The Economic Data calendar for the week of the 23rd of May through the 27th 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.
Takeaway: Current Investing Ideas: DE, HBI, LAZ, MDRX, FL, NUS, JNK, TIF, WAB, ZBH, GLD, ZROZ, XLU, MCD, TLT
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.
Please note that we added Gold (GLD) to the long side of Investing Ideas. Our Macro team will send out a full stock report on Gold next week. We will send CEO Keith McCullough’s updated levels for each ticker in a separate email.
If you haven’t yet, you got another chance to buy long-term Treasuries at lower highs this week. (In Real-Time Alerts, Keith McCullough signaled a good buying opportunity in TLT on Wednesday for those who aren’t already long a continuation in growth slowing.)
If you’re already long of Long Bonds (TLT, ZROZ), stick with it. None of the relevant data released this past week suggests that growth could inflect and trend positive:
Tying together a continued deceleration in growth with policy expectations, the most important callout is that our expectation for growth in Q2 is well below consensus and Fed expectations (which have been horribly inaccurate). When Janet does have to acknowledge deterioration, we expect the policy shift to be dollar bearish on the margin. And, to the contrary, if the Fed RAISES RATES (June) into this slow-down, they’ll be the catalyst for DEFLATION (down yields) again anyway.
And there’s nothing Gold (GLD) likes more than a falling dollar and falling interest rates which is why we added it to the long-side of Investing Ideas this week. Remember, this is the same week various Fed members were in public calling for a rate hike with the worst jobless claims print since 2012. #GoodLuck.
It's clear to us that U.S. growth continues to slow. For this reason, buy more of what’s working: Long Bonds (TLT, ZROZ), Utilities (XLU), Junk Bonds (JNK) and Gold (GLD).
To view our analyst's original report on McDonald's click here.
McDonald's (MCD) continues to evolve. The company's latest step is testing never frozen burgers at 14 units in the Dallas, TX area. This initiative could give them the ability to compete with better burger concepts such as Shake Shack, In-N-Out and Five Guys.
Meanwhile, there has been chatter about the lack of identity for their value platform in 2Q16. MCD is truly still in the testing phase as to what their national value message will be. We can appreciate the fact that they are testing multiple formats before fully committing.
In the meantime, the tailwind from all-day breakfast will continue to propel growth going forward, until lapping this initiative in 4Q16. We continue to favor MCD as one of the best LONGs in the market right now, due to actual growth and style factors that are friendly in volatile markets.
To view our analyst's original report on Wabtec click here.
When a bull story hinges on the acquisition of a French manufacturing company, we think investors should recognize a problem. Especially since that acquisition has been postponed to at least the fourth quarter due to further requests from the EU regulators. To make matters worse, the DOJ has not formally weighed in on the proposed acquisition. We think the Faiveley deal is unlikely to be completed in its current form.
So given weak rail volumes, poor railcar and locomotive orders, we continue to see Wabtech (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.
To view our analyst's original report on Hanesbrands click here.
We’re hosting an institutional call on Monday, May 23rd to review our thesis on Hanesbrands (HBI).
Here's a synopsis. This HBI short goes beyond the whole ‘peak margins, low cotton cost, in a weak category’ argument. HBI has a management team that was aggressive, but is now behaving in a borderline reckless manner. Management is aggressively selling stock while it uses shareholder capital to accelerate acquisition activity at increasingly high (and potentially deceptive) multiples at the tail-end of an economic cycle, as its own factories operate near peak utilization. These deals are supporting earnings, while the Street looks right through the special charges. Ultimately, we see 40% downside from here.
We’ll be back with updates following the call.
To view our analyst's original report on Nu Skin click here.
No update on Nu Skin (NUS) this week but Hedgeye Consumer Staples analysts Howard Penney and Shayne Laidlaw reiterate their short call.
To view our analyst's original report on Zimmer Biomet click here.
Politico sponsored a webcast this week where Cliff Deveny of Catholic Health said that admissions to nursing homes for patients undergoing joint replacement has dropped -45% under the CCJR. That is an incredible result and points to success for Catholic Health not just in lowering the post-acute care costs (nursing homes are more expensive than home care) but also the other buckets of savings likely to occur under the program in the coming years.
Click here to view the webcast.
After the post acute savings on nursing home care, there will be savings from delaying surgery for potentially high-cost patients who have heart disease or obesity, and finally the cost of the implant. We continue to think the fundamentals for Zimmer-Biomet (ZBH) and the ortho sector are going to deteriorate over the coming quarters with the CCJR just one part of the thesis.
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On a related note, earlier this week, our Healthcare analysts Tom Tobin and Andrew Freedman were on HedgeyeTV discussing their top ideas, including Allscripts (MDRX), Athenahealth (ATHN), Hologic (HOLX), Illumina (ILMN).
Tobin and Freedman also explained the latest trends in the Healthcare space like their #ACATaper thesis and provided an update on the JOLTS report with implications for HCA Holdings (HCA) and AMN Healthcare Services (AHS).
Click here to access the associate slides.
To view our analyst's original report on Allscripts click here. Below is an excerpt from a research note on Allscripts (MDRX) written by our Healthcare analysts Tom Tobin and Andrew Freedman.
Takeaway: Competitive gap widens as vendors struggle to find their way amid a slowing EHR market; replacement activity driving share to the winners.
We spoke with a former Greenway Salesperson to gauge the current state of the ambulatory market and for any read-through to public peers ATHN, MDRX and QSII. Greenway Health sells EHR and Practice Management solutions primarily to physician offices. Greenway was acquired by private equity firm, Vista Equity, in 2013 for $644 million and subsequently merged with Vista's other portfolio EHR company, Vitera Healthcare. Greenway's three main products are 1) Greenway 2) Sage-Success and 3) Intergy, and combined represent approximately 6% of the ambulatory practice management market today. Below are our key takeaways:
Anecdotes and data continue support our view that in a post-stimulus environment, market share will accrue to the top vendors (ATHN, CERN, eClinicalWorks and Epic) in a market that remains highly fragmented. Replacement purchase decisions will be driven by value, quality and performance, where initial decisions were made in haste to capture stimulus dollars. Additionally, provisions within MACRA support the adoption of open and interoperable systems, which athenahealth is the most favorably disposed, in our view.
We would emphasize that athenahealth's core competency, value-prop and competitive advantage remains their revenue cycle management capabilities as part of an integrated clinical solution. RCM is a market that struggling EHR-centric companies have turned too for growth as the core EHR market slows, but have found little success due to their limited track-record. We are seeing this play out across the space based on our checks with PracticeFusion, CareCloud, Greenway, McKesson, GE, NextGen and Allscripts over the last 6-months.
To view our analyst's original report on Tiffany click here.
Tiffany (TIF) reports 1Q earnings on Wednesday, May 25th. Looking at recent data points, it seems that this event is more likely to be negative than positive.
This quarter may not reveal a headline miss. 1Q EPS expectations are low, as they should be, since management guided the quarter to be down 15-20% y/y, and sales trends have not shown a bottom. But we believe that the back half acceleration management is hoping for is becoming less and less likely to happen. Translation…earnings expectations need to come down again.
To view our analyst's original report on Lazard click here.
No update on Lazard (LAZ) this week but Financials analyst Jonathan Casteleyn reiterates his short call.
To view our analyst's original report on Foot Locker click here.
Yesterday’s Foot Locker (FL) earnings call marked the most bearish that management has been on Nike in roughly 56 quarters.
Yes, that’s 14 years…but who’s counting?
No, this is not a clash of the two 800lb gorillas like in 2002 arguing over FL’s order cuts in the wake of the Vince Carter Shox appealing to virtually nobody except Carter himself (not even in the Raptor’s home market of Toronto). But, at least to us, FL management was super cautious on Nike. At first it was the discussion about how Basketball was down mid-single digits in the quarter. And mind you, basketball is 40% of the revenue, and Nike has a 95%+ share of FL basketball. That’s about 38% of FL revenue base that was under pressure. But then we heard CEO Johnson talk of the ‘big turn’ at Adidas, and how he would like more product from both Adidas and UnderArmour.
Then one thing became abundantly clear to us…
As FL took its ‘Nike Ratio’ (the % of product it sells that is Nike) from 40% to 73% over this economic cycle, it lost the ability to think and act on its own. You heard it in management’s tone “we WANT more Adidas and UnderArmour, but Nike won’t let us.” Our sense is that FL wants maybe 50% of its store to be Nike, but unfortunately it has to take a lot of Nike’s junky product (yes, Nike makes some junk) and excess inventory in order to be assured premium allocation of the good stuff.
But, Nike stuffing FL with swooshes is absolutely NOT ok, when comps decelerate, FL’s most profitable business is down, it’s missing out on hot product from other brands that are gaining momentum, expenses pick up – causing FL to delever SG&A in a 1Q for the first time since the Great Recession – and EPS growth slows to the lowest rate since 4Q09.
Even though we think FL is a solid short, we absolutely believe that the company has a good management team. A good management team, however, will look at its brand portfolio, and take action when 72% of its business belongs to a brand that is changing up the footwear distribution paradigm. It’s got to be clear to FL management that this dependence on a single brand is no longer working – at least if it wants to accelerate growth and returns. The risk there is that FL cuts 2-3% of expected sales, and then Nike responds by cutting 10% – and giving the increment to DKS in order to stabilize that part of the wholesale channel.
All in, we give FL all the credit in the world for its comments. But the reality is that it sticks with 70%+ Nike and faces an eroding earnings algorithm, or it diversifies away from Nike and faces potential business risk. Sure, FL is down today in an up tape. But this short call is far from over. Estimates remain too high, and we think we’ll see multiple compression repeatedly over the next year.
To view our analyst's original report on Deere & Company click here.
We will let others summarize Deere & Company's (DE) quarter, but we want to lay out what we think longs are missing in Deere. DE is and will remain a value trap. We expect the P/E ratio, which was <9x on peak FY13 in early 2014, to steadily expand as the shares underperform and earnings drop faster than the share price.
While there is often an urge to call the cycle turn, particularly in a larger index weight, those bottom callers typically become bag holders. Given the large used equipment overhang, excess capacity, competitive pressure, and deteriorating farm credit, we don’t think the risk of missing the next Ag upturn should be a concern, even for very long-term investors.
With the confluence of the late-April FOMC minutes and various regional Fed heads floating policy trial balloons having stolen the show this week, it’s easy to forget that the rest of the world still exists. As such, we thought you’d find the following detailed synopsis of we thought were the key developments from the RoW (ex-Europe) helpful. As always, please feel free to email us with any follow-up questions.
Emerging Markets: Given especially easy base effects, we find it somewhat shocking that key high-frequency growth metrics continue to broadly decelerate across the preponderance of emerging market economies in the MAR/APR timeframe (refer to the “Magical Data Dump” section at the conclusion of this note for more details). Moreover, the vast majority of data showing acceleration remains in contraction territory. We are not truly surprised, however, given that we remain the authors of the most thoughtful long-term bear case on EM from here – which we are keen to reiterate amid our structurally bullish bias on the USD. Refer to our 3/23 note titled, “Is the EM Relief Rally Nearing Its [Eventual] End?” for more details on the looming EM bankruptcy cycle.
China: Save for the housing sector, Chinese economic growth has clearly faltered here in APR amid tighter administered policy and increasingly hawkish policy expectations, at the margins. Per our 5/2 note titled “Post Stabilization, Are You Now Too Sanguine On China?” this is right in line with our expectations and we expect such dynamics to remain ongoing. All told, we reiterate our structural bearish bias on China amid what is quite possibly the world’s longest list of secular headwinds – not the least of which is demographics.
Japan: Japanese economic growth is faltering across a variety of key high and low-frequency metrics, prompting a renewed push for expansionary fiscal policy out of Abe’s Diet. Elsewhere in Japan, there appears to be a growing rift between U.S. and Japanese officials over yen intervention. BoJ governor Kuroda came out ahead of this weekend’s G20 summit in Sendai Japan pledging to ease monetary policy if JPY strength interfered with the BoJ’s goal of achieving its +2% inflation mandate. Separately, as senior U.S. Treasury official warned against yen intervention, stating: “there is no disorderly trading in the yen that would justify intervention”. This divergence highlights the risk that Europe and Japan may soon exit what may have been a global FX détente initially outlined at the late-February Shanghai G20 summit. Recall that we first discussed this risk in our 4/28 Early Look titled, “Positioning and Sentiment” and subsequently detailed it in our 5/9 note titled, “Reflation Reversal Risk Part II”. The ultimate impact of the ECB and BoJ refocusing their priorities on domestic outcomes in lieu of global matters is #StrongDollar deflation. We reiterate our negative bias on Japan, but that view may be starting to become stale in the context of higher-lows in the USD and lower-highs in the JPY. Trade the respective ranges accordingly.
India: Subramanian Swamy – a rising star in the ruling BJP – has allegedly secured a critical mass of support among party leaders to eschew RBI governor Raghuram Rajan when his term ends in September. Recall that many investors credit Rajan with taming one of Asia’s fastest inflation rates, stabilizing the rupee and moving to clean up 8 trillion rupees ($120B) of stressed assets in the financial system. Additionally, Rajan was a key public advocate for fiscal discipline. While 90% of Indian CEOs polled this week by The Economic Times newspaper back Rajan for a 2nd term, any increase in support for a “no” vote risks catalyzing incremental stress in Indian financial markets. Elsewhere in India, upper house elections were positive, on the margin, for Prime Minster Narendra Modi’s reform agenda, but meaningful hurdles remain with the BJP holding only 27.3% of total seats. All told, we reiterate our negative bias on India amid #Quad3 stagflation.
Taiwan: Disastrously weak export orders for the month of April may portend incremental bad news for AAPL investors. We don’t have a directional investment bias on Taiwan the current juncture.
Brazil: Brazilian financial markets have finally started to [aggressively] price in what we thought was a dramatically limited scope for fiscal retrenchment and economic reform as detailed in our 4/19 Early Look titled, “What Did You Buy?, as well as Brazil’s ongoing economic collapse – which itself is deteriorating per the latest data. All told, reiterate our structural bearish bias on Brazil, as outlined in our 3/16 presentation titled, “Is This a Generational Buying Opportunity in Emerging Markets?”
Turkey: Binali Yildirim – a close ally of Turkish president Recep Tayyip Erdogan – is set to become the country’s new prime minister after current PM Ahmet Davutoglu steps down in the coming weeks. The change will significantly strengthen Erdogan’s grip on power as he seeks to dramatically elevate the status of what has historically been a largely ceremonial post. Recall that Erdogan and Davutoglu frequently butt heads over the former’s consistent overreach during the latter’s 14-month stint as prime minster. In a backdrop of a marginally hawkish Fed, Turkish financial markets are responding quite poorly to the specter of an authoritarian regime: the Borsa Istanbul 100 Index is down -10% and the TRY has declined -6% vs. the USD over the past three weeks, respectively. We don’t have a directional investment bias on Turkey at the current juncture.
Magical Data Dump (color coding):
Have a wonderful weekend,
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After Quantitative Easing and NIRP (negative interest-rate policy) have failed to deliver economic growth, central planners are now talking about helicopter money. Delusional? Yes.
Takeaway: We are removing athenahealth (ATHN) from our Best Idea List, but staying long in the Position Monitor.
We are removing athenahealth (ATHN) from our Best Idea List, but staying long in the Position Monitor. The recent CFO and other high-level employee departures, combined with negative anecdotes related to the Streamlined rollout and what looks like an early slowdown in our tracker reduces our conviction over the intermediate term. Over the long-term, we continue to believe athenahealth is well positioned to take share in ambulatory and the recently entered inpatient market. What will get us out of the position completely, and possibly pivot short, is if the athena-Tracker continues to slow over an extended period.
The other high-level employee departures include Senior Financial Officer, Parth Mehrotra, who left in March 2016 for a COO position at Brighton Health Group and Director of Enterprise Sales, Ian Ha, who left in December 2015 for a similar role at Flatiron Health. We suspect that the Florida Cancer chargeback was related to Ian Ha's departure, as Florida Cancer currently uses Flatiron for their Oncology EMR solution.
We are becoming increasingly concerned about the disruption that the Streamlined rollout is having on users. We have observed a growing outcry of dissatisfaction both from our outreach using the tracker data, and through various social media and software review websites. We also witnessed several users discussing their dissatisfaction with Streamlined at the New England HIMSS conference earlier this month. The reviews are fairly consistent, complaining about "too-many clicks", poor workflow design and lack of responsiveness from account managers, with some even comparing the new EMR to Allscripts. While we understand that docs don't like change, we would be remiss to ignore the negative and potentially lasting impact this type of disruption can have in such a highly referential industry. As a result, we expect the Net Promoter Score (NPS) to get worse before it gets better and continue to be a headwind to small and group bookings as the Streamlined rollout continues through year-end.
While it is never a good sign to see a CFO leave, in this situation, we believe it is for the right reasons and a net positive for the company. As we had expected, the departure was the result of Jonathan Bush needing to step back in as the direct report to oversee and manage the culture, which had been changing for the worse under Kristi Matus's leadership and the dual CFAO role. The management change is in response to employee comments, such as those on glassdoor.com, as well as a struggle to balance rapid growth and maintain the important employee culture. This is an issue they have been dealing with for some time and a decision that was not made in haste, but came to in a mutual realization recently (Jonathan Bush/Board and Kristi Matus) that they needed to separate roles and Jonathan Bush, CEO, needed to step back in. As there was not another suitable EVP level position available, Kristi Matus decided it was best to leave for other opportunities.
Karl Stubelis, CFO and previously Controller for 3-years, reiterated 2016 guidance, and both he and Jonathan Bush emphasized that Kristi Matus's departure was not due to financial or accounting misconduct.
Please call or e-mail with any questions.
In this brief excerpt from The Macro Show earlier today, Hedgeye CEO Keith McCullough responds to a subscriber’s question about whether he thinks there will be a “20% or more” drawdown in the S&P 500 from here. Spoiler Alert: He does.