Below are analyst updates on our fifteen current high-conviction long and short ideas along with Hedgeye CEO Keith McCullough's refreshed levels for each.
Please note that we added Bats Global Markets (BATS) to the long side this week. Hedgeye Financials analyst Jonathan Casteleyn will be sending a stock report on the company 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.
One of our 3 major Macro Themes for Q3 centers on the past-peak nature of consumption and income growth and how the slowdown in credit expansion is an important recent additive to the consumer spending slowdown. This all equates to growth slowing and a late-cycle economy which we highlight and explain on a weekly basis with respect to our current active positions - you know the logic.
To highlight Friday’s Retail Sales report:
- The headline sales number increased +0.6% M/M, showing acceleration on a 1-year and 2-year basis with auto sales being a huge contributor to a positive number (+5% M/M which was largely expected from a comps perspective)
- 9 of 13 industry subgroups in the report improved on month-over-month basis with Building Materials, Gas Stations (simply higher gas prices) and food & Drink leading. On a year-over-year basis the breadth was more balanced with only 7 of 13 showing sequential acceleration
- The Control Group (the GDP input) was positive m/m for September after falling in July and August. But aggregating the three months together, the numbers that go into the calculation of Q3 GDP, Retail Sales increased +0.3% on a quarter-over-quarter annualized basis after a +6.8% reading for Q2 – a sizable decline to a large GDP contributing data point.
Now, non-farm payroll growth has peaked in rate of change terms, aggregate hours worked has declined, and productivity has declined. All are clear-cut growth headwinds:
The more recent but highly-important trend with regard to consumer spending is the declining credit growth. The framework is simple:
If the average person’s access to credit increases, their ability to consume increases all else equal, even without wage growth or payroll gains.
In the first of the two charts below we stack income growth on top of revolving credit growth. Despite income growth decelerating (after peaking in Q4 of 2014), credit growth offset the decline for the last two years. Recent trends suggest this tailwind is in the process of reversing. The second of the two slides aggregates income+revolving credit growth into one line to show household consumption capacity growth. The trend in this series is apparent.
All-in-all the data suggests the consumer spending (70% of GDP) cycle is long in the tooth and rolling over. An indicator like credit card delinquency rates ticking higher Y/Y is one piece of evidence (among many others in our themes deck) that credit growth’s ability to cushion the decline in the capacity to consume is exhausted.
LVS
Click here to read our analyst's original report.
No update on Las Vegas Sands (LVS) this week but Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan reiterates his long call.
HCA | AHS
Click here to read our analyst's original report on HCA Holdings and here for our analyst's report on AMN Healthcare Services.
Healthcare Job Openings posted the slowest growth in nearly 2-years on a 3-month trending basis. This provides additional confirmation of our #ACATaper thesis and view that Hospital Same Store Admissions will disappoint relative to consensus heading into Q3 earnings season.
The JOLTS forecast model is predicting Q3 HCA same-store adjusted admissions of +0.5% YoY compared to consensus of +2.3%.
HBI
Click here to read our analyst's original report.
Here is what we think is a killer chart as it relates to Hanesbrands (HBI), supporting our assertion that it’s one of the best shorts in Retail.
This chart measures the spread between HBI’s margins and those of the retail channels in which it sells 75% of its product. This is key for a few reasons. The margin spread between content/distribution is invariably the smallest at the start of an economic cycle. But as the cycle matures, margin dollars tend to accrue to either the more powerful of the two – or whomever simply wants it more. Today, we’re at a 900bp margin spread between HBI and WMT/TGT/M/JCP/KSS/$ Stores/etc.
Historically, when the cycle breaks we see a significant narrowing of this gap. That highlights one of the key factors we think people look right through with HBI. This is a company that manufactures 65% of its own product unlike other apparel brands that have a 3rd party/offshore model. The consensus thinks margins at HBI will tweak by 20-30bps in a given year. But that’s not the case when the business cycle rapidly stresses or eases. When that’s the case we can see 200-300bps change in margin ( possibly even more). In effect, its margin cycles should be viewed not unlike an industrial (CAT, Deere, Navistar) and not a traditional apparel brand.
That’s when we see a name like this go from peak to trough multiples on trough margins.
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, Wabtec's (WAB) 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. WAB reports Tuesday, October 25th. Stay tuned.
CERN
Click here to read our analyst's original report.
We spoke with the C-suite at McLaren Health about the factors that led to their selection of Cerner for an integrated EHR, Revenue Cycle Management and Population Health system in October 2015. The purpose of the conversation was to get a better understanding of the RFP process, contract structure, competition, implementation timeline and technology needs of one of the top 100 IDNs in the United States with $3.5 billion in Net Patient Revenue.
KEY TAKEAWAYS
- Considered Epic and Cerner, but quickly eliminated Epic because it was 1.5x more expensive and Cerner provided equivalent functionality. MEDITECH did not have a proven ambulatory offering, and did not even consider Allscripts, and would not have even if Allscripts was 50% cheaper.
- Nine month contract period with favorable terms for new growth ($500k annual for 300 bed hospital) and safety provisions if implementation goes poorly, particularly on the revenue cycle side. Go-live January 2017, but likely will be pushed out by a quarter to be safe.
- Approximately $40-50 million total cost of ownership for on-premise hosting over 10-years. $5-10 million up-front software license, $15-25 million in professional services tied to implementation and maintenance 18% of software costs.
- HealtheIntent bundled in as part of catalog agreement, and including patient portal was less than 5% of total contract value. PMPM was not included in the terms and not tolerant of $3-5 PMPM advertised pricing.
- Expects "mounting pressure" on hospital IT budgets going forward, citing reimbursement pressures and persistent EHR implementation hangover. Areas of investment will be in data warehousing and business intelligence to support increased reporting burden.
AXP
Click here to read our analyst's original report.
No update on American Express (AXP) this week but Hedgeye Financials analyst Josh Steiner reiterates his short call.
BX
Click here to read our analyst's original report.
Blackstone's (BX) stock continued its path of least resistance lower during the week giving up another -4% while the broader market gave up just -1%. The stock is now down ~6% since we added it to Investing Ideas on October 4th.
Aside from the weak fundamental setup with compressing industry internal rates of return (IRRs) and also a hyper cyclical business in the wrong part of the cycle, sentiment is very high on BX shares adding a 3rd dimension of potential weakness. In our calculation of the 2 factors that drive sentiment, sell side recommendations and buy side short interest, BlackStone is in the top quartile in Capital Markets (in the #9 spot) and is the second highest rated in the more discreet Alternative asset managers subsection (behind only ARES).
Simply put, this asymmetry has historically made for good longs (on stocks with low sentiment) and good shorts (on stocks with high sentiment).
On a fundamental basis we estimate fair value at $15-$20 or -25%-40% downside for BX shares.
WMT
Click here to read Hedgeye Retail analyst Brian McGough's long thesis on Wal-Mart (WMT) sent to Investing Ideas subscribers earlier this week.
