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Real Conversations: How the Smart(est) Money Invests

In this edition of “Real Conversations,” AQR Capital Management principal and Efficiently Inefficient author Lasse H. Pedersen sits down with Hedgeye CEO Keith McCullough to demystify the “secret” world of active investing.  Pedersen, who is also a finance professor at Copenhagen Business School and NYU Stern School of Business, describes some of the key trading strategies used by top hedge fund managers, many of whom he interviewed one-one-one for his book.

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. Bob is on a much-deserved summer vacation. While he kicks back and relaxes, we're going into the Hedgeye Vault and highlighting some of his best work. (Click here to receive our daily cartoon for free.)




1. Blast Off! (8/5/2016)

This Week In Hedgeye Cartoons - Rate hike cartoon 11.30.2015


After Friday's Jobs Report "beat" analyst expectations, Hedgeye CEO Keith McCullough wrote, "After going from hawkish to dovish to hawkish to dovish to hawkish, this Jobs print keeps Federal Reserve hawkish."


2. Choppy Waters (8/4/2016)

This Week In Hedgeye Cartoons - fed 6 9 14


Since Yellen & Co. have totally got this (for sure), we bring you another audience favorite.


3. Bull Bomb (8/3/2016)

This Week In Hedgeye Cartoons - Bull bomb cartoon 09.01.2015


As U.S. equity indices hang out near all-time highs, we bring you another audience favorite.


4. Happy Hour? (8/2/2016)

This Week In Hedgeye Cartoons - Oil cartoon 11.20.2015


With oil down 28% from its recent high, we bring you another audience favorite.


5. Currency Wars (8/1/2016)

This Week In Hedgeye Cartoons - currency wars


In light of all the monetary policy shenanigans, we bring you another audience favorite.


Click here to receive our daily cartoon for free.

The Week Ahead

The Economic Data calendar for the week of the 8th of August through the 12th of August is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - 08.05.16 Week Ahead

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Investing Ideas Newsletter

Takeaway: Current Investing Ideas: HOLX, HBI, LAZ, FL, TIF, WAB, ZBH, UUP, LMT, GLD, TLT

Investing Ideas Newsletter - Rate hike cartoon 11.30.2015


Below are our analysts’ new updates on our eleven 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 PowerShares DB US Dollar Index Bullish Fund (UUP) to the long side of Investing Ideas and removed Junk Bonds (JNK), Dunkin' Brands (DNKN), Allscripts Healthcare Solutions (MDRX) and Treasury Inflation-Protected Securities (TIP). We will send Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction Investing Ideas in a seperate email.



To view our analyst's original report on TIPs click here and here for Gold.


We made some changes in this week's edition of Investing Ideas, with the removal of Junk Bonds (JNK) on the short side and Treasury Inflation-Protected Securities (TIP) on the long-side.


With the epic move in ten-year yields to all-time lows, corporate credit spreads (JNK) have floated off the “risk-free” rate. The pull-back in cross-asset volatility from the February highs in the VIX, OVX (oil volatility index), and the MOVE Index (Treasury volatility index), likely exacerbated the tightening in spreads.


The credit cycle WILL cycle, and deterioration in consumer and corporate credit remains an important Hedgeye Macro theme. This week the Q2 Fed Senior Loan Officer Survey was released which confirmed deterioration in credit conditions (see the chart below for our credit cycle indicator; the chart is busy but it’s worth a hard look).


Investing Ideas Newsletter - 08.05.16 Credit Conditions Indicator


Our team’s macro process is both fundamental and top-down, and we get the top-down signals in real-time. The bottom-line is that both the CRB Commodities Index and crude oil have recently broken down from a quantitative risk management perspective. While this is a key factor contributing to our recent addition of the PowerShares DB US Dollar Index Bullish Fund (UUP), it also signals that TIP does not have as much upside as we thought. As Keith McCullough wrote to subscribers this week:


“Changing my mind on longer-term longs has happened infrequently this year, but it should happen. That’s how the game goes.”


Getting out of a position if it’s not working is much more prudent than stubbornly sticking with it when your process signals otherwise.


Back to growth ... we’ll refrain from commenting on Friday’s headline non-farm payrolls number in isolation, and rather offer some perspective on the cyclical nature of the non-farm payroll data series (you’ve heard it before):

  • On a Y/Y rate of change basis, Non-Farm Payrolls peaked in February of 2015;
  • Once growth in this series peaks and rolls over, it doesn’t return and we move toward economic contraction on the margin. Read: Bullish for Long Bonds (TLT);
  • A print of +282K jobs was needed for July to avoid another Y/Y sequential deceleration in the series. NFP additions were +255K. While this beat expectations of +180K (which was cheered by just about every mainstream media outlet), the TREND in this series remains slow-moving, predictable, and most importantly past peak


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


Hanesbrands (HBI) reported 2Q earnings this week. Salesmanship was on another level this quarter, as Richard Knoll took his 10-year victory lap before officially handing the reins over to Gerald Evans. But, salesmanship on the conference call can't mask lack of sales dollars on the P&L, as HBI missed sales expectations for the 8th time in 10 quarters, and posted the 3rd worst organic growth rate since the company became a serial acquirer. Margins showed the first crack we’ve seen in over 2 years – down 75bps Y/Y as competition and the effects of bloated inventories began to rear their heads. Despite all the talk about inventory reduction actions, core inventory grew 11% on -3% sales growth – even more troubling when we consider tepid demand from the company’s wholesale partners.


Even with some recent weakness in the stock, we like the short even more after this print. All in, we think that HBI has another 40% downside until the risk/reward looks more balanced in our model, with the possibility of an even bigger move in the worst case scenario.


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


As we detailed in our Healthcare Themes deck this past month, the US medical economy is on the edge of a massive deceleration. July Helathcare employment, which is a lagging factor, slowed again. Next week, we will get the leading/coincident indicator of demand in the Job Openings and Labor Turnover series on August 10th.


Since growth in insured medical consumers has slowed to 1.5% currently, and managed care payors are withdrawing from Obamacare Public Exchange business, we expect growth in this series to deteriorate further. Hospital admissions continue to slow through 2Q16, with operators cutting guidance.


While Orthopedic and surgical demand appears positive, we still expect declines to emerge and pricing to accelerate to the downside. The CJR has already hit post-acute care, reducing admissions by 40% anecdotally across joint replacements. The next step, again anecdotally, will be to pressure device costs.


Investing Ideas Newsletter - 0805 Hospital Employment


Investing Ideas Newsletter - 0805 Healthcare Employment


Investing Ideas Newsletter - 0805 Healthcare Employment Slowing


Investing Ideas Newsletter - 0805 Healthcare Employment JOLTS


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


In the latest data from MQSA, which has recently begun reporting placements of Digital Breast Tomosynthesis systems, it would appear that growth is slowing and Hologic's (HOLX) share of the incremental facility is dropping. According to the data, the market added 109 facilities in July after adding 107 in June, this conversion pace is similar to the 2D adoption curve post peak.


As it relates to our data, which shows 33 and 22 facilities converting to Hologic, the implication is that Hologic is losing out. In fact when we spoke to a former sales representative who sold mammography for Hologic, the benefits of one manufacturer over the other were scant at best. Going forward, we expect a slowing US Medical economy, as forecast using the slowing number of insured medical consumers, will provide the second leg of disappointing growth for our thesis.


Next Wednesday on August 10th BLS will update the JOLTS data for healthcare, a time series tightly correlated with market growth. We expect a declining number sequentially and slowing overall which will impact Hologic’s Diagnostic segment, the standout this past quarter.


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 on the company.


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


The government released June PCE data this week. As it relates to Tiffany (TIF), we again are looking at the spend in the luxury sector. Real luxury spending went negative in May for the first time since 2011 and the June number, which showed a slight inflection (lower highs and lower lows), was in negative territory once again. That marks the first time we’ve seen negative spending data at the high-end.


The comp sales trajectory has been one of the worst we’ve seen in retail at Tiffany, and some may argue that the company is facing easy compares. But we think that’s a simplistic analysis, given the weakness we are starting to see in the category. We think the negative macro pressure here will compound the already big demand issues TIF is facing. That means… more sales and earnings surprises to the downside.


Investing Ideas Newsletter - luxury spend


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


Diving in on what the Nike Wholesale and DTC dynamics mean for Foot Locker (FL), we outlined last week that given the likely Nike US wholesale growth scenario, FL needs an incremental $200mm from the likes of UA and AdiBok to hit current Consensus Estimates. This means that UA would need to grow FW 60% and AdiBok 20% with 50% of that growth coming from wholesale with the over arching assumption that FL captures 40% of the incremental share from each of the brands.


The only problem with those type of growth and channel assumptions is that Nike isn’t the only brand navigating around its wholesale partners. AdiBok is the worst offender with 70% of its incremental growth over the past 4 years coming from the direct channel. UA is at 32%, and we think FW growth for UA is more heavily weighted to the DTC channel. That means from here, the likes of AdiBok and Under Armour would need to take share from NKE, allocate over 40% of its wholesale growth to FL, and (not or) redirect a portion of its more profitable retail growth to the wholesale channel. A lot has to go right for that to happen.


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


No update on Wabtec (WAB) but Hedgeye Industrials analyst Jay Van Sciver reiterates his short call. Hedgeye CEO Keith McCullough had this to say about the company in a Real-Time Alerts signal sent earlier this week:


"Again, our Best Ideas research list of SELL ideas is a lot longer than my live SELL list in Real-Time Alerts. Main reason for that = patience. I realize consensus is chasing US Equity Beta, so I'm happy to wait and watch for selling opportunities. 


Wabtec (WAB) has been an excellent SELL idea by Jay Van Sciver. We like it when we don't like a stock and it goes down when the market is going up. Jay's most recent comment on WAB was:


"We will let others summarize the WAB quarter, but would note that our WAB thesis continues to play out reasonably well.  We would caution longs that this is only the third quarter of down freight revenue, and both railcar and locomotive deliveries in the quarter remained well above likely ‘normalized’ demand."


To Patient Bears,



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


On Tuesday, the Air Force declared that Lockheed Martin's (LMT) F-35A has officially achieved “Initial Operational Capability” (IOC).  Specifically, this means that the Air Force now has "an operational squadron of 12-24 aircraft with Airmen who are trained, manned, and equipped to conduct basic Close Air Support (CAS), Interdiction, and limited Suppression and Destruction of Enemy Air Defense (SEAD/DEAD) operations in a contested environment.” 


It is hard to overstate the importance of this milestone for the largest Defense acquisition program in history.  There is now a clear sense of momentum for the program and the operational milestones are coming in bunches.  The commander of Air Combat Command declared that he would be getting the F-35A into operations either against ISIS or to Europe in the “near future.”  The Marines now have two operational squadrons and with the first deploying next year to Iwakuni, Japan for potential operations in Korea.   This week also saw the Navy beginning its third and final phase of developmental testing at sea on the George Washington.  


With operational flight data now available, speculative criticism of operational capability has almost completely withered away.  Concern for costs is still present but it is based on the volume of jets needed/desired (2,443 for US) rather than the unit cost of $80-85M for the A (B&C models cost 10-15% more).

[From The Vault] Cartoon of the Day: Blast Off!

[From The Vault] Cartoon of the Day: Blast Off! - Rate hike cartoon 11.30.2015


Our inimitable, in-house cartoonist Bob Rich is on a much-deserved summer vacation. While he kicks back and relaxes, we're going into the Hedgeye Vault and highlighting some of his best work. After Friday's Jobs Report "beat" analyst expectations, Hedgeye CEO Keith McCullough wrote, "After going from hawkish to dovish to hawkish to dovish to hawkish, this Jobs print keeps Federal Reserve hawkish." Here's another audience favorite ... Blast off!

MDRX: We Are Removing Allscripts Healthcare Solutions From Investing Ideas

Takeaway: Please note we are removing MDRX from Investing Ideas (short side) today.

Hedgeye CEO Keith McCullough is removing Allscripts Healthcare Solutions (MDRX) from Investing Ideas today. Below is an excerpt from an institutional research note written by Hedgeye Healthcare analysts Tom Tobin and Andrew Freedman in which they lay out their outlook for the stock and weigh the current upside and downside.


MDRX: We Are Removing Allscripts Healthcare Solutions From Investing Ideas - allscripts



MDRX: We Are Removing Allscripts Healthcare Solutions From Investing Ideas - mdrx


Allscripts (MDRX) reported 2Q16 Sales of $397 million and Adjusted EBITDA of $69.5 million, with both missing consensus estimates of $403.5 million and $72.7 million, respectively. Driving the miss was a lower revenue contribution from Netsmart of $43 million versus $50 million consensus, and disappointing organic sales growth of +0.6% YoY despite strong bookings performance.  The Netsmart joint-venture and financial consolidation masked what would have been a larger miss, with 2Q16 core Allscripts revenue of $353.6 million missing pre-Netsmart consensus sales estimates of $363.0 million, and our estimate of $357.8 million.  Note that 1H16 organic revenue growth of +1.8% YoY is below management's guidance for core Allscripts growth of 3-5%, and with guidance left unchangedorganic growth will have to accelerate to +6% YoY in 2H16 to hit consensus numbers and management's guidanceThis compares to our estimate of +3.5% sales growth in 2H16 and expectations the company will continue to miss estimates like they have for the past 3 quarters.


Non-GAAP EPS of $0.14 was in-line with consensus and slightly above our estimate of $0.13.  However, we would highlight that a combination of a higher R&D capitalization rate for Netsmart and an increase in stock-based compensationresulted in Non-GAAP R&D expense that was down sequentially, which provided a 190bps sequential tailwind to operating margins in 2Q16.  


Bookings were the big positive surprise in the quarter, but were somewhat anomalous even considering seasonality.  Total bookings excluding Netsmart were +22% YoY with mix favoring higher margin software delivery bookings that were up +44% YoY.   Meanwhile, Client Services bookings were down -6% YoY, -26% QoQand marks a deviation from a 3 quarter trend where the mix shift had favored client services due to cross-selling of hosting and other outsourcing services to existing clients.  We have argued that the rate of 2H15 client services bookings was not sustainable as they max out wallet share with their largest clients. Total backlog growth excluding Netsmart was +5% YoY, which is down from +5.6% YoY in 1Q16 and +6.4% in 4Q15, and in-line with our model implying higher churn given our lower bookings estimate.


We have a hard time understanding the drivers of the strength in software delivery given reported deal flow compared to previous periods and our assessment of a slowing market, which we believe to be valid. Despite the many questions on the conference call, management would not provide transparency into the number.  We question the impact a single deal may have had on the number, specifically the strategic agreement with OptumCare to rollout the Touchworks EHR and Practice Management system across their network of providers.  OptumCare was the "commercial partner" tied to the warrant issuance for 4.1 million shares, and while it appears we were wrong to be skeptical about its near-term impact on bookings, we were right in that it was an atypical structure and more strategic in nature.  

"It's a long term, it's a strategic deal so you can imagine it doesn't look like a typical agreement. It's not a typical agreement. This is the platform which we expect to, over time, translate to a significant sized relationship between the two entities." -2Q16 Earnings Call


Near-term revenue impact from the deal will likely be modest, and while we have more to learn about OptumCare, it seems there may be hurdles to getting physicians to adopt.  Additionally, we place less value on the deal as they had to tradeoff economics in the company to close it.  


"...we're going to be methodical and make sure we get it right, get it plugged into the rest of their standardized platform and that they have the time to educate their providers on the benefit of the standard platform too. So they're not — nobody is interested in jamming it down anybody's throat." -2Q16 Earnings Call


Despite management's positive commentary around improvements in Touchworks and the OptumCare deal, we view it as too little too late, with recent market share losses irreversible, especially at the large IDNs. Additionally, while we appreciate that Black Book "deploys one of the most statistically significant survey techniques in the industry", the results run counter to market trends.  We would like to see the characteristics and details of the survey population ourselves.  


We spoke to a 30-year CIO at one of the largest IDN's in Michigan who is currently migrating away from a combination of Touchworks and Pro EHR to Paul Black's alma mater who had the following to say about Allscripts:

  • "No CIO worth their salt would go with Allscripts"
  • "I am not close enough to retirement to make a bad decision like that [Choosing Sunrise]"
  • "Everyone in the industry knows they lost so many people because of their instability"
  • "No one in their right mind would be their career on Allscripts"
  • "Even if Allscripts was 50% of the money of Cerner or Epic, I wouldn't go with them"
  • "I look at their support and it is really poor because of all the employee turnover"


We like the risk/reward on the short side given back-end loaded sales guidance, at a time where we face the most difficult bookings comparisons of the year.  We don't view strength in software delivery bookings as sustainable, which we believe was confirmed by management's guidance related to bookings mix in future quarters and for a return to normalized software delivery gross margin. Meanwhile, Netsmart acquisition brings more accounting shenanigans and is a low quality, highly levered, short-term "fix" to management's growth problems.

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