There was more action than usual this week in Investing Ideas. Friday's Fed-induced volatility storm reminded investors (like last December's "hike" did) that raising rates into a slowdown perpetuates the slowdown.
Please note that we added both Whole Foods (WFM) and Vanguard High Dividend Yield ETF (VYM) to the long side this week. We removed Tiffany (TIF), Foot Locker (FL) and Hologic (HOLX) from the short side and the US Dollar (UUP) from the long side.
Below are our analyst updates on our thirteen current high conviction long and short ideas and Hedgeye CEO Keith McCullough's refreshed levels for each.
LEVELS
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
- "Trade" is a duration of 3 weeks or less
- "Trend" is a duration of 3 months or more
- "Tail" is a duration of 3 years or less
EXPE
Click here to read our analyst's original report.
Expedia continues to be our favorite way to play the OTA (Online Travel Agency) space. With a multitude of growth drivers in place, including HomeAway and the Orbitz integration, Expedia is well-positioned to expand its already massive global platform. Last quarter, EXPE showed us that it is well ahead of schedule with regards to the AWAY model transition, while pointing to additional acceleration in the back half of the year. As for the Orbitz integration, management expressed that the heavy lifting is largely behind them and that they are incrementally optimistic that a large portion of OWW cost synergies will be realized.
We continue to like the set up for the remainder of the year and look forward to providing additional analysis as we near quarter end.
LVS
Click here to read our analyst's original report.
On the heels of a stronger than expected (consensus expectations) Macau Gaming Revenue figure for August, Las Vegas Sands shares continued to march higher, finishing the week with strong relative and absolute returns.
After two years of declining revenues in Macau, it appears that positive and sustainable growth is once again on the table. What’s driving the growth? Hotel rooms and perhaps other non-gaming amenities are driving higher visitation and, importantly, more overnight guests that stay longer and play more. As we have previously stated, the central tenet of our bullish thesis on Macau is predicated on the acceleration of Mass gaming revenue growth. This is best expressed by LVS ... the most pure mass operator in Macau.
In the coming week, the company is set to open their fifth integrated resort in Macau, The Parisian. Management color around hotel bookings and early expectations for the property have been positive. We reiterate our call on long call here.
TLT | GLD | MUB | VYM
To view our analyst's original report on Gold click here.
We made a few changes week-over-week in our core macro positions with the removal of the U.S. dollar (UUP) and the addition of the Vanguard High-Dividend Yield ETF (VYM).
The removal of the U.S. dollar was based on the indicator that trumps all in asset management – the market’s signal:
“This is signaling sideways and is not the sort of idea I want in Investing Ideas"
- Keith McCullough
While the U.S. dollar remains BULLISH from an intermediate-term TREND duration, the risk that the Federal Reserve pivots again on their hawkish commentary in recent days (despite deteriorating data) is not one we want to be in front of. And from a market signaling perspective, the U.S. dollar actually finished lower on the week despite the implied probability of a federal funds rate hike increasing from 59% to 62% by December (Expectations for the federal funds rate by December 2016 have actually moved higher really since Jul) – not good when a catalyst isn’t a catalyst any longer. We’re on the sidelines for now on the USD and will keep our currency exposure to gold.
IMPLIED PROBABILITY OF FED RATE HIKES
We also added VYM on the long side after a relative pull-back in large cap, low beta, liquid names, an exposure we’ve like for the balance of the year. So we can now buy back that exposure lower. As you can see in the style factor table below, high debt, high beta, and small cap stocks in the S&P 500 have outperformed over the last month. As Keith McCullough wrote to II subs Friday:
“We've seen plenty a one-way chart chaser lose lots of other people's money doing it otherwise (they are chasing what’s worked recently). VYM has a 3% Yield and is signaling immediate-term TRADE oversold within our bullish intermediate-term @Hedgeye TREND view.”
HBI
Click here to read our analyst's original report.
There was a recent Bloomberg story about Hanesbrands being a good strategic fit for VFC. Our advice? Ignore it. The logic is flawed.
Here’s why…
- True, it’s been a while – five years to be exact – since VFC (a serial acquirer) has done it’s last deal. That was Timberland for $2bn.
- But there’s a reason why it’s been 5 years. VFC is extremely valuation-focused. Multiples have been inflated in the 3 years since it integrated Timberland, so it’s been out of the game. Whether we’re at the end of an economic cycle or not (we probably are), the reality is that VFC THINKS we are. It won’t step up deal flow at these multiples with earnings at risk.
- There’s another key consideration. Circa 2007 with the sale of Vanity Fair, VFC sold out of the last of its intimate apparel brands at a 4x EBITDA multiple. It wanted out of the commodity-priced brands that owned its own manufacturing assets. Why in the world would it acquire HBI, which is exactly what it exited (but on a much larger scale)? HBI bought Maidenform in 2013 at 9.5x EBITDA. VFC did not want it then (at that price) and it almost certainly does not want it now.
- Does VFC want to acquire its way into Wal-Mart and Target? Seriously?
- HBI itself has been on an acquisition tear – buying underwear assets for up to 12.5x EBITDA. They’re doing this all while the CEO (otherwise young at 58) is exiting the business.
- It bought Pacific Brands in Australia – a big deal at $800mm. Our view on Australia is that the economy is at considerable risk of a consumer collapse as the ability to tap into home equity evaporates. The average underwear replacement cycle for dudes is about 7-years. As gross as that may be, in a consumer downturn it can stretch to an even nastier 10 years. That means sales and margins come down for anyone selling the stuff. HBI could prove, in the end, to have paid 20x or higher for this asset – one that we don’t think is scalable beyond Australia.
- We think Pacific Brands management knew this. It was shopped and sold well before it was bought. HBI was the highest bidder. VFC knows this. HBI knows this. That is one reason why the CEO is stepping away.
- Bottom line – not going to happen.
This remains out top short in Retail.
LAZ
Click here to read our analyst's original report.
Financials analyst Jonathan Casteleyn reiterates his short Lazard thesis. He has no new update this week.
LMT
Click here to read our analyst's original report.
Below is an update from Hedgeye Senior Defense Advisor LtGen Emerson "Emo" Gardner USMC Ret.
As of Friday's close, Lockheed Martin is down 8.9% over the last 30 days, compared to the S&P 500 which is down 1.9%. That still puts the stock up ~12% YTD compared to the S&P’s 6%.
Investors apparently remain unhappy with the final result of the Reverse Morris Trust divestiture to L3 of LMT’s commercial services business (-600K shares). Recently increased short interest is allegedly based on perceived cash strain caused by the still unfinalized contract for 160 FY 2015 and FY 2016 lots of F35 aircraft which has a total value of ~$16B. However, most of that risk should have been mitigated by the government’s August payment of $1B in an Undefinitized Contract Action which came in response to LMT grousing in its quarterly earnings call.
While all sides claim a handshake deal is imminent, monthly costs are increasing as the initial aircraft of the deal have now been in work for more than 18 months and production ramps from 53 aircraft delivered last year to nearly 100 two years from now. C130J sales remain strong. LMT appears to have come in second to RTN in its bid to provide missile defense (MEADS) for Poland. The jury is still out on purchase of Sikorsky.
On a strategic level, the outlook for increased defense spending continues to improve as each of the candidates and Congress look to outdo each other with hawk talk. Just this week, Trump proposed 25% increases to US force structure. North Korea reminded everyone that it still craves attention with its largest nuclear test ever, even while Russia continues to threaten eastern Europe and the Middle East continues to hemorrhage. The US engaged in air strikes in six separate countries on a single day this week.
WAB
Click here to read our analyst's original report.
While the bull story continues to pin its hopes on an acquisition of a French manufacturing company (which we still think the deal will not go through in its current form) Wabtec’s high-margin aftermarket business is continuing to deteriorate as equipment continues to be pulled into storage. 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. We remain short.
AHS + HCA
Click here to read our stock report on AMN Healthcare Services (AHS).
We remain short a number of names in the Healthcare Position Monitor related to our #ACATaper thesis. In case you're not already familiar with this thesis, here's a brief overview.
The implementation of the Affordable Care Act (ACA) resulted in a largely unprecedented influx of newly insured individuals. Because many of those formerly chronically uninsured had deferred care and carried higher acuity, their utilization rates subsequent to gaining coverage were comparably higher. The ramp in the insured base coupled with higher utilization and cost rates for the newly insured drove healthcare consumption higher and a discrete ramp in sales in earnings growth for the sector. Growth rates in healthcare relative to the S&P500 broadly and its defensive brethren (staples and utilities) decoupled, leading to marked outperformance in the related equities. The #ACATaper theme is centered on the reversal of this dynamic as the sector comps out of the benefit and growth shows a meaningful deceleration.
HEALTHCARE JOLTS -4.75% yOy jULY 2016
BLS released the Job Openings and Labor Turnover Survey (JOLTS) for July 2016 this morning. Healthcare Job Openings continued to slow sequentially and posted the first year-over-year decline in 26 months of -4.75% YoY. We have found a strong relationship between job openings in healthcare to overall medical consumption generally, and hospital same store admissions specifically. Healthcare Job Openings were down sequentially -6.0% and on a rolling 3-month basis decelerated to +5.2% YoY. As a percentage of Healthcare Employment, Healthcare Job Openings remain above 6% but below the peaks seen in 2015.
For HCA and AHS we have drawn specific conclusions from the deceleration in insured medical consumers and lower per capita spending for the newly insured that we believe is reflected in the JOLTS data.
