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REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.

 

Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)

 

Enjoy!   

 

1An Animated History Of U.S. #GrowthSlowing (5/6/2016)

 

  

In this animated video, Hedgeye CEO Keith McCullough walks through the recent history of the #LateCycleU.S. economy, exploring peak corporate profits in 2014 to today’s lackluster growth.

 

2. MUST-SEE REPLAY | Key Trends in the Restaurant Industry: Speaker Series (5/6/2016)

 

Click here to access the associated slides.

 

Friday, May 6th at 11:00AM ET our Restaurants analysts Howard Penney and Shayne Laidlaw hosted the second installment of our speaker series. On the call, we had Phil Mangieri and Wally Butkus of Restaurant Research, Phil Hofmann BDO USA, LLP and other industry thought leaders who discussed industry trends with key implications for high-conviction companies our Restaurants team covers, like McDonald's (MCD), Wendy's (WEN), Darden Restaurants (DRI) and Yum! Brands (YUM). Click here for speaker bios and more information about the call.

 

3. Trump’s Path To The Presidency (5/6/2016)

 

 

Hedgeye Director of Research Daryl Jones sits down with Hedgeye Potomac Chief Political Strategist JT Taylor to discuss the path forward for the presumptive Republican and Democratic nominees. 

 

4. McCullough Denounces Trump On Dollar (5/6/2016)

 

 

In this brief excerpt from The Macro Show yesterday, Hedgeye CEO Keith McCullough denounces Donald Trump who reportedly said that a strong dollar is a big problem. “If you think a strong dollar is a problem, you’re a jackass,” McCullough said. “Strengthening the purchasing power of the people is the answer.” 

 

5. Gundlach vs. McCullough on Utilities | $XLU (5/5/2016)

 

 

In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough discusses why he disagrees with DoubleLine Capital founder Jeffrey Gundlach’s call to short Utilities.

 

6. About Everything: The Great Productivity Slowdown (5/5/2016)

 

 

In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe explains why the much-debated productivity shortfall – amounting to $3 trillion – is "simply far too vast to pin on mismeasurement." Howe suggests, "It’s time to take the productivity slowdown seriously" and explains the broader implications for investors.

 

Click here to read Howe’s associated About Everything piece.

 

7. McCullough: Why Our GDP Forecasts Are So Accurate (5/4/2016)

 

 

In this special excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough takes subscribers “behind the curtain” on our quantitative forecasting model and how we interpret and debate evolving economic data.

 

8. Will the Stock Buyback Boom Go Bust? (5/3/2016)

 

 

In this brief excerpt from The Macro Show, Hedgeye Senior Macro analyst Darius Dale responds to a subscriber question about whether “financial engineering” can continue to prop up the stock market.

 

9. McCullough: The Most Important Point I’ll Make Today (5/2/2016)

 

  

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why he’s not going to be the “crazy one” buying U.S. stocks at this point.


Saudi Arabia King Salman Appoints Former Aramco CEO Al-Falih as New Energy Minister

Saudi Arabia announced a major cabinet reform and reshuffle this morning that also included the appointment of former Aramco CEO Khalid Al-Falih as the new Minister of Energy and Industry replacing long-time oil minister Ali Al-Naimi.

 

Al-Falih is highly respected and well-known in the energy community. As Aramco CEO, he transformed a national oil company into a global energy company. His appointment will bring stability and credibility to the world's second largest oil producer. When he left Aramco, he was appointed as the Saudi Minister of Health and also stayed on as chairman of the state oil company.

 

The most important take-away here is that a change in oil ministers does not equal a change in Saudi oil policy.  We fully expect the Saudi market share policy to continue at least through 2015, and therefore, we do not forecast any change in OPEC policy at the upcoming June 2 meeting in Vienna.

 

Beginning in January 2016, Al-Falih started to become more visible on Saudi oil policy having a prominent role at the World Economic Forum in Davos. His public comments have been very much in line with current Saudi oil policy:

 

·        "We are not going to accept to withdraw our production to make space for others."

·        "This is the position that we've earned...we are not going to leave that position to others."

·       "Saudi Arabia has never advocated that it would take the sole role of balancing market against structural imbalance."

·       "If there are short term adjustments that need to be made and if other producers are willing to collaborate, Saudi Arabia will also be willing to collaborate."

·       "If the prices continue to be low, we will able to withstand it for a long, long time...obviously we hope it will not happen."

 

There is so much misinformation being reported about today's development. Here are the facts:

 

·       Today's announcement was not just about the oil ministry. It was part of a major reform and reshuffling of cabinet departments. The oil ministry is now the "Ministry of Energy and Industry." The Water and Electricity Ministry has been dissolved. The water portfolio is not part of the environment ministry and the electricity portfolio is now with the energy ministry. Some media reports also incorrectly said Khalid Al-Falih was "fired" as health minister but he was obviously promoted to a new and expanded energy ministry.

 

·        It is quite natural that King Salman would want to make changes to the cabinet and make new appointments. Saudi oil ministers do not freelance, especially on such a sensitive policy matters involving oil production or Iran. The royal court has always made decisions regarding oil policy. Regardless of who is the oil minister, there is never daylight on oil policy between the minister and the King.

 

·       There is a new Saudi central bank governor with the appointment of Dr. Ahmed Al-Kholifey. He is currently deputy governor for international affairs and research and also Saudi Director at the IMF. We expect continuity in Saudi monetary policy. As we have previously written in client notes, we believe it is highly unlikely that the Kingdom will de-peg the riyal from the dollar.

 

·       We would also expect an upgraded role officially or unofficially for Prince Abdulaziz bin Salman who has been the Kingdom's influential Deputy Oil Minister for a decade and also a son of King Salman. Prince Abdulaziz is very active in OPEC activities and an astute observer of the oil sector often relying on market data in making assessments. He is highly respected and well thought of in the global energy community.


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.)

 

Enjoy!

 

1. Truth-Challenged China (5/6/2016)

This Week In Hedgeye Cartoons - China cartoon 05.06.2016

 

China's Shanghai Composite Casino was down -2.8% today and is off -44% since the July crash. 

 

2. Stuck (5/5/2016)

This Week In Hedgeye Cartoons - Fed cartoon 05.05.2016

 

What more can the Fed do? A preponderance of economic data is rolling over despite the central planner's best efforts.

 

3. Red, White & Blew It (5/4/2016)

This Week In Hedgeye Cartoons - Fed cartoon 05.04.2016

 

“A rate hike could be appropriate, if the data is as expected," San Francisco Fed Head John Williams remarked yesterday. As Hedgeye CEO Keith McCullough wrote in today's Early Look, "Given that a recently reported GDP of 0.5% isn’t in the area code of “as expected”, I don’t think Williams has a lot of credibility as a Wall Street forecaster."

 

4. Slow Grrrrowth! (5/3/2016)

This Week In Hedgeye Cartoons - growth cartoon 05.03.2016NEW

 

#GrowthSlowing globally (i.e. economic gravity) can’t be fixed by a central market planning #BeliefSystem this time.

 

5. Tough Times In Tokyo (5/2/2016)

This Week In Hedgeye Cartoons - Japan cartoon 05.02.2016

 

Japan's Nikkei is down -23% from its high in July 2015.


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The Week Ahead

The Economic Data calendar for the week of the 9th of May through the 13th of May 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 - 05.06.16 Week Ahead


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: DE, HBI, LAZ, MDRX, FL, NUS, JNK, TIF, WAB, ZBH, ZROZ, XLU, MCD, TLT

Investing Ideas Newsletter - Fed cartoon 05.04.2016

 

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. 

 

Note that we removed General Mills (GIS) from the long side of Investing Ideas. Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction Investing Ideas.

LEVELS

Investing Ideas Newsletter - levels 5 6 2016

 

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 | 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.

 

As our Growth, Inflation, Policy model is oscillating between tracking in quad 3 and 4 for the second quarter, we’re sticking to core positions that perform well when growth is slowing and the yield curve is flattening:

  • QUAD3: Growth Slowing, Inflation Accelerating
  • QUAD4: Growth Slowing, Inflation Decelerating

The model signals that growth is slowing either way, and we expect a continuation of bond market discounting late cycle, growth-slowing. An allocation to Long Bonds (TLT, ZROZ) and Utilities (XLU) keeps investors out of the way of guessing which way assets levered to inflation will move next. The yield spread 10s-2s moved this week like it is headed toward taking out YTD lows. To be clear, this is NOT an indication that growth is back. 

 

Investing Ideas Newsletter - 05.06.16 Yield Spread

 

How do we know growth is slowing (ex. being validated by Treasury bond market and XLU outperformance)?

 

We look at every relevant data series on a rate-of-change basis to analyze a sine curve. Taking a look at our analysis of Y/Y Non-Farm Payroll growth, a clear cyclical picture develops. Mainstream media and other sell-side sources who talk about guessing the sequential NFP number are pursuing a fool’s errand (a confidence interval that is very wide) in terms of positioning into a number. We call this “open the envelope risk."

 

Rather, constructing a sine curve of the rate of change in NFP growth gives us a clear visual that employment growth peaked (in Feb. 2015), and it’s not recapturing that growth rate in this cycle. So whatever the sequential number is M/M, we know where this series is headed. And, when considered with every other relevant data series, we have a clear empirical view on where the U.S. economy is positioned in the economic cycle.

 

Investing Ideas Newsletter - 05.06.16 NFP

MCD

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

 

McDonald's (MCD) reported 1Q16 earnings on April 22nd that beat consensus estimates. The quarter serves as continued proof that the comeback story is in full swing.

 

The big question is where MCD is headed in terms of their national value platform. They had the McPick 2 for $2, then 2 for $5, now they have shifted to the monopoly promotion. McDonalds regaining a consistent value message is key to their success, and they know this. Additionally, we have another two quarters of tailwind from All Day Breakfast before we begin to lap it.

 

McDonalds’ recovery has been nothing short of extraordinary and has been a great source of alpha for all of its holders. We continue to like the name on the LONG side given the strong fundamental turnaround and the style factors that we love, big cap, low beta and liquidity.

 

Investing Ideas Newsletter - mcd

WAB

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

 

Wabtech's (WAB) 1Q 16 earnings release and call were notable because of what they did not contain: a clear explanation the favorable decremental margin (materials are likely to prove mean reverting) and a disclosure that Faiveley was under significant scrutiny by antitrust regulators. Given those omissions, we are interested to hear more about the Siemens PTC suit. 

 

A failure to be forthcoming is deceptive, in our view.  We have met with several larger longs in WAB that place significant faith in this management team, and we wonder if those holders noticed those omissions. We continue to see WAB as a promising short, and expect 2016 EPS ex-Faiveley below $4/share as the company’s core freight market enters a multi-year downturn.

HBI

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

 

Hanesbrands' (HBI) recent actions give us even greater confidence in our short call.

 

The recent acquisitions at HBI bothers us. At this point late in the cycle, the deals are getting more and more expensive. HBI bought DB Apparel for 7.5x in 2014, Knights Apparel for 8x in 2015, and now both Champion Europe and Pacific Brands cost 10x EBITDA (Pacific Brands was actually 10x on the company's adjusted NTM number, using the proper measure its actually closer to 12x). Basically, though still expensive, HBI is trading at a 20% lower multiple, but it’s deal multiples are 20% higher. Why?

 

Also, if HBI was interested in buying Pacific, why didn’t they do it a year ago at half the price? That’s kind of a rhetorical question. It is a public company … so it’s not like it ‘wasn’t for sale,’ and it’s also not like ‘HBI wasn’t a buyer.’ Just strange to pay nearly $400mm more for the same asset.

 

When a company behaves this badly, no one wins.

NUS

To view our analyst's original report on Nu Skin click here

 

As we reported last week Nu Skin (NUS) reported earnings that beat expectations (which were deflated by prior guidance). An important thing to note is the YoY decline in VitaMeal sales, which fell -8% YoY. We are under the impression that a big driver of distributor growth is provided by contributing to charity. As VitaMeal sales have eroded so have the number of sales leaders.

 

We continue to like NUS on the SHORT side, as the company boasts inconsequential market share in the global personal care landscape, and operates a business model that will likely not be sustainable in the long-run. 

 

Investing Ideas Newsletter - nus

ZBH

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

 

Zimmer-Biomet (ZBH) is now priced for the recovery, with the EV/EBITDA multiple moving back over 10X after touching 8.75X, a multi-year low, in February 2016. ZBH had a good quarter in the US, although we think the leap day, a mild winter, and weak flu season all played positive rolls. The weak flu season helps because patient surgeries are often delayed if a patient is sick and running a fever, or can’t get to the OR because of deep snow. An extra day of surgeries helps as well.

 

As the multiple has recovered, however, estimates have remained consistent. We still believe there are far more risks to the stock from here compared to the upside fundamentally. The price certainly disagrees with us, and we hate to be as wrong on the price as we have been recently. But we still like the short. 

 

We’ll keep digging, talking to surgeons and our policy team, and watching our #ACATaper data. On the ACA, the employment update for healthcare showed that trends continue to slow for healthcare. We think the pent-up demand created by millions of newly insured (and a 6.2-fold increase in knee replacement surgery) is beginning to unwind to the downside.

 

Investing Ideas Newsletter - 20160506 ZBH EVEBITDA

MDRX

To view our analyst's original report on Allscripts click here. Below is an research note on Allscripts (MDRX) written by our Healthcare analysts Tom Tobin and Andrew Freedman.

MDRX | IT ONLY GETS WORSE FROM HERE...

 

Investing Ideas Newsletter - mdrx1

 

inline sales and eps; software delivery bookings plunge -25.7%

Allscripts reported a lackluster 1Q16 with sales of $345.6 million and Non-GAAP EPS of $0.13 coming inline with consensus and our expectations. Recurring software delivery, support and maintenance revenue declined -1.5% YoY, while recurring managed services grew +22.3% YoY.   Total bookings were up +7% YoY to $252 million, but missed consensus estimates of $257 million.  While we were expecting Software Delivery bookings to slow YoY, we were surprised by the -25.7% YoY decline. To provide "context", this was the weakest Software Delivery bookings quarter since 1Q13, and the third consecutive quarter where the 2-year average growth rate has been negative. We also view this as confirmation that the incremental revenue from the University Hospitals contract expansion was mostly maintenance, and therefore had little impact on reported bookings. Allscripts also did not close any new Sunrise deals in 1Q16 despite positive reported deal flow at competing vendors, which supports our negative view of Allscripts weak position in the market.

 

Investing Ideas Newsletter - mdrx2

 

growing client services at the cost of profitability

Offsetting the -25.7% decline in software delivery, Allscripts reported a large mix shift toward Client Services bookings in 1Q16, which were up +61.4% YoY and represents a continuation of a trend that began in 3Q15.  While we acknowledge that Allscripts has been able to execute on their strategy to cross-sell hosting and outsourcing solutions to current customers, we don't view this as a sustainable growth alternative to new system software sales.  We expect the downside of this strategy to become more evident as we head into the 2H16 and begin to run up against the large hosting and outsourcing agreements Allscripts signed with some of their largest customers. Additionally, it is important to note that Client Services (34% of sales; 14.8% GM 1Q16) at full potential (20% GM) has only a third of the gross margin of software and maintenance (66% of sales; 63% GM 1Q16).  2H16 and 2017 profitability will be challenged as the mix shift results in lower gross margins while at the same time Allscripts anniversaries the cost cutting and restructuring that occurred in 2015.

 

another year, another reclassifcation...

Allscripts management has made reclassification routine, and 1Q16 was no exception, further reducing transparency for investors.  With the addition of the recent Netsmart joint venture, investors will have an increasingly difficult time understanding underlying business trends.  After pulling Maintenance backlog last year, management has decided to no longer break out 'Support and Maintenance' and 'System Sales' revenue separately.  It was only a year ago that management thought that these were the right metrics to report.  Instead, they now believe investors need even less transparency and are grouping everything into two buckets 1) Recurring 2) Non-recurring. Needless to say this is a red flag as we no longer have transparency into support and maintenance, which provided the cleanest read on attrition and accounted for 33% of 2015 revenue and approximately 25% of total backlog.

 

estimates still too high

We are reducing our estimates for the upcoming quarters to further reflect our expectation for lower software delivery bookings and a faster than anticipated sales mix-shift toward client services.  This shift will put increasingly negative pressure on gross margin in 2017.  We also increased our R&D expense estimate to reflect additional costs associated with having to bring three EHR solutions in compliance with the new MIPS quality reporting standards by 2017. With respect to bookings, we continue to believe that the consensus estimate for +2.5% bookings growth in 2H16 is too high as the prior year contains deals that we don't view as repeatable.  We are modeling 2H16 bookings growth of -12.4% YoY.  Note that our estimates do not reflect any impact from Netsmart. 

 

Investing Ideas Newsletter - mdrx3

TIF

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

  

During its analyst day, Tiffany (TIF) announced a partnership with Net-a-Porter which would allow the online retailer to sell select Tiffany designs for limited periods of time. Those designs hit the website about a week and a half ago.

 

We find this partnership to be interesting for several reasons, but ultimately it seems to be a move of desperation on the side of TIF.

  1. At face value, the partnership makes a lot of sense. Net-A-Porter, from a demographics standpoint, skews younger than TIF and also high income, perhaps bringing the brand to the younger affluent consumer that TIF needs for future growth. 
  2. Despite claiming to have "best in class digital" during the analyst day, Tiffany's online penetration hasn't grown in about 10 years, sitting at 6%. It seems the company is using this partnership as a way to accelerate growth in the online channel (albeit with a lower realized revenue and gross margin), which it has failed to do on its own.
  3. The timing of the deal is interesting, given that our trackers show 1Q traffic trends have looked very negative at both tiffany.com and net-a-porter.com (charts below).  Perhaps both sides felt the need to make a move in hopes of reversing the weak sales trends.

 

Investing Ideas Newsletter - 5 6 2016 TIF II

LAZ

To view our analyst's original report on Lazard click hereBelow is an analyst from Financials analyst Jonathan Casteleyn.

 

No update on Lazard (LAZ) this week but Financials analyst Jonathan Castelyn reiterates his short call. Below are a few key takeaways from Castelyn's original stock report:

  • 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.
  • Street estimates are unbelievably complacent in our view with numbers that completely ignore the hyper-cyclicality of the advisory and asset management businesses.
  • For 2016, we think the company will earn under $3 in earnings, some -20% below the Street. 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.

FL 

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

 

The first of the athletic retailers reported earnings last night, with the Big Five printing a comp and EPS miss. Sales trends are increasingly negative. After reporting high single digits comps in January, trends slowed to low single digit comps through January and February, and finished 1Q at -1.9%. Comps in 2Q to date are down low to mid single digits. 

 

Foot Locker (FL) points to the highly promotional environment as the driver of comp weakness. Also, in the face of two recent athletic retail bankruptcies (The Sports Authority & Sport Chalet), the company noted that 60% of their stores overlap with these retailers. Investors in the likes of DKS, BGFV, HIBB, and FL are expecting a sales lift from the reduction of competition. But the Big 5 result indicates that there will be more pain before any gain.

 

So, for FL, it looks doubtful that any TSA bankruptcy benefit will hit in 1Q. We would argue that the upside is minimal. Sales started slowing at BGFV and FL before the bankruptcy liquidation commenced (TSA closures are running March-May). And as it relates to FL, there is only a very small portion of TSA revenue that FL could steal, given the 30% footwear penetration rate at TSA, the closing of only ~30% of the stores, and 30% shopper overlap. That puts the total revenue upside for FL around $85mm, or just over 1% growth assuming they take all of the relevant revenue, which competitors won’t allow.

 

Investing Ideas Newsletter - 5 6 2016  FL II

DE 

We added Deere & Company (DE) to the short side of Investing Ideas. Click here to read our Industrials analyst Jay Van Sciver's full stock report.


Cartoon of the Day: Truth-Challenged China

Cartoon of the Day: Truth-Challenged China - China cartoon 05.06.2016

 

China's Shanghai Composite Casino was down -2.8% today and is off -44% since the July crash.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

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