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. We will send Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction Investing Ideas in a seperate email.
TIP | TLT | GLD | JNK
To view our analyst's original report on Junk Bonds click here, here for TIPs and here for Gold.
The week saw a relative alpha retreat in our preferred exposures, but a low volume melt-up in beta isn’t something we’re buying right now. Total market and total exchange volume was well below 1 and 3 month averages in every trading day this week, showing the lack of market conviction and overall confusion behind the move to all-time S&P highs.
Again, we continue to be long of growth slowing and want some exposure to inflation picking up into the end of 2016 behind the CPI easier base effects. All things considered, here's what we recommend and why:
- Long Bonds (TLT) = #GrowthSlowing, yield curve compression
- Gold (GLD) = Protection from global currency devaluation and inflation/down USD – You can travel anywhere on earth and get a quote in local currency
- Treasury Inflation-Protected Securities (TIP) = Combination of the above exposures
- Junk Bonds (JNK) = #GrowthSlowing/#LateCycle. Spreads historically widen late cycle (corporate vs. treasury) and this relative exposure is one we want when the number of corporate defaults in the U.S. is already at 100 and on pace to take out Great Recession levels (LINK). JNK has rallied with Treasuries, but on a relative basis, TLT is crushing JNK YTD with less realized volatility: +14.7% vs. +6.6% YTD respectively
Dissecting a domestic data-filled Friday, industrial production printed down -0.7% for June, marking the 10th consecutive month of contraction while capacity utilization declined for the 16th straight month. The manufacturing recession is ongoing…
Moving over to the consumer, our top-down call was front and center in our Q3 themes presentation. The data shows a rollover in consumption, consumer confidence and corporate profitability, which peaked in 2H14/1H15 (see last week’s write-up: LINK ). However, as the data comes in, we must look at it objectively and June's retail sales reported on Friday was a positive on the margin for growth. Still, as mentioned, the bigger picture view shows a consumption cycle that is past peak.
- Headline retail sales printed +0.6% sequentially with a solid report for the balance of the report’s various components. A partial caveat is that the sequential positive came off a negative revision to May. Still, the report was a marginal positive
- The retail sales control group, which is the GDP input from this data series, finished +7.2% Q/Q annualized off of a positive revision in May
- Building materials, health & personal care, and e-commerce led on both a M/M and Y/Y basis
Part of the game investors must play today is to assess the Fed's policy response to marginally positive data. There’s no question the market was driven largely by the "Fed put" off the February lows. So the question to ask now is does a tick-up in the expectation for a hike support a strong-USD, deflationary pivot? As Keith McCullough wrote in Friday’s top 3 things:
“One way to keep US Equity Beta Up on the week = Dollar Down. But how does that continue from here with U.S. economic growth (Q2 GDP) not tracking to recession (our Q2 predictive tracking algo currently has 1.5-1.8% y/y)?”
Is marginally better news, bad for equity beta? We’re sticking to the aforementioned exposures which have continued to work throughout 2016 (TLT, TIP, GLD).
To view our analyst's original report on Dunkin Brands click here.
With Dunkin Brands (DNKN) up roughly 5% this week, we remain bearish on the name heading into earnings next week (7/21 BMO). Industry metrics have continued to deteriorate as the year goes on.
Below is a Black Box Intelligence chart showing Restaurant-industry traffic trends getting progressively worse. Moreover, traffic is Dunkin’ Donuts’ biggest problem, and with their hefty price increase, they could be in for a rude awakening. We will update you more next week after they report.
To view our analyst's original report on Wabtec click here.
All quiet prior to Wabtech (WAB) earnings on July 25th, Hedgeye Industrial analyst Jay Van Sciver reports. With the stock down -25% since we added it to Investing Ideas, Van Sciver reiterates his short call.
To view our analyst's original report on Hanesbrands click here.
Hanesbrands (HBI) closed the acquisition of Pacific Brands this week. Australia now accounts for about 10% of sales at HBI.
The real deal multiple is about 12.5x EBITDA, which is very expensive, especially when you consider the economic risk within this new market. Australia is currently at an economic cycle peak and facing a housing bubble worse than what we saw in the US during 2007/08. The country is quite possibly on the brink of a financial collapse. (Note: Our Hedgeye Financials team recently held a call on shorting Aussie Housing/Banks.)
When this bubble bursts, the impending recession will have a huge impact on consumption in the market. HBI is guiding that they can take Pacific’s operating margin up to 14% from 9% over 3 years. If the economic situation down under plays out as we expect, that 9% is more likely to be cut in half. The 12.5x EBITDA price in reality could become 20x plus.
This has the potential to be a catalyst for negative earnings surprises relative to expectations.
To view our analyst's original report on Allscripts click here.
Allscripts' (MDRX) stock has rallied in recent weeks on speculation that they signed a large new client agreement due to warrants they issued to ‘commercial partner’ for 3 million shares (1.5% the company) at various strikes on 6/30 (Click Here for the 8-k). We have been told that the issuance was related to a new client relationship. The last time Allscripts did a warrant issuance to a 'commercial partner' it coincided with the $400 million outsourcing agreement with their largest customer, Northwell Health (formerly Northshore LIJ).
While details are limited, we are skeptical that this represents an outsized bookings event in the near-term. However, the relationship is clearly meaningful. What we do know is that Allscripts has been looking for a development Partner for some time, and we would place a higher probability that the 8-k was related to a strategic development agreement with a Health System than a large new deal.
To view our analyst's original report on Tiffany click here.
Sales trends have clearly been weak for Tiffany (TIF) in the US. But we should also recognize that less than half of TIF's revenue and operating profit come from the Americas. Trends outside of the US have been no better.
This week Chow Tai Fook, a large China and Hong Kong jewelry retailer, reported its quarter ending in June and the results were not good. Mainland China was down -13% and Hong Kong/Macau was down -22%.
Asia Pacific makes up about 1/4 of TIF's revenue, and comps in this region have slowed from around 0% in 1H15 to -15% in 1Q16. Chow Tai Fook's results do not a paint a positive picture for jewelry consumption in the Asian market. We continue to see global #GrowthSlowing and global demand for luxury jewelry weakening, meaning continued downside in TIF's earnings that is not currently baked into consensus expectations.
To view our analyst's original report on Lazard click here.
No update on Lazard (LAZ) this week but Hedgeye Financials analyst Jonathan Casteleyn reiterates his short call. Note: The stock is down -12% since we added it to Investing Ideas.
To view our analyst's original report on Foot Locker click here.
Foot Locker (FL) stock has run up 12% in the last 3 weeks, outperforming the S&P and the XRT. At this level, we think Foot Locker is a good short on any duration.
We've talked a lot about the Tail (3 years or less) risk as Nike changes the manufacturing and distribution paradigm for athletic footwear. However, now there is a clear disconnect in the intermediate term (Trend – 3 months or more) consensus expectations and what we think are hittable earnings numbers. After 3 years of nearly bulletproof earnings prints (FL has gone 11 straight quarters meeting or exceeding street numbers), FL will likely see a significant miss or guide down before the books are closed on 2016.
To beat numbers for the 2Q print coming in August, we would have to assume FL sees comparable sales growth of about 4%. FL grew comps 2.9% in 1Q against 7.8% last year, now it is going up against a 9.6% in 2Q with the street expecting a year-over-year acceleration. We think the number will be closer to 2%. At that comp rate, FL can't leverage occupancy and SG&A expenses, meaning margins will be lower.
We think FL EPS numbers need to come down, otherwise the company will struggle to meet expectations for the remainder of 2016.
To view our analyst's original report on Zimmer Biomet click here.
Zimmer Biomet (ZBH): We presented a slide deck detailing our outlook for the US Medical Economy yesterday. One of the incremental analysis we conducted was to calculate the number of insured persons in the United States by month going back for several years.
In the absence of a reference data source, we created our own based on data reported by CMS for Medicaid and Medicare, Obama Administration data for Federal and State exchanges, Census data for Medicare population, and BLS and Kaiser Family to derive the number of employer based beneficiaries.
The #ACATaper theme appears intact with our forecast for the number of insured Americans is set to return to pre-ACA growth rates in 2016 and 2017. The chart shows, what we think is evidence that orthopedic surgical volumes benefited (Society of Actuaries agrees) from the massive expansion seen in 2014 and 2015. While 1Q ortho volume reaccelerated on a 2Y basis, and contradicted our thesis, the magnitude was small, and the bigger picture (years) remains consistent with the thesis, as compared to the short-term variation in quarterly reports, which can be high.
We also updated our JOLTS charts for the report issued this week and continue to see the highly relevant Healthcare job openings series coincident with a slowdown of medical demand, which is what we expect coincident with slowing growth in insured medical consumers.
Click here to read the Early Look, "If You Don't Laugh, You'll Cry," written earlier this week by Hedgeye Healthcare analyst Tom Tobin. In it, Tobin explains why the changing healthcare landscape could be "a jarring experience" for investors "that are unprepared." And click here for a brief video of Tobin on The Macro Show.
To view our analyst's original report on Hologic click here.
The issues we discussed yesterday on our HC Themes call detail a US Medical economy about to slow materially. Our views on 3D Tomo have not changed, and should exacerbate the consensus optimism baked into estimates. The rise and fall of estimates drive valuation and stock prices, but the peer group a company sits in is also an issue to consider.
For Hologic (HOLX), the equipment and supply names appear to be the most extended into the slowdown from a relative and absolute multiple basis. We’ll update our 3D tracker this weekend and our estimates for the quarter. Estimates have come in, but not enough, in our view.
Click images to enlarge
To view our analyst's original report on Lockheed Martin click here.
Below is an excerpt from an excerpt from a recent institutional research note written by Hedgeye Potomac Lt. General Emerson "Emo" Gardner USMC Ret.:
"Motivated by a sense of the unravelling of the European Union in the face of the clear and present danger of Russia, NATO leaders at last week's NATO summit in Warsaw affirmed for the second time their committment to spending 2% of their GDP on defense by 2020. Other manifestations of a renewed NATO included the approval of permanent NATO troops in the Baltics and Poland and the symbolic gesture of the admission of the last Balkan country, Montenegro, to the Allliance.
According to NATO figures, the 28 countries of NATO collectively spend $US 900B annually on defense with US spending of $650B comprising 72% of that amount.
Translating GDP% to the dollars required to meet the goal shows the potential impact of additional spending on the defense industry. In dollar terms the individual nations are underspending from the NATO guideline by a total of $109B annually. Given the 20% equipment spending minimum, there is potential for at least $21B more spending annually on hardware when and if NATO countries meet their goal."
Bottom Line: Even if NATO achieves only a fraction of the promised $109B increase in annual defense spending by 2020, US defense companies will see windfall. Lockheed Martin (LMT) stands to benefit from this significant industry development.