REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream

Takeaway: Enclosed is our REPLAY of our Best Ideas Short call we hosted on T. Rowe Price called Paddling Upstream.

REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream - replay 1






We hosted a Best Ideas Short call on shares of T. Rowe Price (TROW) yesterday. While a well managed, disciplined investment manager, the secular shift to ETFs and mostly importantly to Large Cap strategies is too pervasive for the firm to meet the Street's expectations in our view. In addition, this predominately equity mutual fund manager is at the wrong part of the cycle operating at peak margins and peak profits with the growing potential for a long overdue market decline to kick off negative operating leverage. The firm has unappreciated equity leverage in its most important product, its target date fund franchise with its "through" asset allocation. Our key takeaways are:


1.) The shift from active to passive continues to accelerate and 67% of passive inflows are going to Large Cap strategies. TROW has the largest percentage of Large Cap product of any public mutual fund manager and when including SMAs, TROW's Large Cap exposure goes to over 40% of total assets-under-management:


REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream - replay 2


REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream - replay 3


2.) The firm's Target Date franchise is its go to source of growth, however the oldest Baby Boomers turned 65 in 2011 and now three Series of TROW target date products are in redemption. The hump gets worse in the distribution into the 2020 series which is the second biggest pool of TD assets for the manager. Target date is the only source of growth currently in the overall complex.


REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream - replay 5


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3.) TROW is once again at peak margins and profitability and after setting a new high water mark in 2014 at over 50% pretax margins, results are set to recede. TROW will also be bumping up against a break point in fees at over $500 billion in mutual fund AUM which won't help margins. We have earnings at $4.06 for 2017, -17% below the Street before considering that the stock's multiple should also contract against the group.


REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream - replay 7


REPLAY Best Ideas Short Call T. Rowe Price | Paddling Upstream - replay 8



Please let us know of any questions.

Jonathan Casteleyn, CFA, CMT 


Joshua Steiner, CFA





RH: We Are Removing Restoration Hardware From Investing Ideas

Takeaway: Please note we are removing Restoration Hardware from Investing Ideas (long side) today.

"Since this is a long-term investor product and Retail Sector head Brian McGough doesn’t want to be long it past the summer time (see below), I want to take advantage of this week’s ramp and take it off our long-term list," says Hedgeye CEO Keith McCullough. "Happy to revisit once our macro call plays out."


RH: We Are Removing Restoration Hardware From Investing Ideas - rh


Here's the bullish case for Restoration Hardware from McGough:


Fundamentally, the name looks outstanding on a TRADE and a TAIL basis. The question lies in TREND. 


My point is this…

  1. The results printed earlier this week were 4Q – they report REALLY late. The next quarter ends in just four weeks.
  2. If you bought a leather sofa today, you would not take delivery until early May. Therefore that would be 2Q revenue. In other words, RH already knows its 1Q number (which will be reported late May/early June). But people don’t look at it that way.
  3. RH just issued 1Q guidance that I think leaves room for upside – potentially a lot. Guided to $0.04-$0.06.


Then we get into mid-summer ... when you don’t want to own retail stocks anyway, and there’s 3-6 months before the biz accelerates again. During that time they’ll be spending on infrastructure. Don’t want to own it then.


Bottom line

We like it over the next month ... don’t like it again until Sept/Oct ... and we are WELL above the Street next year.

Craziest Offer In Hedgeye History (Not an April Fool's Joke)

Takeaway: The deal expires at 4pm today. Get it before it's gone.

Click image below to take advantage of thiS offer.


Craziest Offer In Hedgeye History (Not an April Fool's Joke) - z april fools promo

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.




Hedgeye and the Potomac Research Group are proud to present our first annual Spring Health Policy Conference.  This special, invite-only event will be held at The Benjamin Hotel in New York City on Monday, April 4th, 2016 from 9:30am - 4:00pm.



RSVP TODAY to  to attend. Please note that space is limited. 


Our lineup of health policy experts will offer an insider's view on their policy outlook and how as practitioners policy is influencing their decision making process.


This exclusive event will be moderated by Hedgeye Healthcare sector head Tom Tobin and feature in-depth presentations and panel discussions.  There will be ample opportunity for interaction throughout the day.







CHIP KAHN - Hospital Industry Outlook


Chip Kahn, President and CEO of the Federation of American Hospitals, will shape the regulatory environment for hospitals heading into the Presidential election.  Mr. Kahn’s extensive health policy expertise and lengthy Capitol Hill experience make him one of Washington, D.C.’s most effect and accomplished trade association executives.


NEIL HOWE - Demographic Outlook & Healthcare Reform


A historian, economist, and demographer, Neil is also a recognized authority on global aging, long-term fiscal policy and migration.  He is a senior associate to the Center for Strategic and International Studies (CSIS) in Washington, D.C., where he helps direct the CSIS Global Aging Initiative.


ANDREW MCKECHNIE - Health Reform Under Republican Administration


Andrew McKechnie, former policy advisor to the Senate Finance Committee, will discuss Republican efforts to repeal the Affordable Care Act and what the law may look like under a Republican controlled White House.  Mr. McKechnie was a key negotiator in bipartisan efforts to pass health reform in 2009, with an area of expertise in Republican politics and strategy.


YVETTE FONTENOT - Health Reform Under Democratic Administration


Yvette Fontenot is a partner at Avenue Solutions, a democratic government affairs firm that offers strategicadvice, policy development, and counsel in federal legislative and executive areas. She previously held theposition of Deputy Director of the Office of Health reform at the Department of Health and Human Services(HHS) and has helped to draft and implement the Affordable Care Act (ACA).


ROBERT LASZEWSKI - Managing Transition to Value Based Payment Models


Robert Laszewski, president of Health Policy and Strategy Associates (HPSA), will address the issues facing key stakeholders (Hospitals, MCOs, Physicians and Pharma) as we the transition to value based payment models focused on delivering better quality at a lower cost.  HPSA is a policy and marketplace consulting firm specializing in assisting its clients through the significant health policy and market change afoot.


DR. BABER GHAURI - Policy in Practice


Dr. Ghauri, Interim East Division CMIO for Trinity Health, will discuss how policy influences the decision making process of the second largest nonprofit health system in the nation.  Dr. Ghauri’s has a deep background in medical informatics and will also discuss how Trinity is using technology to pursue quality and value initiatives.


DR. RICHARD IORIO - Bundled Payments (CCJR)


Richard Iorio, MD, is the William and Susan Jaffe Professor of Orthopaedic Surgery at New York University Langone Medical Center Hospital for Joint Diseases and Chief of Adult Reconstruction at NYU Langone HJD.  Dr. Iorio was involved in the Medicare pilot program that led to expansion of the of bundled payment initiative for total knee replacements.

LULU | Black Book – Vetting the Growth Algorithm

Takeaway: On Monday, April 11th at 11:00 am EDT we’re hosting a Black Book Call on LULU.

Watch a replay below.


Our thesis as it stands today reads like this. We think that this is a very good brand housed within a bad company. Management is shooting to get back to a low-50s gross margin, which is admirable. But the company has to invest in talent, distribution, branding, international and e-commerce capability in order to support a $4bn global sales target. All of which will a) understate the gross margin recapture over the near term, B) subsequently repair the top line (in 2+ years), and then, and only then will we even think about paying for a 'margin improvement story' here -- especially with UnderArmour and Nike committing incremental capital to women's fitness. 


With the stock up 30% YTD and 10% over the past two trading sessions, valuation seems stretched. Especially when we consider the fact that the majority of the near term earnings growth is centered on operational excellence (something LULU has never proven it can uphold). On the top line, 2015 was a win for LULU against a set of extremely easy compares in 2014. But, as we look out over the next 1, 2, and 3 years we need to make some bold assumptions to believe that LULU can grow organically in its core market without the benefit of accretive square footage growth, and improve operating margins as it fights tooth and nail for market share.


A brief preview of the topics we will be discussing on the call…

1) Long Term Plan – We’ll vet through the long term growth algorithm for LULU which management laid out on its call on Wednesday 3/30. The basics call for $4bil in sales and double the earnings in power. But, if we put all the pieces together: $4bil in sales, low 50’s gross margin, low 20’s operating margin, on a 2% and change buyback, that adds up to $5+ in earnings power. Our analysis will show that requires some very bullish assumptions for a brand that is on the wrong side of the maturity curve in its core market.

2) International – To get to $1bn by 2020 – we need to assume 30% comps for the next 5 years, and more importantly a meaningful inflection in profitability from a business that is currently dilutive. That comes in a region where a) LULU has limited brand awareness and b) is much more difficult to scale profitability due to the geographic limitations and undeveloped global supply chain.

3) Men’s – LULU’s men’s business has been knocking the cover off the ball for the better part of 3 years – with 20%+ comps in each of the past 10 quarters the men business finished the year at $330mm. That’s the past, from here to get to $1bn we need to assume a 25% 5 year CAGR, which would outpace even UA who added an incremental $625mm in its men’s apparel business from '06-'11. That type of growth (we will drill down if we think it’s even possible) we’ll require a significant capital investment to a) build brand awareness and b) reformat stores to give the men’s product a more prominent in store position.

4) E-commerce – 30% e-commerce penetration or $1.2bn in sales doesn’t seem like a stretch to us given the digital sales adoption rate, but the key question that needs to be answered is how cannibalistic is that growth to the in-store business. We can think of a handful of names that have been able to sustain both channels, and maybe half of those which have been able to do it while improving profitability.

5) North America – We’ll dive into each part of the growth algorithm from here, and ultimately flesh out what it means for the top line, profitability, and returns. Each of the three branches in the region is at a very different part of the growth cycle. Canada – mature, LSD comps, no sq. ft. growth. US – saturated in key markets, sq. ft. growth coming from less profitable avenues (bigger stores, less productive regions). Ivivva – sq. ft. and comp growth, but lower margin profile.


Call details will be provided prior to the call.

Us Versus Them (What We Think About US GDP)

Takeaway: Our estimate for Q1 2016 GDP is 1.0% versus delusional Fed commentary and Wall Street's high forecast.

Us Versus Them (What We Think About US GDP) - 4  growth cartoon 03.02.2016


Yellen & Co. remain steadfast believers in an "all is well" U.S. economy as a mostly blinded Wall Street eats it up. Right? Apparently, the Fed doesn't believe its own forecasts. The Atlanta Fed's GDPNow forecast for Q1 2016 has tumbled from 2.7% in Febraury to 0.6% today (click here and here for more). Talk about a messaging mess (among other Fed messes...)


Meanwhile, Fed head Janet Yellen waived away recent weakness largely blaming "transitory" lower oil prices, a stronger dollar that would "gradually dissipate" and "foreign economic growth... [that was] weaker this year than previously expected." 


Roger that.


Here's where we shake out in comparison to Wall Street's stubbornly high Q1 GDP forecast and the Atlanta Fed's scattershot estimate.


Us Versus Them (What We Think About US GDP) - gdp estimates wall fed us


... And watch the video with Hedgeye CEO Keith McCullough below to learn what we REALLY think about the Fed and "data dependence."


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