Below are our analysts’ new updates on our sixteen 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 Hologic (HOLX) to the short side of Investing Ideas. Hedgeye Healthcare analyst Tom Tobin will send out a full stock report on HOLX next week. We will send CEO Keith McCullough’s updated levels for each ticker in a separate email.
IDEAS UPDATES
TLT | GLD | XLU | ZROZ | JNK
To view our analyst's original report on Junk Bonds click here, here for Gold, here for Utilities and here for Pimco 25+ Year Zero Coupon US Treasury ETF.
After a busy week of data and macro meetings with institutional investors in California, typical discussions turned into a debate about whether or not Janet would hike rates in June. As Keith outlined in Friday’s Early Look, here is how the line of questioning went down:
- “I hear you on #TheCycle, but could they raise anyway?”
- “What happens if they don’t raise? Do we rip?”
- “If they raise, then when is the earliest they can start cutting again?”
On Friday, Seasonally adjusted annualized GDP was revised to +0.8% QoQ from the +0.5% print for the first revision with construction spending, trade balance and factory order data driving the positive revision.
So, is that grounds for a hike?
Sure, +0.8% is better than +0.5% on the margin, but what does GDP look like on a trending Y/Y basis. As you can see in the highlight line of our GDP summary table below, Y/Y GDP has trended lower for 4 consecutive quarters, and we expect this to continue:
Shifting to important labor market data. In our view, the probability that the Federal Reserve continues on a tightening course is next to nil if #LateCycle employment data continues to deteriorate, and there are signs that is happening. For example, one of the slides in our Q2 macro themes deck provides a long history of one of Janet’s favorite indicators, the “Change in Labor Market Conditions Index.”
This index has trended positive for the balance of the cycle until 2016. The index has now dipped into negative territory for four consecutive months to the lowest readings since June of 2009. You can see in the chart below that the probable outcome (from here) is for the 4 red bars just reported to go really red sometime soon:
Does Janet want to be the catalyst in expediting that? When the bars in the chart above start to dip deep into red territory, she has to be dovish – it’s part of her playbook, and the dovish pivot will continue to be supportive of #GrowthSlowing allocations on the margin (like Long Bonds (TLT, ZROZ), Utilities (XLU), and especially Gold (GLD).
On Junk Bonds (JNK), in the brief excerpt from The Macro Show below, Hedgeye Macro analysts Darius Dale and Ben Ryan respond to a subscriber’s question about our views on the credit cycle and high-yield debt. Spoiler alert: We're still bearish.
Click the image to watch
MCD
To view our analyst's original report on McDonald's click here.
Aside from the rumors flying around about McDonald's (MCD) potentially moving out of it's Oak Brook, Illinois headquarters and the minimum-wage related protests going on just outside those doors, it was a relatively quiet week for the fast-food giant. No update this week but Hedgeye Restaurants analyst Howard Penney reiterates his long call on McDonald's.
HOLX
We’ve written volumes both on the long and short side with Hologic (HOLX). When we publish the Tomo-Tracker next week we'll include a revenue schedule that is our best estimate of the 3D revenue impact over the last few years by quarter. After combing through the filings and transcripts, we were able to jigsaw our way to a reasonable estimate and forecast.
Following discussions with a number of buysiders this week, we are hearing more concrete chatter that Hologic is talking down 2017 growth in meetings, and is perhaps gearing up to make an acquisition, likely in Surgical, in the near term. A deal, depending on the quality and size of what they buy is a potential positive and could fix their growth profile. However, recent transactions at big multiples have us interested in looking more closely at what they need to spend to fix the 2017 growth declines in front of them.
Healthcare analyst Tom Tobin will send out a full stock report on HOLX next week.
WAB
To view our analyst's original report on Wabtec click here.
We have met with several larger longs in Wabtech (WAB) that place significant faith in this management team, and we wonder if those holders have noticed the many missing pieces in their rosy narrative, especially as the bull case for WAB steadily evaporates. Here are a few recent highlights that strengthen our short thesis:
- 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.
- It is now increasingly clear that divestitures may be needed for LEY FP & WAB US to close. Faiveley’s Braking & Safety Systems – the area most likely to generate overlap concern as we understand it – is about a quarter of LEY sales. Divestitures would almost certainly undermine at least part of the strategic rationale for the transaction.
- WAB's 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). A failure to be forthcoming is deceptive, in our view.
Add in weak rail volumes, poor railcar and locomotive orders and we continue to 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. Below is a review of our short thesis on Hanesbrands (HBI) following this week's Black Book call with institutional clients.
Margins are at peak
HBI’s own manufacturing plants account for roughly 65%. While the company guards these numbers closely, our sense is that utilization is likely running close to 90%. That’s actually to management’s credit, as they’ve got this engine running like a 911 Turbo. But where’s it going to go from here?
Most retail analysts don’t cover companies that actually own manufacturing assets. They all have offshore/outsourced models that lock in price, limit volatility, and make it such that the company has to worry only about design, sales and marketing. The point is that margins for these ‘other’ brands might move by 1-2 points in a year. But for a company like HBI that owns its own assets, we could see 4-5 point swings with no problem as demand shifts and factory utilization drops.
In the end, we ask the question…why should HBI have higher margins (15%) than VF Corp, PVH, Ralph Lauren, and even Nike? We should note that it’s about on par with Gildan, which interestingly is the only other major company that buys cotton directly in such quantities for use in company-owned plants.
These deals are getting 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. Basically, HBI is trading at a 20% lower multiple (tho still expensive) than it was, but it’s deal multiples are 20% higher. Why?
For more, watch the video below, from our HBI Black Book call, for a quick primer on Hedgeye Retail analyst Brian McGough's ten reasons why HBI shares are headed lower.
Bottom line: We see 40% downside from here.
NUS
To view our analyst's original report on Nu Skin click here.
It’s no secret that Nu Skin's (NUS) revenue is heavily impacted by foreign exchange rates given that roughly 85% of its revenue is captured outside of their Americas region. In 1Q16, their revenue was negatively impact -5% by FX. With 34% of their revenue coming from Greater China, the Yuan represents their highest foreign currency exposure.
The chart below displays YoY change in USD/YUAN exchange rate versus NUS adj. EPS growth YoY. The relationship has a negative correlation of -0.74, meaning as the USD gets stronger versus the Yuan EPS tends to trend down. Fluctuations in currency seem to explain how NUS is trading intra-quarter while the success of LTO’s and distributor growth will still be key factors to look at on a quarterly basis.
ZBH
To view our analyst's original report on Zimmer Biomet click here. Below is an update on ZBH from Healthcare analyst Tom Tobin.
Over the next 2 weeks we'll see how far we've gone off course hanging in with the Zimmer-Biomet (ZBH) short as the stock looks as strong as ever. It blew past our $115 entry price from March, 2015 when I first began writing negatively on ZBH.
I hear a lot of "hiding out in Med Tech" from the buyside these days, but the bottom line is that staying short ZBH after 1Q16 metrics looked pretty good has been a mistake. With monthly updates to Healthcare employment, JOLTS, Medicaid enrollment, and Medicaid spending, we'll hold on for a few more days to get the updates.
I don't think we are seeing a fundamental acceleration in orthopedic volume excluding the ACA, but it has been a mistake not to entertain the alternative since the market is disagreeing with us.
MDRX
To view our analyst's original report on Allscripts click here.
No update on Allscripts (MDRX) this week but Hedgeye Healthcare analysts Tom Tobin and Andrew Freedman reiterate their short call.
TIF
To view our analyst's original report on Tiffany click here.
Earlier this week, we sent Investing Ideas subscribers an institutional research note on Tiffany (TIF) written by Hedgeye Retail analysts Brian McGough and Alec Richards following the company's earnings this week. In it, they outline why a combination of horrible results and arrogance caused the stock to decline over -3% last week. Click here to read the note.
LAZ
To view our analyst's original report on Lazard click here.
Below is an update on Lazard (LAZ) from Hedgeye CEO Keith McCullough in which he reviews why the company remains one of his favorite shorts:
"One of our highest quality shorts (since #TheCycle peaked in 2015) has been Lazard (LAZ). JC (Jonathan Casteleyn) is the analyst on this one too.
Our main contention is that the Old Wall 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.
LAZ looks "cheap" if you use the wrong numbers (i.e. peak of the cycle numbers). Being long it has been an expensive mistake in 2016.
Be mindful of the immediate-term risk ranges and don't sell at the low-end of the range.
Wait on SELL signals in core short ideas when they bounce to the top-end of the range.
KM"
While we're on LAZ and Past-Peak M&A...
Here's a key chart from our 2Q16 Macro Themes slide deck.
FL
To view our analyst's original report on Foot Locker click here.
No update on Foot Locker (FL) this week but Hedgeye Retail analysts Brian McGough and Alec Richards reiterate their short call.
DE
To view our analyst's original report on Deere & Company click here.
This quarter saw a sizeable decrease in profit from Deere Financial, partly on lower residual values. Much of the build in farm equity has been an inflation in land values, which is now reversing, and credit is deteriorating across many metrics.
Contrary to the point on the call, lower rents and land values are because of cost pressures, and not alleviation from them. Tight credit is often causal in a downturn, as much as easy credit fuels excessive sales. We expect DE Financial’s profitability to continue to move lower, and would hesitate to value DE Financial at even book value, let alone apply a multiple to its current elevated earnings.
