Below are analyst updates on our thirteen current high-conviction long and short ideas along with Hedgeye CEO Keith McCullough's refreshed levels for each.
Please note that we added the British Pound (FXB) and U.S. Dollar (UUP) to the long side of Investing Ideas this week. We also removed CIBC (CM) from the short side and Bats Global Markets (BATS) from the long side.
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
IDEAS UPDATES
FXB | UUP | MUB
We added the U.S. Dollar (UUP) and the British Pound (FXB) on the long side of Investing Ideas this week. Here's why.
When US growth and inflation are both accelerating (QUAD 2 for Q4 in our Growth, Inflation, Policy Model), the playbook for asset allocation can be summarized as follows:
- Long-term Bonds, Gold, etc. should go down (they have historically)
- Domestic value and growth equity exposures should have positive returns (think Russell 2000)
Pretty simple. Since Trump’s win, the S&P 500 has developed a +0.95 correlation (30-day duration) to U.S. Dollar.
Specific to our currency calls, a down Euro from Draghi’s cowbell (a.k.a. more easing on the margins) this past Thursday perpetuates a #StrongDollar. The Euro still our favorite FX short idea (vs. #StrongDollar long).
In the Global Central Planning playbook, stronger growth and inflation data (like we’re seeing in the U.S.) tends to warrant more hawkish policy. That's also the set-up in Great Britain from a Growth, Inflation, Policy standpoint. This is why we added the British Pound as a long. It’s a relative play on economies. For more color on the set-up for the British Pound, read the bullets below from Macro analyst Darius Dale:
- “Reported growth across the preponderance of high-frequency data has been consistently accelerating on a trending basis, which mirrors the trending acceleration in U.K. GDP growth capped off by the 3Q GDP report. Moreover, our GIP Model has the U.K. economy trending in #Quad2 over the next three quarters.
- Be it 1Y OIS Spreads (+7bps in the trailing 3M), 10Y Yields (+57bps in the trailing 3M), 10Y-2Y Spread (+63bps in the trailing 3M) and 5Y5Y Forward Breakeven Rates (+33bps in the trailing 3M), U.K. interest rates have already begun to price in this incredibly hawkish reality.
- As such, we would expect the BoE to adopt a commensurately hawkish policy stance, at the margins. The obvious investment implication here is to be long of the GBP – especially vis-à-vis the Euro.
- Moreover, investors continue to be overwhelmingly short the GBP and overwhelmingly in the futures and options markets. The crowded nature of this positioning implies material room to run once a bottom in the GBP is formed.”
When the data changes we change our views (#DataDependent). The University of Michigan preliminary December reading for Consumer Confidence, released on Friday, came in at the highest level since 2015. It’s not just a single confidence reading (table below):
- ISM Services ramped to 57.2 in November vs. 54.8 in October and the year-to-date low of 51.4 (August)
- Business Activity spiked to 61.7 in November vs. 57.7 in October and the year-to-date low of 51.8 (August)
- Business Employment popped to +58.2 in November vs. 53.1 in October and the year-to-date low of 49.7 (May)
Much of the high frequency data is reflecting improvement (or an expectation for it), which is why we shifted our core exposures into year-end. Consumer Confidence, Business Confidence, Durable Goods, Retail Sales, ISM Manufacturing and ISM Services all showed a moderate to significant increase in their latest readings. That’s right. Bottoms are processes, not points. Sometimes they happen slowly.
Whether this short-term shift in psyche results in durable data-supported behavior has yet to be seen but, as it stands, Trumphoria continues to roll through the post-October Consumer & Business Confidence Data.
AXP
Click here to read our analyst's original report.
The latest wrinkle in the American Express (AXP) saga came this week from none other than JPMorgan’s CEO, Jamie Dimon, himself. At an investor conference, Dimon mentioned that the success of the Chase Sapphire Reserve card meant that the bank would report $200-300 million less in earnings in the fourth quarter.
The Sapphire reserve card offers 100,000 upfront bonus points after cardholders spend $4,000. The cost of those points is around $1,300/card, which means that as many as 150k Chase Sapphire Reserve cards appear to be in the market already. For comparison purposes, the direct competitor, the American Express Platinum card, has roughly 1.4 million cards outstanding.
The difference?
The Amex Platinum card has been around since the mid-1980s whereas the Chase Sapphire card has been around since mid-August. Chase has fired a major shot across the Amex premium segment bow. The increasingly competitive landscape is one of the core tenets of our bear case on Amex and these numbers from Chase are nothing short of remarkable.
HAIN
Click here to read our analyst's original report.
Management changes won't change the numbers. Hain Celestial Group (HAIN) made a number of management changes this week:
- Gary W. Tickle came on a HAIN’s COO
- Jerome W. Erskin joins Hain as Chief Supply Chain Officer
- James F.G. Fay joins the Company as Chief Customer Officer
- Leah Dunmore comes on as VP, Marketing
- James R. Meiers has been appointed CEO, Hain Pure Protein Corp.
- James Skidmore has been named CEO, Hain Daniels
Despite these changes, we still have little confidence in HAIN going forward, as the Company has still not reported numbers.
AMN
Click here to read our analyst's original report.
October Healthcare Job Openings were +17.7%, up sequentially from -1.92% in September. We have found a strong relationship between job openings in healthcare and overall medical consumption generally, and hospital same store admissions specifically. Healthcare Job Openings were up +5.9% year-over-year on a rolling 3-month basis, down from +17.6% YoY in the same period last year.
As a percentage of Healthcare Employment, Healthcare Job Openings were 7.0%, the highest levels in over a decade. We have drawn specific conclusions from the deceleration in insured medical consumers and lower per capita spending for the newly insured that is reflected in the overall downtrend of the JOLTS data and supports our bearish view on AMN Healthcare Services (AMN).
HCA
Click here to read our analyst's original report on and
We believe there are several reasons to be cautious on Healthcare and Hospitals, and HCA Holdings (HCA) specifically. The first is what we believe will be the ongoing hangover from the #ACATaper, which we've described since we began publishing on the theme mid-2015.
While October Healthcare Job Openings were +17.7% in September, we believe the overall downtrend of the JOLTS data continues to support our bearish view on HCA. We expect Hospital admissions and many other types of care to continue to slow and likely decline in the coming year.
WAB
Click here to read our analyst's original report.
With the Wabtec (WAB) and Faiveley merger underway, we have revised our estimates and expectations for the merged company. We would bet that optimistic WAB holders have not delved into the investment trends and fleet demographics for the European transit market. The chart below is a snapshot of France's transit market. As you can see, the data is rolling over.
Our take is that Wabtec’s acquisition of Faiveley does not bring the ‘accretion’ needed to offset the long-cycle downturn in freight rail equipment investment. Instead, the deal likely offers a host of new risks, inflexibilities, and expenses.
CERN
Click here to read our analyst's original report.
We spent last Friday 60 miles outside Fort Worth, Texas visiting a 17-bed rural hospital that has athenahealth's inpatient system up and running. It is both a development partner and showcase client. This hospital was a RazorInsights customer prior to athenahealth's acquisition in early 2015, and has been on four different EHRs in the last five years.
The purpose of the visit was to see first-hand how the system is being used on a daily basis and to determine its readiness to go mainstream in 2017. What we witnessed was a hospital running the majority of their clinical operations and the entirety of their business office on athenahealth's solution. The hospital staff was extremely pleased with the usability of the system, as well as the level of service from athenahealth on both the clinical and financial side. Overall, there were no major holes in the system not already being addressed that would limit athenahealth's ability to bring the > 80 hospitals in the backlog live in 2017.
The production quality of the tour was top-notch, with access to the CEO, CFO, Business Office Manager and Nursing Director. We were allowed behind-the-scenes into the business office to see how they run reports, work through claims and manage the P&L of the hospital. With a new $30 million hospital to show off, inpatient suites rivaling that of urban peers and no shortage of technological accoutrements, we could not imagine a better showcase client for athenahealth. Athena's success is a significant risk to Cerner (CERN) as Athena starts winning more deals in the small hospital market.
WFM
Click here to read our analyst's original report.
The nine-point plan takes center stage. Whole Foods Market (WFM) was a first mover in the organic food retail space and continues to drive innovation. After a sluggish 2015, WFM decided to refocus and re-dedicate the brand to building a solid foundation for its long-term sustainable growth.
The result was their 9-point recovery plan, put in place to better their business and provide a better product to their customers:
- The plan began with a $300 million cost savings initiative to streamline the business and remove inefficiencies.
- WFM has also begun to implement inventory and labor management systems.
- WFM is investing in price that is backed by national advertising to drive traffic to the stores.
- The company is investing in the simplification of the store, which primarily consists of building a centralized kitchen to streamline processes and technological advances.
Furthermore, over the past 50 years, there have been 6 periods of deflation (excluding the current period of deflation for the "food at home" CPI category) lasting approximately 7.2 months. The current deflationary cycle has lasted 11 months so we are well past an average downturn.
As we approach calendar 4Q16, it looks like early 2017 could be the inflection point in the turn from deflation to inflation and also the sentiment on WFM.
WMT
Click here to read our analyst's original report.
Wal-Mart Stores (WMT) was the antithesis of what we’ve seen this earnings season. If we could characterize what we’ve seen in 3Q to date in a sentence it’d be this… low quality management teams at the likes of KSS and TGT posted big earnings beats, while underspending on SG&A on negative traffic and soft comps, which ultimately amounted to rising guidance for the last quarter of the year.
The sins of 2015/16 will come back to haunt the weaker brands/retailers that are behaving badly (HBI, KSS, TGT, TIF, FL, HIBB, FINL, CRI, JCP, etc…). Lower margins, weaker turns = severe multiple compression on lower numbers.
On the flip side, those that are investing in the face of top line pressures will accelerate market share gains, accelerate top line, improve margins, while simultaneously improving operating asset turns. That equals higher ROIC and multiples on earnings beats.
We think WMT is taking the right strategic actions (investing in stores, e-comm), putting the capital behind that plan (SG&A/sq.ft. was up 8.5% trailing twelve months), in order to continuously win the market share battle – especially in the US market.
As we ran our SIGMA analysis on the WMT numbers following the last print (see table below), the fact that WMT had been in Quad 4 for 6 consecutive quarters caught our eye. That’s usually a transitory quadrant which usually = margin expansion on better working capital management. WMT’s elevated SG&A spend obviously skews that metric, but when we look at the numbers just taking into account the GM performance – it’s clear that the company has made some serious improvements in its working capital management, good for 5 straight quarters of +40bps in GM improvement. And, WMT just comped the comp.
PENN
Click here to read our analyst's original report.
Our positive call on Penn National Gaming (PENN) last week was NOT predicated on whether Trump policies would work or not. However, what we do know is that consumer confidence has improved since the election and may be contributing to driving improved regional gaming revenues.
While Consumer Confidence is not broken out by state, it is clear that a lot of regional gaming markets ended up “flipping” from blue to red this year. Half of the bigger regional markets ended up voting opposite of what they voted for in 2012. Moreover, 80% of those states voted for Trump.
So far, it is likely that Trump is providing a shot in the arm for regional gaming. With that in mind, regional gaming revenues have come in stronger than expected in November, which supports our thesis that, on the margin, things could be getting better – certainly relative to expectations.
We continue to recommend shares of Penn Gaming.
MU
According to Hedgeye Technology analyst Ami Joseph's most recent Institutional Research note, he had this to say about Micron Technology (MU):
- Prices for November and December monthly PC DRAM (and server DRAM) are already above the quarter-price deals struck in September. Specifically, if the Q was ~$17 per module, November might be $18, and December $19.
- Biggest shocker? Customers are seeking quarterly price deals for 1Q17, at prices higher than Nov-Dec levels, up approximately 30% quarter-over-quarter. Price increases may even extend into mobile DRAM for 1Q.
- How good does this get? Micron’s November quarter is about to close. We are more or less in-line with Street. But for the coming February quarter, the recent data – when confirmed – would put us over 130% above Street for Feb-Q EPS.
Joseph will send a stock report for MU next week.
