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.


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