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A Nasty Day For Debt Collector PRA Group (Another Solid Short Call By Josh Steiner) $PRAA

Takeaway: PRA's weak quarter is only the beginning of it's downturn, says Financials analyst Josh Steiner. We still see "significant downside."

A Nasty Day For Debt Collector PRA Group (Another Solid Short Call By Josh Steiner) $PRAA - praa

 

Today hasn’t exactly been a happy day for investors long debt collector PRA Group (PRAA). After the company missed first quarter earnings estimates by a wide margin, shares plummeted over -18%. Ugly? Of course. But this barely scratches the surface of PRAA’s underlying issues.

 

To be clear, our Financials analyst Josh Steiner has been advising our customers to short PRAA. Since adding it to his team's Best Ideas Short list in November, shares are down almost 30%.

 

Here’s an excerpt from an update on PRAA via an institutional research note written by Steiner:

 

“PRA Group (PRAA) reported 1Q 2016 earnings after the close last night. The company missed revenue expectations by -6%, reporting $225 million versus expectations for $240 million, and adjusted EPS of $0.85 fell -11% short of expectations for $0.96. GAAP EPS, meanwhile, was $0.69, 28% below expectations.”

 

It’s also important to note, as Steiner continues, “Operating margin has fallen by a massive -770 bps from 39.2% in 1Q15 to 31.5% in 1Q16.”

 

Another highlight that caught our Financials team’s attention, since the broader issue is on the SEC’s radar, was the widening disparity between PRAA’s GAAP and non-GAAP earnings:

 

The last 9 months have seen GAAP earnings of $1.91, while non-GAAP earnings have been $2.87 (50% higher!). We think the buyside and sell-side may be slowly waking up to the fact that GAAP numbers are the better gauge of how PRA is performing. It's also remarkable how in the last 9 quarters, not once have Non-GAAP earnings been lower than GAAP earnings.”

 

Other important issues to watch include further deterioration in major company metrics, regulatory scrutiny, allowance charges and IRS-related tax troubles. In other words…

 

Not good.

 

Bottom Line: “Given the numerous aforementioned headwinds, we believe this quarter’s broad deterioration in PRAA’s metrics is only the beginning of the company’s downturn. We continue to see significant downside to PRAA’s stock price.”

 

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Editor’s Note: To access our institutional research email sales@hedgeye.com.


Reality Bites Retail: Most Bankruptcies Since 2009

Takeaway: The Aeropostale bankruptcy marks the sixth of the year -- putting the YTD count ahead of the full-year tally for each of the past 6 years.

Editor's Note: Below is a brief excerpt from an institutional research note written recently by Hedgeye Retail analyst Brian McGough. To access our institutional research email sales@hedgeye.com.

 

Reality Bites Retail: Most Bankruptcies Since 2009 - chapter 11 bankruptcy

BANKRUPTCY CYCLE PLOWS AHEAD

 

In case you were hiding under a rock, Aeropostale finally did a favor for both the teen shopping crowd and the investment community alike when it filed Chapter 11 this week. There are two major takeaways from where we sit…

Click charts to enlarge

 

Reality Bites Retail: Most Bankruptcies Since 2009 - retail bankruptcy 1

  1. First off, let this serve as a reminder as to how long these apparel retailers can sustain a state of sub-mediocrity without going under. While not super high margin businesses, the only real capital needs are in inventory -- as capex is generally low, and property values are almost all off-balance sheet. In other words, by the time a company looks like it is headed to file, it might actually have another full economic cycle left in it. That's Aeropostale.
  2. Secondly, this event marks the sixth major retail bankruptcy of the year -- putting the year-to-date count ahead of the full-year Ch 11 tally for each of the past six years. If we annualize the current run-rate, we'll be on track to see more bankruptcy events than any year in two generations -- including the Great Recession. In fairness, as someone astutely pointed out to us last month, Chapter 11 filings are historically weighted toward the start of the fiscal year. That, in fact, is true. But we're still likely to see a few more by the end of the year. Regardless of any nuances, the most notable point to us is that we're seeing such a significant uptick in business failures when we're so late in this economic cycle.  

 

Reality Bites Retail: Most Bankruptcies Since 2009 - retail bankruptcy 2


As Neil Howe Predicted In March … ‘Trump Will Run To Left Of Clinton’

 

Renowned Demographer and Hedgeye Sector Head Neil Howe is always one step ahead of the crowd. Case in point: A popular Washington Post article today lays out how presidential hopeful Donald Trump is “running to the left of Hillary Clinton.” In a then controversial video on HedgeyeTV, Howe predicted this would happen … back in March. Watch as Howe and Hedgeye CEO Keith McCullough review and update his prescient call in this brief excerpt of The Macro Show.


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[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too

Takeaway: International equity mutual funds, a long standing divergent from soft domestic equity trends are starting to weaken now too.

Editor's Note: This is a complimentary research note originally published May 5, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

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Investment Company Institute Mutual Fund Data and ETF Money Flow:

While the long standing weakness in domestic equity mutual funds continued during the week with another -$5.5 billion redemption, international equity mutual funds are now looking worse for wear with 7 straight weeks of outflows including the latest survey's -$2.4 billion outflow for the category. For the better part of this cycle, international equity funds have been positive contributors to asset management complexes as the #1 performing market every year over the past 25 years has been abroad and with financial planners evolving to global total return strategies, foreign stock mutual funds trends have been stable (only in 2008 did international stock funds have redemptions). With nearly 2 months of consecutive redemptions however and a 2016 weekly average down over -40% year-over-year from 2015, this once stalwart category is weakening. International stock fund flows (shown in orange below as a 5 week moving average) tend to track performance of the MSCI World Index and Franklin Resources (BEN) closely tracks both flows and market returns as the manager with the biggest exposure to both foreign stock and bond assets-under-management.

 

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - 1 Theme normal

 

In fixed income, all bond mutual funds put up their largest inflow of the year last week, taking in +$8.3 billion as investors headed for the safety of fixed income in the actively managed space. With tax season payments winding up and incremental risk aversion during the week, investors also shored up +$10 billion in money market funds. The best performing traditional asset management stock year-to-date is Federated Investors (FII), the leading public money fund manager with 8% share of the money market industry.

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI1

 

In the most recent 5-day period ending April 27th, total equity mutual funds put up net outflows of -$7.9 billion, trailing the year-to-date weekly average outflow of -$1.9 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$8.3 billion, outpacing the year-to-date weekly average inflow of +$2.2 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$4.8 billion, outpacing the year-to-date weekly average outflow of -$676 million and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$70 million, trailing the year-to-date weekly average inflow of +$1.7 billion and the 2015 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI2

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI3

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI4

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI5

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI12

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI13

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI14

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI15

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI7

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors pulled a whopping -$672 million from the XLP consumer staples ETF, -7% of the fund's market cap.

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI17

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$11.5 billion spread for the week (-$3.1 billion of total equity outflow net of the +$8.3 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is -$1.2 billion (negative numbers imply more positive money flow to bonds for the week) with a 52-week high of +$20.2 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI10 2

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

[UNLOCKED] Fund Flow Survey | International Equity Funds Weakening Now Too - ICI11 


ABOUT EVERYTHING: Live Q&A @ 2:30pm ET With Hedgeye's Neil Howe

ABOUT EVERYTHING: Live Q&A @ 2:30pm ET With Hedgeye's Neil Howe - neil howe about everything

 

What are you doing this afternoon?

 

World-renowned demographer, historian and economist Neil Howe (the guy who coined the term “millennials”) is hosting a special, interactive live Q&A at 2:30pm ET today for investors.

 

It’s free—and you’re invited. Click here for exclusive access.

 

In this sixth installment of his About Everything series, best-selling author Neil Howe will discuss the long-term secular decline of the cable industry. During these interactive broadcasts, Howe dissects the key underlying demographic trends and distills the broader implications for investors and their portfolios.

 

You’re encouraged to ask a question during the Q&A.

 

For the record … Howe has written over a dozen books on generations, demographic change, and fiscal policy. Vice President Al Gore called his first book, Generations, “the most stimulating book on American history that I have ever read,” and sent a copy to every member of Congress. Newt Gingrich called it “an intellectual tour de force.”

 

Howe is always insightful and thought-provoking…

 

click here to join us


What's Been Driving Macro Markets?

Takeaway: Bulls are begging for a dovish Fed and as the Down Dollar trade reversed yesterday Metals & Mining stocks and Russian equities took a hit.

 What's Been Driving Macro Markets? - dollar crumbled

 

What's been driving macro markets?

 

Look no further than the U.S. Dollar, Hedgeye CEO Keith McCullough writes. Bulls are begging for a dovish Fed, as the dollar's inverse correlation to the S&P 500 (-0.72, 90-day correlation). 

 

That's why it was so interesting to read the knock on effects yesterday, as the Down Dollar trade reversed even marginally. Here's analysis via McCullough in a note sent to subscribers this morning:

 

"Get the Dollar right and you’re still getting most things macro right – USD hammered #Reflation yesterday (Metals & Mining ETF -7.8% on the day!) and should signal immediate-term TRADE overbought on this bounce up at 94.65 USD Index."

 

 

On The Strong Dollar, Russia took a hit...

 

 

Meanwhile in Japan...

 

"Japan loves Up Dollar, Down Yen – Nikkei +2.2% overnight got US Equity Futures excited, but I’d fade that – Nikkei will signal overbought on the bounce around 16,667 inasmuch as Yen will signal oversold vs. USD around 110."

 

 

More to be revealed.


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