Below are analyst updates on our fifteen current high-conviction long and short ideas and Hedgeye CEO Keith McCullough's refreshed levels for each.
Please note that we removed Expedia from the long side this week. We also added Sabre Corp (SABR) and American Express (AXP) to the short side. Hedgeye Technology analyst Ami Joseph and Financials analyst Josh Steiner will be sending a stock report on the companies in the coming week.
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
TLT | GLD | MUB | VYM | JJC
Click here To view our analyst's original report on Gold.
It was a busy week of elusive theories for the media to feast on – one being that global investment banks were facing a liquidity crisis (Deutsche Bank), another the speculation of an OPEC oil production quota curb. In short, like Brexit, we believe it’s difficult to predict how the world will react to either of these two events however they get sorted out.
Less important to mainstream media, but more important to us, was the heavy dose of domestic economic data that objectively proves our #GrowthSlowing theme remains front and center. For additional color see last week's update - this week was more of the same.
We’ll highlight why our Investing Idea positions are part of the same call because the market clearly gets our #GrowthSlowing theme. Looking at S&P sector performance, Utilities (XLU) finished the month in positive territory vs. Financials (XLF) which led S&P sectors to the downside, finishing -4.5% on the month. Year-to-date, our favorite sector long, XLU, is +14% vs. our preferred sector short in XLF -1.6%.
If you’ve followed our #GrowthSlowing call, the connection between XLU, TLT, MUB, VYM should be is straighforward – low beta instruments, with fixed cash flows or dividend payments in the future that get discounted at lower rates when the yield curve flattens (a smaller denominator in a fraction = a higher number). And when rates go to zero globally, yield-seeking fund managers rotate from Treasuries, into corporates or munis. And then when rates move even lower they rotate to bond-like proxies like Utilities or High Dividend Blue Chips (VYM).
It’s the global starvation of yield, and the epic inflation of asset prices. You can see this in Trump’s real estate holdings and peak equity market trading multiples that look downright scary. When you consider the fact that 85% of financial assets are held by the top decile of income generators in the U.S., and the top decile accounts for 1/4 of consumer spending, financial asset price deflation is a huge risk to growth – higher interest rates across the Treasury curve would perpetuate this deflation.
So as growth continues to slow, we continue to look to short cyclicality (via Copper (JJC) currently) and instruments that thrive on a steeper yield curve. That helps explain the unequivocal spread in performance between XLU and XLF. A bank traditionally makes money by borrowing on the short-end of the curve where rates are lower and lending longer-term when they give someone a mortgage. The spread between those rates is the set-up for profitability, or the yield spread.
As we’ve called out many times, the yield spread has made lower lows for two years. That also explains why Long Bonds (TLT) are up 14% versus just 6% for the S&P 500 year-to-date. Stick with your #GrowthSlowing exposures here.
LVS
Click here to read our analyst's original report.
Following a better week in Macau, our monthly forecast and investment thesis remains unchanged. We still expect flattish GGR growth for September but mid-to-high single-digit growth for the more important mass segment. We should have a good estimate for Q3 mass revenue growth from the Hedgeye Mass Tracker in early October. In terms of foot traffic at least, Parisian appears to be off to a better start than Wynn Palace although we would caution against reaching any conclusions this early.
Nevertheless, Las Vegas Sands (LVS) remains our top stock pick in the group as it is the company best positioned to capitalize on the accelerating mass segment. We continue to forecast flattish GGR for September. We’ve heard of (and witnessed) strong visitation at the Parisian despite a seasonally slow period leading up to Golden Week (Chinese National holiday week, which starts this weekend). Long LVS remains the call.
WFM
Click here to read our analyst's original report.
We added Whole Foods Market (WFM) to Investing Ideas on the long side on 9/7. In recent news, that signified WFM’s commitment to the grocery delivery service, the company took a stake in Instacart, estimated to be worth $36 million. The shares purchased by WFM were valued at the 2014 share price and added to Instacart’s previous funding round. Before the WFM investment, Instacart had raised more than $270 million. The grocery delivery business has seen a boom recently, as many people (especially Millennials) are shifting from prepared meal delivery services.
The Whole Foods-Instacart partnership began in 2014 (as seen below) and has expanded to more than 25 markets across the country. Such a relationship allows for WFM to reach a greater number of patrons, and make its shopping experience more convenient, in an effort to shed its reputation of being overpriced.
HCA
Click here to read our analyst's original report.
Hedgeye Healthcare analyst Tom Tobin has no update on HCA Holdings (HCA) this week but reiterates his short call.
HBI
Click here to read our analyst's original report.
The traditional line of thinking in men's underwear is that a man chooses a brand at a young age, and tends to stick with that brand for a long time. Perhaps that used to be the case, but now barriers to entry are so low for this industry that we think a material portion of the market is shifting to high-end product and away from the likes of Hanesbrands (HBI). It seems like every week we are seeing a new performance underwear brand marketed to us, and these brands have better design, better style, and better advertising than the large market share holders.
Traditionally, the underwear market was dominated by department stores, Wal-Mart and Target – which accounted for 80% of sales. As such, only brands that could scale into these channels made the cut. That’s Hanes, Fruit of the Loom, Jockey… Now as distribution blows wide open with multiple forms of new media, it’s allowing start-up brands to emerge at an alarming rate. This is a paradigm shift for brands in every segment of the market – from HBI to NKE. Only those companies that see this are taking it by the horns. Nike’s doing it. HBI is not. That’s why CEO Rich Noll is no longer the CEO come Monday. He’s smart, he’s young, and he’s leaving.
WAB
Click here to read our analyst's original report.
Shorts Love Faiveley Deal – Reuters is reporting that the Faiveley deal is set to be cleared by European regulators with the divestiture of “Faiveley's brake pad unit” as a condition of the sale. Brakes & Safety accounted for 23% of Faiveley sales, and the “people familiar with the matter” didn’t get around to specifying what products are included or who regulators would view as credible buyers. In the end, we don’t care that much. As discussed in our April 2016 Black Book on Wabtec (WAB), we think the Faiveley merger is an obvious dud. Let them eat Faiveley.
WAB is a high short interest name and needs to be handled accordingly. Well, we believe the misplaced strength is here and perhaps not for long.
AHS
Click here to read our analyst's original report.
Our #ACATaper theme continues to play out as we watch the U.S. Medical Economy data slowly deteriorate. Employment gains have rolled over from their peak in March of 2016 to their lowest point since September 2015. There is no change to our short thesis and we still believe shares of AMN Healthcare Services (AHS) are headed back to the low-$20s. Our next major data point will be the jobs report released next Friday morning.
CERN
Click here to read our analyst's original report. Below is an excerpt from an institutional research note written by the Hedgeye Healthcare team.
FIELD NOTES (CERN, ATHN, MDRX) | CENTRA HEALTH
Takeaway: Centra Health signed an Enterprise-wide IT agreement with Cerner in April 2016. Cerner will be replacing MCK, MDRX and ATHN.
OVERVIEW
We spoke with an individual close to the c-suite at Centra Health, and who was involved in the RFP process that led to the selection of Cerner for their Enterprise-wide IT platform in April 2016. Purpose of the conversation was to get a better understanding of the RFP process, contract structure, competition, implementation timeline and technology needs of a medium-sized health system.
Centra had been a long-time McKesson client, with four of their acute care hospitals (841 beds) using Horizon as the primary EHR and Star for revenue cycle management. Centra currently uses Allscripts Emergency Department (ED) application in all four hospitals and Allscripts Homecare in their hospice facility. On the ambulatory side for ~450 providers, Centra uses a combination of Allscripts Pro EHR and athenahealth for Practice Management. Driving the timing of the replacement decision was the sunset McKesson's Horizon EHR.
This is consistent with our view that > 30% of all EHR replacement decisions since 2013 were driven in-part by McKesson and with their market share depleted, is not a repeatable driver for new bookings heading into 2017 and beyond.
key takeaways
- Cerner / Centra deal approximately $100 million total cost over 10-years. $26.5 million in licensed fees to be paid out within first 3-years and 16% maintenance. Approximately $15 million in professional services for EHR build and $5 million for education and go-live support. Remaining $20 million managed services for hosting and third party subscriptions.
- Currently pay $2-3 million in recurring maintenance to Allscripts (MDRX) for their ED solution and Pro EHR for 200+ providers. Approximately $2.5 - $5.0 million to athenahealth (ATHN) for ambulatory revenue cycle management.
- 18-month implementation timeline from contract signing in April 2016. Targeting 1Q18 for first go-live that will include ambulatory and revenue cycle, and main hospital. Go-live timing corresponds with the sunset date for McKesson Horizon.
- Worked with Gartner Consulting when evaluating vendors, and quickly eliminated Allscripts because they didn't have the "back-end power" for their financial system and didn't have a complete clinical application suite.
- Epic was too expensive at $150 million over 10-years and would not negotiate price; considered Epic Connect with larger Virginia IDN, but still was going to be ~$100 million and would sacrifice control over IT.
- Long-time McKesson partner, considered making the switch to Paragon, but there was a lot of "vapor ware" and realized that they were not going to meet long-term needs. Began looking at new vendors in 2014 and accelerated decision when McKesson announced sunset date of 1Q18.
BX
Hedgeye Financials analyst Jonathan Casteleyn reiterates his short call on Blackstone (BX), which is down -3% since we added it to Investing Ideas. He will send out a stock report outlining his thesis early next week.
