The December Federal Funds Futures contract has declined in a straight line since December’s rate hike.  

 

Investing Ideas Newsletter - 02.19.16 fed funds futures

 

 

This implies that the probability that the Fed continues to hike rates has gone from likely to zilch. That's what the bond market and federal funds futures market are telling us about the preponderance of growth slowing data points. Take this week's Industrial Production. It declined for the 3rd consecutive month on a Y/Y basis in January (see chart below).

 

Investing Ideas Newsletter - 02.19.16 Industrial Production

 

With market turmoil, the Junk Bond ETF (JNK) is down -4.5% vs. the defensive, growth slowing equity sector Utilities (XLU) which is up 6.7%, outperforming the S&P 500 by 12.9% on a relative basis. That’s yet more confirmation of our dour economic outlook economy (spreads widen in tumultuous market environments and Utilities are a defensive sector that outperforms when growth is slowing). Take our advice, and stick with allocations that have worked: Long TLT, XLU; Short JNK.

MDRX

To view our analyst's original report on Allscripts Healthcare Solutions click here. Below is a brief excerpt from an institutional research note written by Hedgeye Healthcare analyst Tom Tobin following Allscripts earnings release on Thursday.

 

MDRX | INITIAL THOUGHTS ON 4Q15 EARNINGS AND 2016 GUIDANCE

 

Key Takeaways:

 

  • Missed Q4 Sales Estimates by $10 mill on slower software sales growth and continued decline in non-recurring revenue.
  • 2016 Sales Guidance of $1.43 - $1.46 bill is below consensus of $1.48 bill, but within our expectation of $1.45.
  • 2016 EPS guidance in-line with 20-30% growth management provided at JPM earlier this year < - Cost cuts in 2015 to provide a tailwind in 2016, but benefit slows heading into 2017
  • Commentary around bookings for 2016 suggest potential for negative growth in 2H16, which is in-line with our expectations for flat-to-negative bookings growth for 2016 (Consensus looking for +8%). 

 

Bottom Line: MDRX provided disappointing 2016 sales guidance and bookings growth will likely to go negative in 2H16. We continue to see downside < $10.

NUS

To view our analyst's original report on Nu Skin click here. Below is a brief institutional research note written by Consumer Staples analysts Howard Penney and Shayne Laidlaw.

 

NUS | CHANGING THEIR LANGUAGE…AGAIN

 

Nu Skin (NUS) reported 4Q15 and full year 2015 results on February 11th that missed consensus numbers by a long shot. What was even worse, was their guide down for 2016. (Click here to read last week's Investing Ideas earnings update on NUS.)

 

The reason for this note is to report additional disclosure that we found in their 10-K filed this morning. The fact that the SEC is investigating NUS for actions in China, specifically regarding charitable donations is not new. But the increased disclosure around subpoenas being served and employees being questioned by the SEC is. Below is a statement from their risk factors in their 10-Q filed on 5/6/15, and then their risk factors reported in the most recently filed 10-K.

 

Click the image below to enlarge. 

Investing Ideas Newsletter - NUS chart

 

As the SEC continues to peel back the onion, we do not know what else they will find. There is no definitive conclusion to be made from this, but the increased interest from the SEC is not good news for the company.  

 

We continue to see significant downside in the stock.

WAB

To view our analyst's original report on Wabtec click here. Below is a brief excerpt from an institutional research note written by Hedgeye Industrials analyst Jay Van Sciver following Wabtec's earnings this week.

 

ORDERS, NOT SALES

 

Looking past the headlines, the internals of yesterday’s report from Wabtec (WAB) continue to point to 2016 EPS well below $4.00. We don’t think that the 2016 guide from WAB makes sense, beyond what we expect is management’s desire to see a higher share price to appease a potentially disgruntled Faiveley family.

 

The company met estimates in 4Q15, but drained the backlog of orders from earlier periods to do so, as Freight orders were ~20% below reported sales. While we need the 10-K for a proper analysis given WAB’s skimpy disclosure, the implied orders, aftermarket sales, and PTC trends look pretty negative to us. The big picture of rail equipment capital spending rolling over from a significant long-term up cycle remains intact.

 

Investing Ideas Newsletter - wab image

TIF

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

 

Tiffany (TIF) declared its quarterly dividend this week. It was kept in line with last quarter at 40 cents per share.

 

The company has seen record operating cash flow over the last 4 quarters.  However, the cash generation has not been from improving operations, but rather management de-risking the balance sheet, which may be driven by the negative economic outlook.

 

Tiffany has a cash conversion cycle of about 470 days, among the highest you can find in retail. It makes sense that the company would be cautious about building working capital in the face of an increasingly volatile economic environment.

W

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

 

A Portland, Maine local newspaper reported this week that Wayfair (W) is planning new sales and customer service offices in Brunswick and Bangor, Maine. The company is planning to hire up to 950 employees, that equates to a 30% increase from the ~3,170 they had at the end of 3Q15.

 

Not the traditional talent hotbed, our sense is that Wayfair is getting a good real estate deal while recognizing lower competitive compensation rates vs its HQ in downtown Boston. Management had guided to accelerated hiring on the last conference call to catch up with growth.

 

This is yet another example of Wayfair investing in the infrastructure to service an addressable market that we think will be way below the company’s expectations. 

 

Next week we will have thoughts on Wayfair’s 4th quarter earnings release as the company reports on Thursday. Stay tuned.

RH 

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

 

Last week Restoration Hardware (RH) secured an anchor lease in San Francisco's planned Pier 70 shopping center. This is a typical RH maneuver in its backyard of SF. Taking a Flagship spot in a new redevelopment, while being one of the first retailers to sign on the dotted line. That leads to below market rents in an up-and-coming retail space, which allows the landlords to attract the right type of co-tenants with RH as the anchor.

 

Investing Ideas Newsletter - rh

ZBH

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

 

We have no update on Zimmer Biomet (ZBH) this week but Hedgeye Healthcare analyst Tom Tobin reiterates his short call. Hedgeye CEO Keith McCullough offered up his own thoughts upon issuing a "sell signal" on ZBH in Real-Time Alerts Thursday:

 

"I have a very long list of high quality short ideas. As I explained in RTA Live yesterday, some of the happiest hunting grounds for short are where there are still the most bulls left:

 

1. Healthcare 

2. Consumer Discretionary 

3. Financials 

 

Since all 3 of these Sector Style factors are bearish on both my TRADE and TREND durations, all I have to do from there is ask my analysts for the best shorts within these sectors. Zimmer continues to be one of them.

 

Zimmer Biomet (ZBH) should have continued issues in Europe and worsening conditions in the US as we progress through the year. The stock price definitely incorporates some of the weakness, but as of yet, not enough.

 

Are you Bearish Enough?

KM"

MCD

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

 

No update on McDonald's (MCD) this week from Hedgeye Restaurants analyst Howard Penney. MCD continues to outperform. It's up 17% since the fast-food company was added to Investing Ideas in August, versus -8% for the S&P 500. 

FL 

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

 

Foot Locker's (FL) big capital spending plan announced this week is anything but good for the financial return profile, and the stock. The company’s capex number for the upcoming year is expected to clock in at $297mm. That’s the most FL has spent since 1999, and it represents a 26% increase from the already-elevated levels we saw in 2015.

 

As context, our extremely negative long-term view on FL is predicated upon an unsustainable financial model, and a mismatch between how much FL is spending on both the P&L (SG&A) and on PP&E to drive the business forward in a changing footwear retail selling model.

 

This stock will be choppy quarter to quarter. But last we checked, stocks don’t go up when financial returns get cut in half.

 

Next week we will have thoughts on Foot Locker's 4th quarter earnings release as the company reports on Friday.

GIS

General Mills (GIS) is a large player in the Yogurt category with their Yoplait brand. Their competitors, Dannon, Chobani and Fage have been aggressive on merchandising and consumer spending, making it difficult to compete while maintaining internal margin objectives. GIS is turning on innovation with the growth of Annie’s yogurt and that should help the trajectory of the business. Yogurt being a roughly $1.4 billion business, turning it around is a top priority for management.

 

On the broader GIS long thesis, it's unlikely that the stock is going to go up 20% in the next year, but we do believe it will fare better than most in the consumer staples sector, especially as we head into an economic slowdown.

DRI

We added Darden Restaurants (DRI) to the short side of Investing Ideas this past week. Click here to read our analyst's full stock report.


JWN | Not Now, Not At This Price

Takeaway: There is absolutely no reason to own JWN today at this price. But it's equally as difficult to short.

This JWN print followed the road map we expected. Weak quarter followed by a guide down for 2016. The 8% sell-off afterhours isn’t enough to get us more excited about this name as a long -- and quite frankly, we'd be surprised if it closed down that much tomorrow. 

 

If anything the print raised more questions than it answered. Primarily around the comp trajectory at Rack and the viability of the non-core businesses. The earnings drivers in the core are in place as JWN emerges from ‘investment mode’ in the second half of 2016. Especially if at that time we're in the midst of better consumption growth (we're not banking on it). Until then, we're comfortably on the sidelines. At this price, this is pretty much a 'do nothing' stock. 

 

Additional details…

 

What We Liked:

1) Comps: The topline actually held up relatively well accelerating on a 1 and 2yr basis sequentially despite the macro backdrop. There are puts and takes across the business – one being the -3% comp at Rack, the worst comp in its history. At the same time, e-comm growth in the off-price channel accelerated by 500bps to 51% YY. That of course comes with an offset lower on the P&L, as the company bought the comp with gross margins down 184bps in the quarter – the biggest hit to GM since 1Q09. We’re generally encouraged by the fact that JWN performed as well as it did with the rest of the Department store space cracking.

 

2) Lower capital intensity/cost rationalization: Now out of the peak investment year, we already knew that CapEx was coming down from elevated levels, but the company slashed its five year target by another $300mm. We expect that to come down even more from here evidenced by the fact that the Rack launch into Canada (first store opening date announced earlier this week) was pushed back a year to 2018. On the SG&A side, management talked to a $100mm cut in SG&A spending. It’s hard to give that a lot of credence without more detail, but it’s an encouraging change on the margin given JWN’s propensity to spend.

 

3) Guidance: Tough to see a 9% earnings guide down as a positive, but expectations headed into 2016 were overly bullish especially in 1H in light of the current state of consumer demand. No question that street models are coming down considerably from current levels after this print. But, the drivers for a positive change in the earnings trajectory are in place in the 2nd half of 2016.

 

What We Didn’t Like:

1) Nordstrom Rack Performance: As noted earlier, this was the worst quarterly performance from the concept, EVER. It comes as no surprise that we’ve seen a bifurcation in B&M comp trends at the same time off-price online is growing like a weed. The question that we have to answer is, will e-commerce continue to dilute the Brick and Mortar business? If so, we are looking at lower profitability across the board. Given that much of the valuation premium for JWN to its peer group is predicated on square footage growth (i.e. viability of the brick and mortar Rack business), this comp number will only stoke the concerns about a) the 300 store target and b) the viability of the business model.

 

2) Inventories: JWN already took it on the chin on the gross margin line, not once but twice over the past two quarters, and the current inventory position is still out of whack. That will lead to additional gross margin pressure in the first half of the year as the sales outlook is less than optimistic.

JWN | Not Now, Not At This Price - JWN SIGMA

 

3) Canada/Trunk dilution: Management conveniently lumped in the dilution from off-price into is calculation of the dilution from ‘non-core’ this quarter, but based on our best measurements of the bar chart we get to dilution of $62mm and $64mm from Trunk and Canada, respectively. Collectively that’s a $126mm hit to EBIT, a far cry from the $56mm guided to on the 3Q call. Some of the Trunk dilution is due to acquisition costs in FY15, but the outlook for ’16 is for another $30mm-$40mm of dilution for a business that was ‘break-even’ when JWN acquired it. On the Canada front, a boat load of capital has been allocated to setting up operations North of the border, with the outlook for $1bil in sales by 2020. We don’t think Nordstrom Canada will get there by then because of the productivity premium we’d have to assume (about 35%+ in the full line business) to get to that number. There is enough leverage for this model to work to offset about $50mm in dilution by 2017, but we need to see a positive inflection in the EBIT trends, starting now in order to get more positive.

 

Our note from earlier this week...

02/17/16 02:56 PM EST

JWN | TIME VS. PRICE

 

Takeaway: When we finally get a glance of JWN’s sales numbers–they need to be truly horrendous. We’d actually look to buy it on a sell-off tomorrow.

 

Conclusion: This is a multi-duration call. Bearish over the near-term as macro headwinds put earnings at risk. But, levers are there once the consumer stabilizes/recovers. The reality is that this is the only department store that really needs to exist.

 

We assembled a rather hefty slide deck on JWN as it emerged as a battleground stock ahead of this week’s print.  Initially, we were very bearish. The precipitous increase in short interest from 6% to recession levels of 20% over the past month means that when we finally get a glance of JWN’s sales numbers – they need to be truly horrendous. By the look of its e-commerce business, that’s precisely what we’ll get. Sometimes, the consensus is right, and this time, it probably is.

 

Unfortunately, it’s still the consensus. And while we think that this quarter will be terrible. The rate of change on the sales, gross margin, sg&a, and capex lines will change on the margin in JWN’s favor by mid-year. At that point, we might actually look to go long this one. After all, it’s the only department store that really needs to exist, and it’s trading at less than 7x a doable EBITDA number.

 

In the end, we’d actually look to buy it on a sell-off on tomorrow’s numbers – something in the low-mid $40s sounds about right. Otherwise we might be interested in buying with a $5-handle later this year when the Macro environment is de-risked and JWN emerges from ‘investment mode.’

 

Additional details…

 

Trade (3 weeks or less): JWN is the only name amongst its peer group that has been radio silent throughout the holiday season that saw M and KSS pre-announce earnings growth rates of -20% (-30% ex. the Brooklyn asset sale) and -15%, respectively. Management lowered the 4Q bar by 9% post the 3Q print, and then the Street came down by another 7% over the past three months. Sales expectations still look too high given the general softness in the retail space (especially at the high end) over the holiday period and the fact that JWN is up against its toughest comp since 4Q12. E-commerce traffic trends have been soft across all of JWN’s concepts as it laps the launch year of the Rack website, while Full Price and Hautelook continued to weaken into quarter close. We’re about $100mm, or 2%, below the street.

 

These Traffic Trends Look Terrible

 

JWN | Not Now, Not At This Price - JWN Traffic

 

On the margin side, JWN likely took the biggest hit of any of the department store players in the quarter with gross margins down 160bps in 3Q, as it proactively managed its inventory position. Warm weather and weak demand will still be an issue in 1Q, and we expect inventory growth ahead of sales for the 16th time in the past 18 quarters. Canada and Trunk dilution is starting to roll off now that the sales base North of the border is forming a critical mass and the acquisition of Trunk Club is annualized. The company pulled a few SG&A levers last quarter by cutting its investment in its loyalty program (bullish for credit income). All in we’re modeling a 200bps hit to EBIT, broken out into 110bps of deleverage in the core, another 40bps from non-core investments, and the remainder allocated to the sale of the credit card receivables.

 

3Q15 SIGMA Chart

 

JWN | Not Now, Not At This Price - DEPT SIGMA

 

Trend (3 months or more): Not unlike the rest of the retail space, the street is looking for a snap back on the top line as we enter 1H16, chalking up most of the demand issues we saw in the back half of 2015 to just weather. We’re not buying it. And, after what we think will be another sales miss in the 4th quarter we expect the guide for 2016 to be conservative on the top line. Or, at least it should be given the price action on the stock over the past 3 months and the fact that short interest is at 5 year highs at 19% (up from just 6% in late November).

 

Here’s where we come out on each of the lines on the P&L in the first half of 2016…

  • Revenue: No comp growth in the brick and mortar side of the business with negative LSD comps at Full Line and flattish comps at Rack against easy compares last year. That’s offset by low teens growth in the company’s e-commerce business (inclusive of FullLine.com, Rack.com, and Hautelook), about a half a point of growth from Canada and Trunk Club, and 5% square footage growth. That gets us to LSD sales growth in the first half of the year at the retail level (flat revenue growth reported due to the loss of credit revenue).
  • Gross Margin: We’re looking at another 75bps of deleverage as the company continues to invest in its roll out of Rack and Canada stores, which caused about 30bps of deleverage on the gross margin line in 2015. As noted earlier, JWN took it on the chin on the margin side to keep inventories in check headed into 4Q15, but we expect the combination of weak demand and warm weather to lead to a negative move in the sales to inventory spread. That coupled with high inventories across the space = another ‘highly promotional’ environment in 1H15.
  • SG&A: Growth in the mid to low single digit range as the company laps the Trunk Club acquisition, East Coast fulfillment center, and the profitability in the Canada business operation starts to head North. Offset by about $25mm in credit revenue from the TD Bank agreement in each quarter.
  • Earnings: Add that all up and we get to a negative DD earnings growth rate in 1H. 5% and 10% below the Street in 1Q and 2Q, respectively.
  • Tail (3 years or less): Over a longer duration (3 years or less), we like the setup for JWN. Yes, macro headwinds and category risk are keeping this name on the long bench rather than the core set of names as trend earnings risk still looks likely. But, once we get through the macro reset

 

JWN has the makings of a textbook long. Here’s why…

1) For starters, we have to ask the question does JWN need to exist? We think the answer is unequivocally yes. It has arguably the best e-comm operation in all of B&M retail, premium content, a concentrated footprint in the top malls/MSAs outside of the Northeast, and can hit 300 rack doors without skipping a beat. We’re not convinced that the ‘non-core’ (Canada/Trunk) growth drivers are ROIC accretive, but expectations have come down to a level where we think the point is moot.

 

2) JWN is coming off a peak investment year, and while there is still $3.1bn left on the $4.3bn 5 year CapEx plan, 2015 marks the tops of capital investment. Margins are washed out as the company invests in the Rack rollout (27 doors added this year), Canadian entry, new East Coast fulfillment center, credit card receivables sale, and absorbs the Trunk Club acquisition. That should in turn fuel top line growth in the HSD range once we enter the back half of 2016 (consumer environment permitting).

 

3) We don’t have to make wild profitability or sales assumptions for this model to work. By 2017, we assume that Full Line EBIT margins are 100bps off 2014 levels, Rack EBIT margins are 50bps off of 2014 levels, slight improvement in e-comm margins as the business (Rack and Full Line) climbs to ~$4bil, and a profitability donut in the non-core side of the business (Canada/Trunk). At that point Canada will be around a $400mm business, with the entire full line buildout complete, and Trunk (which was break even when JWN acquired it) will have benefited from 3 years of integration. Any improvement in each of the four segments will add additional upside.

 

4) On that math we get to earnings of $4.13 in 2017 on a sales base just north of $16bn. 6% ahead of the street today and likely higher as numbers come down after 2016 expectations are reset. 


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