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JT Taylor: Donald Trump vs. Pope Francis... The South Carolina Primary

Takeaway: What to watch on the election 2016 campaign trail.

Editor's Note: Below is a brief excerpt from Potomac Research Group Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. 

TRUMP'S Holy War

JT Taylor: Donald Trump vs. Pope Francis... The South Carolina Primary - trump 66


Our top story is that Donald Trump is going to build a wall around the Vatican and make the Pope pay for it. It will be the biggest wall around the world's smallest country, but it will be beautiful. Actually, what he really said in reaction to Pope Francis challenging his Christianity was: "If and when the Vatican is attacked by ISIS, which as everyone knows is ISIS's ultimate trophy, I can promise you that the Pope would have only wished and prayed that Donald Trump would have been president because this would not have happened."


Just when we thought this election couldn't get any more surreal. With SC Republicans casting their votes tomorrow, we don't think that this spat with the Pope will have much of an impact on the outcome -- but a handful of the many polls just released this morning show a tightening race in the Palmetto State.


JT Taylor: Donald Trump vs. Pope Francis... The South Carolina Primary - rubio pic


South Carolina increasingly looks like a fight to the death between Marco Rubio and Jeb Bush. Bush faces a political death spiral if he finishes behind Rubio, which would demolish the rationale for his candidacy. Rubio faces a financial death spiral if he finishes behind Bush; his campaign needs to tap into sidelined establishment donors and current Bush backers in order to stay afloat.


Unless Bush pulls off a big surprise this weekend, his supporters are likely to bolt for Rubio regardless of whether he concedes or formally endorses his fellow Floridian. Meanwhile, John Kasich will go underground until the Michigan primary on March 8th.

Cartoon of the Day: Juggling Bull

Cartoon of the Day: Juggling Bull - 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.

FHQ (Friday Housing Quant)

Takeaway: YTD returns for Housing stocks are awful, but falling rates, a flurry of insider buying, and campaign promises are helping on the margin.

Our FHQ (Friday Housing Quant) tables present the state of the publicly traded Housing complex in a simple, quantitative format that takes ~60 seconds to consume. 



  • Housing Macro |  “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”  Recall, that perfectly subjective question from the BLS - at a ~32% weighting in the Index -  anchors the CPI report and the Fed’s view of Inflation’s reality.  Shelter inflation made a higher high in the January data released this morning, accelerating to +3.2% YoY and again buttressed muted pricing growth across the balance of services and further negative growth in core goods pricing.  Rising rent costs flowing through to both Headline and Core CPI growth are supportive of the Fed’s inflation target and companies directly levered to rent inflation but the gains largely represent excess growth in a key consumer cost center a drag on other discretionary and housing related consumption. 

  • Performance Roundup: Housing stocks have posted YTD losses roughly double that of the broader market. While the S&P 500 is down 6.3% YTD, the average Housing stock has lost 11.6%: Title Insurance (-5.5%), REITs (-7.2%), Building Products (-7.7%), Home Improvement (-9.5%), RE Services (-13.3%), Homebuilders (-16.8%) and Mortgage Insurance (-20.9%). The only categories to roughly keep pace with the market are Title (+0.7% relative) and REITs (-1.0% relative). Among homebuilders, DR Horton is down 22% YTD, Lennar is down 18%, Toll Brothers is down 24.7%. NVR, the most defensive of the builders, is down 3.9%. Beazer, the worst of the bunch, has shed 40.3% YTD. 
  • Insider Buying: Insider buying has been heavy in the last few weeks. As we show in the tables at the end of this note, insiders stepped up to buy shares at BZH, KBH, TMHC, and PHM. Interestingly, while at PHM and KBH there was just a single buyer, at TMHC there were 5 different buyers and at BZH there were 9 different buyers.
  • Short Interest: Meanwhile, alongside the most insider buying, the largest increase in short interest  in the last two weeks was at KBH (+958 bps), HOV (+415 bps) and CAA (+355 bps). The three companies seeing the largest declines were LEN, NVR and MDC. 


Politician Promises / Housing Policy Update: 

At least one of the candidates has weighed in with their plan for US Housing reform. Secretary Clinton recently unveiled a plan to help jumpstart housing in economically depressed areas by, among other things, offering up to $10,000 in downpayment matching for select first time homebuyers. While the plan would largely rely on Congress for implementation, here are the provisions as described.


- Match up to $10,000 in down payments for home-buyers earning less than their neighborhood's median income.

- Increase funding and loosen lending requirements for borrowers who go through housing counseling programs.

- Push government agencies to use new ways to assess borrowers' creditworthiness.

- Give agencies 90 days to clarify their requirements for backing loans so that lenders will know how to offer more mortgages without violating new rules.

- Increase the number of affordable rental properties and offer more low-income housing tax credits in neighborhoods where there are shortages.

- Offer more funding to local governments that build affordable housing in neighborhoods with better schools and more jobs.



FHQ (Friday Housing Quant) - Subsector Performance


FHQ (Friday Housing Quant) - BQ 1


FHQ (Friday Housing Quant) - BQ 2


FHQ (Friday Housing Quant) - tmhc


FHQ (Friday Housing Quant) - bzh


FHQ (Friday Housing Quant) - phm


FHQ (Friday Housing Quant) - kbh


FHQ (Friday Housing Quant) - BQ 3


FHQ (Friday Housing Quant) - BQ 4




Joshua Steiner, CFA


Christian B. Drake

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Stock Report: Darden Restaurants (DRI)

Takeaway: We added DRI to Investing Ideas on the short side on 2/16.

Stock Report: Darden Restaurants (DRI) - HE DRI table 2 19 16



Where do we go from here?


Having pulled all the levers to create shareholder value, it’s now down to the facts about how Darden's core business is performing. There are cracks in the Olive Garden story and the brand is not as healthy as the consensus believes.


Major capital investments are needed:


Olive Garden has been in need of a major remodel since FY2007. While the sales trends at Olive Garden have improved slightly, to sustain long-term growth the concept is in need of a major overhaul which will be expensive. As sales trends rollover at the brand, the need for significant capital investment will become more evident.


The real numbers suggest multiple compression:


Under the new business model the company is posting peak margins. In addition to significant capital investment, the company will need to invest in incremental food and labor costs to drive positive traffic across the enterprise.




Management doesn't seem to be thinking about Olive Garden the right way:


During the 2Q16 call DRI management was asked about unit growth plans:

  • CEO Gene Lee stated, “I think we’re going to get back on a path where we’re opening somewhere between 8 to 12 Olive Gardens a year, so that will be a big boost to our numbers. Olive Garden is still an incredible investment from a new restaurant perspective. There will be some cannibalization, but we think that Dave and the team have the strategy to identify trade areas that could support Olive Garden, but without so much cannibalization that we can’t make the returns work.”
  • He went on, “Obviously, we’re going to continue to push Yard House. And we think LongHorn can get back up to low double digits also. And so with those types of new restaurant development, we can firmly be in that 2% to 3% [unit growth] range.”

Management’s thinking about unit growth is clearly evolving as the year goes on, and yet, Olive Garden’s top line performance continues to struggle. Plus, they have gone from vocalizing that they will open 1 to 2 Olive Gardens a year, to 8 to 10, which implies 1.2% unit growth.


Additionally, they are not spending aggressively on fixing the business:


Olive Garden’s last remodel was completed at the end of fiscal year 2001, when Joe Lee held the CEO position and Clarence Otis was the CFO. Management defended the remodels during 2002, although they struggled to increased their alcohol sales, which were supposed to be a benefit of the remodels.


In fiscal 2011, management started early remodeling tests on Olive Garden. Olive Garden has about 400 older RevItalia restaurant models that are in dire need of remodeling. In 2011, they remodeled 35 to test the effectiveness of the prototype. Clarence Otis successfully kicked the remodel can down the road until he met his demise in 2014:

  • 2011 Annual Report: “Olive Garden will begin remodeling more than 400 early restaurants to be consistent with the Tuscan Farmhouse design of the restaurants opened in the past six years.”
  • 2012 Analyst Meeting 2/23/12: “Olive Garden now testing a remodel program for 430 pre-Tuscan Farmhouse restaurants that were built before March 2000.”
  • 3Q13 Earnings call transcript: “Olive Garden is preparing to implement their remodel program in the second half of this fiscal year.”

To date, Olive Garden has done 32 remodels, and is far behind schedule, on a massive remodel project. Clearly, no one wants to remodel the Olive Garden concept because it will be disastrous for earnings.




The Olive Garden is still not fixed and is in desperate need of a large capital investment to turn around their negative trends. Until management realizes this the business will continue to decline and the stock will go with it. Determining what management will do in the TAIL duration is not possible, and we don’t like to participate in that guessing game. What we know now is that Olive Garden is not fixed and management does not currently have a plan to rectify the situation.


Additionally, Darden is a multi-concept restaurant company and in our past experience it is very difficult for management teams to allocate capital effectively amongst its brands. On one hand you have high growth concepts such as Yard House, and on the other you have Olive Garden which makes up roughly 56% of sales and is in need of cash just to prevent declines. We look forward to following the story over the next couple of years to see what course of action management takes to recover the business.


Stock Report: Darden Restaurants (DRI) - HE DRI chart 2 19 16


Howe: How Demographic Trends Impact Your Portfolio


In this recent excerpt of The Macro Show, Hedgeye Managing Director and Demography analyst Neil Howe responds to a subscriber’s question about how the “glacial pace” of demographic trends and migration impacts investors’ portfolios. If you like this excerpt, you’ll love The Macro Show.

VFC | There’ll Be Another Guide Down

Takeaway: Mother Yellen’s more to blame than Mother Nature. Only saving grace in owning this is that everything else likely to go down more.

VFC is near the top of the list of names we really want to own. The portfolio (even though we don’t like portfolios of brands) has gotten so good over time, it diversified geographic exposure more than most people think with ~30% of sales coming from outside the US, and its channel distribution is just about as good as a wholesale portfolio can expect – and it is now by a factor of 3 it’s own largest customer. These factors add up to a degree of earnings defendability that you don’t find too often in retail. And of course, check out the 20-year chart. Some management teams are worth betting against – this one certainly is not.


With all that said, we saw an extremely sharp deceleration in organic growth – from 7.4% to 2.6%, at the same time Gross margins rolled 70bps vs last year and EBIT margins similarly turned down. Management came across as ‘beyond-beared-up’ on the global demand equation throughout the remainder of this winter season and at least for the next 6 months. Yes, weather played a part in the miss – we all know this part of the story without having to go through puffy coat inventory issues.  But let’s be crystal clear, there was more than weather at play here. In fact, Janet Yellen likely had a bigger impact than mother nature.

VFC | There’ll Be Another Guide Down - 2 19 2016 VFC chart1

VFC | There’ll Be Another Guide Down - 2 19 2016 VFC chart2


Given VF's product diversity mass market/athletic and global reach, this company should be putting up more consistent and predictable earnings than just about anybody, anywhere. And yet, it didn’t, which might end up being one of the more negative data points we've seen through retail earnings season.


Yes, the stock is starting to look ‘cheap’ (whatever that means). But when a management team as good as this loses control over its business so quickly and to such a great extent, we absolutely positively cannot say that this guide down will be the last.  If you have to maintain certain exposure to retail, then yes, it might be worth picking away at VFC on red – but only because everything else is likely to go down more.

VFC | There’ll Be Another Guide Down - 2 19 2016 VFC chart3


Other Thoughts --

Macro Outlook - VFC sounded particularly bearish on the current Macro environment. Characterizing the Macro environment as 'worse than anyone expected'. Supporting that with numbers, this was the first time VFC reported negative revenue growth since 2009. But, unlike many street models would lead one to believe, it's not letting up now that we've entered 1H16.

Inventory - Inventory was up 9% and the sales/inventory spread weakened to -13% from -9% last Q. Despite management spin, the fact is that inventory is way too high at VFC and likely around the industry (DKS, TGT, WMT, etc.). Even if we were to adjust for the cold weather hit, we are still looking at a sales to inventory spread of -9%.

Outdoor Weak, Jeanswear Strength - If there was one positive in this print for VFC and its US wholesale partners it’s the jeanswear segment. Contrary to what we heard from HBI on the basics category at WMT and TGT, the jeanswear segment actually accelerated in 4Q. Not that the wholesalers can hang their hats on that one. Outdoor was the laggard at 1% C$ revenue growth, especially when considering the way it has carried the topline. But, North Face as a brand is anything but broken.

VFC | There’ll Be Another Guide Down - 2 19 2016 VFC chart4

VFC | There’ll Be Another Guide Down - 2 19 2016 VFC chart5

VFC | There’ll Be Another Guide Down - 2 19 2016 VFC chart6

VFC | There’ll Be Another Guide Down - 2 19 2016 VFC chart7

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.