Below are our analysts’ new updates on our fifteen 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 removed Restoration Hardware (RH) from the long side of Investing Ideas this week. We also added Hanes Brands (HBI) to the short side and CME Group (CME) to the long side. Retail Sector head Brian McGough and Financials analyst Jonathan Casteleyn will send out full stock reports next week. We will send CEO Keith McCullough’s updated levels for each ticker in a separate email.
IDEAS UPDATES
TLT | XLU | ZROZ | JNK
To view our analyst's original report on Junk Bonds click here, here for Utilities and here for Pimco 25+ Year Zero Coupon US Treasury ETF.
You might have heard on the radio while driving into work Friday that “the jobs market is good.” Non-Farm payroll additions came in over +200 again (+215K to be exact) and private sector wage growth was also “good,” increasing +4.2% Y/Y. But as we continue to reiterate, absolutes like “good” and “bad” are outside the Hedgeye vocabulary. We’re most concerned with "better" or "worse" from a rate of change perspective.
Our translation of the “jobs market is good” commentary? The non-farm payroll number was is "less good" (i.e. "worse") from a Y/Y rate-of-change perspective.
Growth in non-farm payrolls peaked in February 2015 at +2.3% Y/Y and the trend since then has been one of decline (+2.0% Y/Y for March 2016):
If there was something “good” about the jobs report, it was embedded in the salary & wage growth numbers which accelerated on a Y/Y % change basis vs. February, right?
While accelerations are good, one data point does not make a trend. In reality, private sector salary and wage growth peaked on a Y/Y % change basis in December of 2014. So, yes "good" but again we’re still well passed peak.
From a process perspective, the goal is to get the longer-term trends of growth and inflation correct. On that front, inflation-adjusted growth is like a sine curve that goes through cycles of peaks and troughs, and we use every relevant data-series as an additive to predicting where we are in this endless sine curve:
So how does all of this filter down into our Investing Ideas?
Along with a myriad of other economic data points, the two labor market charts referenced above from Friday’s late-cycle non-farm payrolls report continue to roll over. That's why you stay bullish on Long Bonds (TLT and ZROZ), Utilities (XLU) and short Junk Bonds (JNK). We expect more alpha after what was a great Q1, as the back-end of the Treasury curve continues to get flatter regardless of Fed rate hikes. We were alone in that camp, in December, when we first told you that a rate hike was in fact good for long-duration Treasury bonds. Stick with what's worked.
Here's the Q1 2016 Scorecard (data through 3/31):
- TLT +8.3%
- XLU +14.7%
- JNK +1.0%
- versus S&P 500 +0.7%
MDRX
To view our analyst's original report on Allscripts click here.
Allscripts (MDRX) press releases announced two deals this week:
- A contract renewal and expansion with University Hospitals; and
- A dbMotion win at Salford Royal in the U.K.
With respect to the UH deal and the impact on 1Q16 bookings, we would note that Allscripts does not include renewals in reported bookings and the bulk of incremental revenue ($3-6 million) associated with the 5 Sunrise Hospital installations will likely flow through maintenance and therefore also not be reflected in reported bookings. One of the hospitals has over 300 beds, but the rest are small, under 150 bed facilities (~900 beds total). However, Allscripts will lose 2x the number of beds in 2017 between the loss of Summa Health and Barnes Jewish when these facilities switch over to Epic in 2017.
Below are our key takeaways from our conversations with Allscripts' customers:
University Hospitals
- Rolling out the core Sunrise suite to 5 hospitals UH acquired in the last two-years. One of the hospitals has over 300 beds, but the rest are small, under 150 bed facilities (~900 beds total).
- Renewed and expanded existing contract to include additional inpatient modules for surgery and radiology.
- Allscripts was generous in the pricing of both the existing and expanded portions of the contract renewal.
- CEO of University Hospitals has a strong relationship with Allscripts.
- UH does not use Allscripts for hosting services and in a limited capacity for implementation services.
- Physicians happy with Sunrise. Touchworks is an issue, but no plans on changing.
Barnabas Health/RWJ
- Cerner will likely replace Allscripts at RWJ facilities when EHR contracts expire in 2020. However, they will consider all alternatives at that time.
- RWJ embedded with Allscripts and the physicians are happy with Sunrise, although they have devoted substantial internal resources to integrating Touchworks.
- It is highly probable that Barnabas will purchase dbMotion as a short-term solution to normalize data exchange with RWJ (similar to Baylor, Scott & White).
- Looking to optimize revenue cycle in 2017 and consolidate vendors. Will keep all options open and consider athenahealth.
- Will likely go the HealtheIntent route for population health as you get the most value out of a system that is integrated with your EHR.
WAB
To view our analyst's original report on Wabtec click here.
We think the rally back in shares of resource-related capital equipment companies, like Wabtec (WAB), has provided an opportunity to sell or enter a short. We expect rail capital spending to turn down given fleet demographics and rail volume trends. We still expect to earn well less than $4 per share in 2016, with a weaker second half of the year.
NUS
To view our analyst's original report on Nu Skin click here.
Hedgeye Managing Director Howard Penney has no update on Nu Skin (NUS) this week but reiterates his short call on the company.
TIF
To view our analyst's original report on Tiffany click here.
Tiffany (TIF) has rallied over the past month and a half along with most of retail. The Retail (XRT) is up 20% from its trough in mid February, and TIF has traded alongside. The company is up 21% since then. At the same time, TIF earnings expectations have continued to head downward. The stock is now trading over 19x 2016 consensus EPS numbers that we still think are too high.
Ultimately, we estimate that earnings growth will continue to underperform those lofty expectations and the premium P/E multiple will be at risk.
LAZ
To view our analyst's original report on Lazard click here.
Financials analyst Jonathan Casteleyn has no update on Lazard (LAZ) this week but reiterates his short call. Below are the key takeaways from Casteleyn's original stock report:
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"Our main contention is that Wall Street is ignoring warnings signs of a high-water mark in M&A, including rising private equity participation levels and also all-time highs in consideration value. Both metrics last peaked in 2007."
- "In addition, the constant rise of corporate credit costs from mid-2015 to current day has widely referenced Moody's indices higher by over 100 basis points. Our research shows that a move of this magnitude has historically impacted M&A by -20% on an annual basis."
- Meanwhile, Lazard is riding a wave of new, successful Emerging Market product offerings. "The firm's EM exposure is understated and we estimate it is 55% of assets-under-management, and not the stated 30%." Also, "Lazard Asset Management has never sidestepped an EM melt-down, experiencing both negative growth and also market depreciation."
- "The Street currently is at $2.78 billion in top-line for 2017 on EPS of $4.01 with '18 at $2.82 billion and $4.40."
- "Our base case estimate is the stock is worth $30 per share on 10x our $3 EPS estimate for '16. Meanwhile, our bear case if M&A activity rolls over by -20%, is a $22 stock at $2.20 in earnings at a 10x multiple."
MCD
To view our analyst's original report on McDonald's click here.
McDonald's (MCD) hit an all-time high this week. "They can't chase Energy Charts today, so they're just dog-piling into our long calls on GIS and MCD," wrote Hedgeye CEO Keith McCullough on Friday.
We've said it before, McDonald's has all the style factors that we like during these turbulent macro market times; high market cap, low beta and liquidity. The stock is up 7.5% this year beating the S&P 500 by more than 600 bps. In August 2015, Restaurants analyst Howard Penney wrote that "2015 will be the last time this stock is below $100."
A prescient call. Stick with it.
ZBH
To view our analyst's original report on Zimmer Biomet click here.
Growth in the US medical economy remains strong through March 2015 based on both healthcare and hospital employment as well as the job openings data. To date, we have not yet seen the #ACATaper in full force, although there are clear signs of slowing. This week, we saw a study from Blue Cross Blue Shield which makes us more convinced it's coming.
The study details the massive difference in medical consumption between ACA enrollees and other plan enrollees.
Within the Obamacare population, inpatient and outpatient visits were north of 80% higher per person. We expect that increase to mean revert as these chronically uninsured people get the care they need and drop back to the insured baseline. And since knee replacement surgery was 6-fold higher among these newly insured, this will be a problem for Zimmer Biomet (ZBH) when it does.
FL
To view our analyst's original report on Foot Locker click here.
In Foot Locker's (FL) 10K, the company disclosed that the percent of its purchases from Nike went DOWN in 2015 to 72% from 73% a year earlier. A whopping 1%, you say? Does this REALLY matter? Yes. It does. And here’s why…
- The share gain for Nike from 50% to 73% has been the primary driver of FL’s gravity-defying earnings recovery. Nothing that Foot Locker sells drives more traffic and boosts ASP more than something with a Swoosh on it.
- We think that Nike will add $10bn in online sales by 2020, and that’s off a base of $32bn. By our calculations, Brick&Mortar sales are likely to be down every year – unless industry sales growth can be in excess of 6% (and that only happens when we’re at the peak of a cycle). Let’s also keep in mind that Nike isn't the only company shifting online.
- At the same time, Nike’s percentage showed that 73% is likely the ceiling at Foot Locker, we actually saw FL’s Footwear Ratio go up 300bp to 82%. So it sold more footwear, but less of it was Nike (thank you Steph Curry/UA)
- FL bulls might argue that the company still comped well with less Nike going through the pipe. Yes, that’s true. But in the US, FL comps last year went from ‘low DD’ in ’14 to ‘high singles’ in ’15. We’ll call that a 300-500bp slowdown in comps, with just 100bp less in Nike product as a percent of the total. What happens if (when) the Nike ratio goes down to a healthier (but still unhealthy) 60%? FL comps are solidly negative in that scenario – there’s really no way around it.
Bottom Line: With no square footage growth, peak gross margins, higher investment in SG&A and capex to compete against its vendors, this could easily cost FL 1,000bp in RNOA, $2-$3 in EPS, and 40% of its market cap.
GIS
Joining McDonald's, General Mills (GIS) also hit an all-time high this week.
We continue to like GIS as one of the best large cap names in the packaged food space. With that being said, the third quarter was not without some noise around the numbers. Just look at the Green Giant divestiture, Walmart clean store policies, foreign currency exchange, and grain merchandising to name a few things that muddied the waters.
But after filtering out the noise, this is a business that is truly turning a corner. When fiscal year 2016 began last June, we knew this was not going to be an easy ship to turn towards success.
Now, many key product platforms are turning (through strong product innovation and renovation) in the right direction and operational improvements implemented through cost savings initiatives, GIS is on the cusp of success. We will be measuring this success and expect GIS to realize sustained top line growth in the low single digit range.
