Below are analyst updates on our seven current high-conviction long and short ideas along with Hedgeye CEO Keith McCullough's refreshed levels for each.
Please note that we removed Penn National Gaming (PENN) Textron (TXT) and Wal-Mart (WMT) from the long side and Cerner (CERN) from the short side of Investing Ideas this week. We also added Lockheed Martin (LMT) to 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
On Friday, domestic economic data confirmed the trend that the U.S. is experiencing a positive inflection in both Growth and Inflation (Quad2) in 4Q16. While the Q/Q Seasonally-Adjusted Annualized GDP reading came in lighter than we would have expected, the core trend is intact.
This economic data-inflection theme was largely the first theme in our Q1 Macro Themes presentation. As we mentioned in last week's newsletter, Industrial Production broke 15 straight months of negative year-over-year growth last week. That same positive inflection came through with Durable and Capital goods reported Friday:
- Durables Ex-Defense & Aircraft (household demand proxy) = +0.9% sequentially for December and improving solidly to +3.6% YoY = 3rd month of positive YoY growth
- Capital Goods, like industrial production last week, broke the negative growth streak (13 months) = +0.8% MoM for December and accelerated to +2.8% YoY. That was the fastest pace of growth since September 2014.
Now on to the Q4 2016 GDP highlights…
- Net exports were a -170 basis point drag on the Q4 GDP reading of 1.9% (QoQ SAAR). We knew there’d be a reversal, but the magnitude of the drag was significant. You would have to go back to 2Q10 when it lopped off -177bps from a final number of 3.9% QoQ SAAR to get anything larger in absolute terms. In relative terms to the total, you have to go back to 1Q07 when it dragged -155% of the final figure (vs. -89% today).
- With the advent of the Q4 handoff, our model is now anticipating a real GDP growth rate of +1.5% YoY and -0.76% QoQ SAAR for Q1 of 2017, which, in conjunction with our expectations for inflation, would represent a dip into #Quad3.
- Trump is likely going to blame Obama for this and we’ll likely see his administration ratchet up anti-#StrongDollar rhetoric in the coming weeks. We remain buyers of the greenback on weakness, however, as the preponderance of his hinted policy remedies (shy of leaning on the Fed) are overwhelmingly bullish for the USD. – See our previous write-ups for in-depth logic.
- Historically, in #Quad3, we’ve been buyers of bonds, gold, utilities, REITS and high-dividend, minimum-volatility stocks in #Quad3, but we continue to strongly advocate against that strategy on any correction.
- Instead, we continue to advocate that investors use any investable correction to allocate capital to high-beta stocks, the financials, tech and consumer discretionary as our model is currently forecasting three consecutive quarters of #Quad1 to round out the year.
And here is a more granular breakdown of the fourth quarter GDP components and outliers…
- Consumption: Contributed +1.7% (down from 2.03% last quarter) – but basically as we’ve been calling for = flat sequentially on a YoY basis = +2.84% YoY in 4Q vs +2.78% YoY in 3Q.
- Net exports: We knew agriculture exports (i.e. soybeans) would fully reverse and give back last month’s gains. We already had 2 months of data (below) so we knew drag would be sizeable. It was however a surprisingly large reversal with contribution -1.74% vs. +0.85% last quarter.
- Inventories: Contributing a big +1.0% to the GDP number (i.e. better than anyone thought at beginning of the quarter) was inventory numbers, which in Oct/Nov came in pretty good on the back of solid gain last qtr. Inventory-to-Sales ratio’s had been rising for a few years before the last quarter+ but the relevant question now is whether businesses are correctly building inventory into currently rising forward demand.
- Investment: Outside of inventories, Residential investment was strong while nonresidential investment was largely flat sequentially
MU
As Hedgeye CEO Keith McCullough wrote earlier this week on Micron Technology (MU):
"I've been waiting on an immediate-term TRADE oversold signal in Micron (MU). They've been few and far in between. While many have a had a hard time buying on red for the last 2 months, I haven't.
I haven't been chasing longs after they go up either. That's not how I roll.
On Micron (MU) specifically, our Senior Tech Analyst, Ami Joseph, thinks that understanding the implications, good and bad, are the more important elements to understanding the trajectory of Micron's equity value.
Specifically, he thinks we're used to a fairly consistent range of supply and demand growth, with negative matching years providing great shorting opportunities, and positive matching years providing great opportunities to get long. But he asks "what if the range changes in the next three years? Is it positive or negative?"
Recent news on MU has been positive, and we think pricing is going a lot higher."
TWX
Click here to read our analysis on why we think the AT&T/Time Warner (TWX) deal will be approved. Here are the key takeaways:
- Disregard the Rhetoric: We continue to believe the proposed transaction will ultimately be approved (and we doubt DOJ will file a lawsuit to break up Comcast-NBC Universal). The campaign is over and we doubt the merger was a significant factor affecting the outcome of the election, suggesting it will not be a policy priority. Moreover, much of the President's attack on the deal was probably driven by his broader criticism of bias in the mainstream news media (i.e., CNN).
- Burden of Proof: The Justice Department will conduct a civil prosecutorial investigation and we doubt the Trump Justice Department will pursue a highly uncertain and ambitious case to block this vertical merger. Challenges must be filed in federal court with the burden of proof on the government. In other words, blocking the deal is not an executive decision within the unilateral power of the President, and we doubt DOJ would want to pursue a weak case in court. The Antitrust Division does not like to lose.
- FCC Review?: If FCC review is successfully avoided, the odds of approval go way up. We would be in the 70 percent range on likely approval because DOJ review, by itself, is not likely to present a strong enough case to advocate an injunction in federal court. Again, the burden of proof in such cases is on the Justice Department.
CRI
Click here to read our analyst's original report.
On Wednesday, a Wall Street bank upgraded Carter's (CRI) to a buy giving it a one day jump, but the stock gave it all back by week’s end. Here’s a quick hit on why we continue take the other side:
- US store growth is saturated. Moving to Canada.
- Structurally, the company can’t comp consistently.
- It can't keep selling the same product in all channels – at completely different prices.
- It's over-earning vs all of its distribution channels.
- CRI is not prepared for the Amazon onslaught.
- The entire category is in deep trouble in a border tax environment.
- It has very few margin levers.
- There will be near-term cotton cost headwinds.
- Margin expectations are too high.
- The company just missed its first quarter in 7-years. This quarter might be in check, but likely to guide down again.
This short has been working, we continue to like it unless we get a reset of expectations.
WFM
Click here to read our analyst's original report.
No update on Whole Foods Market (WFM) this week but Hedgeye Consumer Staples analyst Howard Penney reiterates his long call. The company announces earnings on February 8th so we'll have more to report then.
LMT
"I'm on the road with General Emo Gardner today in San Francisco, CA," Hedgeye CEO Keith McCullough wrote earlier this week. "The takeaway on Defense Spending is crystal clear. It's going up, from here (potentially up a lot)."
On Lockheed Martin (LMT), McCullough adds:
"Lockheed is down more than -2% this morning post earnings guidance that 'disappointed' the Old Wall. In the immediate-term that presents an oversold signal. Longer-term, buying LMT at the low-end of the risk range should continue to pay off. As usual, LMT's guidance is now officially conservative."
