Below are analyst updates on our twelve current high-conviction long and short ideas. We will send Hedgeye CEO Keith McCullough's refreshed levels for our Investing Ideas in a seperate email.
Please note that we added Panera Bread (PNRA) to the long side of Investing Ideas this week. We also removed Wabtec (WAB) and Hain Celestial Group (HAIN) from the short side.
IDEAS UPDATES
FXB | UUP | MUB
Below is an institutional research note written by Hedgeye Senior Macro analyst Darius Dale.
Is It Early-Cycle, Late-Cycle Or Does the Cycle Not Even Matter Anymore?
- A slew of recent economic developments have been supportive of the view that the current economic expansion has plenty of room to run.
- Specifically, our analysis of the domestic labor, household consumption and private nonfinancial sector credit cycles suggests the post-cycle peak progression to sub-0% growth is likely to take longer in duration than it has in previous cycles.
- This has positive implications for equity beta and credit markets and may further serve to perpetuate the ongoing backup in rates and the U.S. dollar – neither of which we view as material headwinds to the U.S. economy or domestic capital markets.
In the ensuing weeks post Donald Trump’s surprise election victory, McCullough and I have been on the road visiting with clients and prospective clients in Kansas City, Chicago, London and New York. Needless to say, the fiscal policy outlook and potential changes to the regulatory landscape dominated our discussions. The general sentiment ranged from giddy bullishness brought on by another round of supply side economics to skeptically optimistic. Few, if any, investors were explicitly bearish on The Don – which is probably a signal in and of itself.
One of the more consistent debates throughout this round of marketing centered on trying to identify where the U.S. economy is in the business cycle. Obviously anyone in the giddy bullish camp believes (or at least hopes) the economy is early-cycle. Conversely, 100% of the skeptical optimism centered on the belief that the U.S. economy is late-cycle. Valuations, the rising U.S. dollar and rising interest rates also contributed to said skepticism.
From our vantage point, the U.S. “economy” is neither early-cycle nor late-cycle because we think it makes sense to separate the components of the economy into distinct elements. The cyclical side of the economy, which endured a shallow, but protracted recession is clearly early-cycle and has room to run based on at least 18-24 months of easy comps.
By contrast, the consumption economy is clearly late-cycle; November's jobs report confirms that view as the progression in nonfarm payrolls growth from its February ’15 cycle-peak to where it always goes late in the business cycle (i.e. sub-0%) continues.
All told, the sine curve that is the domestic labor cycle has historically exhibited a period of “x” and an amplitude of “y”. The protracted and mild nature of the post-2009 recovery therein would seem to suggest the downturn might be equally as protracted and mild – i.e. containing a period of “2x” and an amplitude of “0.5y."
Our model is calling for a continued #Quad2 setup (i.e. growth accelerating and inflation accelerating) here in the fourth quarter. The advent of recent economic data (highlighted by the aforementioned consumer confidence release, personal income and spending data, factory orders and ISM PMI reports) continues the trend of positive revisions to our GDP estimate for Q4. Our predictive tracking algorithm is now up at +1.8% YoY/+1.8 QoQ SAAR.
AXP
Click here to read our analyst's original report.
American Express (AXP) has for years been a mighty, blue chip growth stock in the Financials sector. That growth has been driven by the inexorable transition away from paper-based payments, providing the company with a long-term durable top line tailwind. That tailwind is now fading, however, and, simultaneously, pricing pressures are accelerating. The longer-term outlook for top line growth at Amex is darkening. Moreover, the core business is facing growing competitive pressures on multiple fronts.
Beyond this, the post-Trump outlook for a stronger US dollar and rising US rates will create additional headwinds for Amex.
The recent post-Trump, reflationary bounce across the Financials landscape has pushed shares of Amex higher by 20% in just the past month, setting the stage for a better exit point for longs or entry point for shorts.
AMN
Click here to read our analyst's original report.
AMN Healthcare Services (AMN) is a leader in the Nurse Staffing industry and has secured contracts with some of the largest Hospital Systems in the country. However, we believe the tailwinds are fleeting, and that the Affordable Care Act (ACA) has been responsible for much of the good news for AHS. For the US Medical Economy broadly, millions of newly insured have gained access to healthcare services and entered the delivery system with pent-up demand. The ACA-driven incremental demand occurred over a compressed period of time, exacerbating short-term staffing deficits. This created what we believe was a temporary increase in volume and pricing at AMN.
PNRA
"Looking for names that are pulling back today on slow-volume?" Hedgeye CEO Keith McCullough wrote earlier this week. "We're still buyers of US Equity exposure (sellers of Gold, Bonds, Utes, etc.) when stocks we like tap the low-end of our risk range. Panera (PNRA) is one of those stocks."
Our Restaurants analyst, Howard Penney, recently wrote the following about PNRA to Institutional Subscribers:
"What makes PNRA a best idea LONG is the notion that the company has already begun to make investments to offset the negative MACRO environment.
The investments include:
- Panera 2.0, a comprehensive guest experience platform enabled by digital.
- Accelerated growth of catering, delivery, and rapid pick up
- Panera at Home
- Early in understanding the growing importance of wellness and doubled down on menu transparency and clean food
- Creation of a loyalty program that is now the industry's largest
The investments the company is making have driven seven straight quarters of incremental entrees served. While the number of entrées served is a new method for PNRA to calculate traffic, it is a more classic method used by a number of restaurant companies. While some critics might say this is done just to make the numbers look better, it calculates a more accurate view of the number of people eating at a PNRA."
HCA
Click here to read our analyst's original report.
We believe there are several reasons to be cautious on Healthcare, Hospitals, and HCA Holdings (HCA) specifically. The first is what we believe will be the ongoing hangover from the #ACATaper, which we've described and embellished upon since we began publishing on the theme mid-2015. We expect Hospital admissions and many other types of care to continue to slow and likely decline in 2017. We think there is limited upside with significant downside into the $40s given the balance sheet leverage.
CERN
Click here to read our analyst's original report.
Cerner Corporation (CERN) is the #2 EHR vendor in the U.S. and #1 Healthcare IT vendor in the world. While we don't believe this will change anytime soon, we also don't believe they are immune to the challenges of a saturated market with limited replacement opportunity. Simply put, Cerner is a nice house in the bad neighborhood, that is, the EHR industry.
We have been fielding many questions related to the policy implications of Tom Price as HHS Secretary, Repeal & Replace of the Affordable Care Act and the impact it will have on Healthcare IT spending. In our view, the marginal effect from this uncertainty will amplify the ongoing slowdown post-meaningful use and the stimulatory effects of ACA.
While the slew of recent sell-side downgrades are justified, we would caution investors not to view fundamental weakness as a temporary phenomenon tied to a surprise election outcome. With no wholesale driver of EHR replacement activity the market will enter a secular decline and reimbursement pressure coupled with a persistent EHR implementation hangover will weigh on Hospital CapEx budgets for the next several years.
WFM
Click here to read our analyst's original report.
The latest CPI Food at Home (FAH) information showed an ever so slightly improvement in deflation in what could be a signal that we have hit the bottom. CPI FAH was down -2.2% in November which is a 10bps sequential improvement from Octobers results of down -2.3%.
Whole Foods Market (WFM) continued the strength it had on Thursday into the Friday trading period in part due to this news. We continue to love WFM for the fundamental turnaround of the business and the benefit it will see from the reflation trade.
WMT
Click here to read our analyst's original report.
In a quarter where Target (TGT) beat earnings expectations by 25%, mostly from cost cuts on the SG&A line, Wal-Mart Stores (WMT) continued its investment behind the business. SG&A sq.ft. was up 8.5% on a TTM basis compared to TGT down 1.2%. That’s good for nearly a 10 point spread between the two retailers.
We are hard pressed to see how this ends well for TGT as its biggest competitor dictates the marketplace, and it’s other biggest competitor (AMZN) takes 28% of the incremental consumer outlays. We’ve already seen the divergence in investment between the two retailers manifest itself in a meaningful bifurcation in traffic trends, with WMT at 2yrs of positive traffic, and TGT at 2 quarters of traffic declines. We expect that trend to continue.
PENN
Click here to read our analyst's original report.
Here are two catalysts for our Penn National Gaming (PENN) long thesis:
- Regional gaming might be improving – We were already projecting sequentially accelerating improvement from October but there seems to be a new level of optimism in regional gaming. We’ll see over the next few weeks as the states release gaming revenues whether our forecast proves too conservative. We think it will. Looking ahead, our contacts are now expecting some growth. Positive same store EBITDA growth next year would probably surprise some investors. Following our meeting with management, we now feel there is actually some opportunities for cost cutting so even in a flat revenue environment, EBITDA could grow. PENN has run a pretty lean operation for a few years so we hadn’t expected even more cost saving initiatives.
- Capital return makes sense right now – Despite sluggish regional gaming revenues this year, PENN finds itself in a good position to start returning cash to shareholders. With only maintenance capex, 2017 will be a year of cash harvesting. A dividend is possible, but with the stock down here, a buyback program makes much more sense and would be a bigger catalyst for the stock, in our opinion.
MU
Dear Activist,
Please consider an activist position in Micron Technology (MU). We believe there is considerable upside in breaking up Micron and selling the pieces.
After collecting $42b through the sale of Micron’s DRAM and NAND businesses, you will need to pay down the debt ($4.4b net), and you will be left with a $1.1b mixed-memory business that includes NOR, PSRAM, and various other flavors. We think that business can fetch between 0.5x to 1.0x EV/S. Netting that all out, on equity alone you could harvest ~$38 per share, approximately 2x today’s share price.
-Hedgeye Technology analyst Ami Joseph
