Below are analyst updates on our eleven current high-conviction long and short ideas. We will send Hedgeye CEO Keith McCullough's refreshed levels for each in a separate email.
Please note that we added Carter's (CRI) back to the short side and Trip Advisor (TRIP) to the long side of Investing Ideas this week.
IDEAS UPDATES
FXB | UUP | TUR | EWW
Click here to read our analyst's original report on Turkey.
With the addition of Turkey (TUR) and Mexico (EWW) on the short side, we’re making the bet that weaker emerging market economies won’t be shielded from strong Dollar (UUP) and Pound (FXB) pressures.
Both the U.S. and U.K. have seen growth accelerating in their respective economies. Growth accelerating alongside rising rates and tighter monetary policy is a currency strengthening cocktail relative to economies with weaker set-ups.
In the U.S. we got extremely favorable growth accelerating and QUAD2 data this week (QUAD 2 is a set-up where growth and inflation are accelerating). The U.S. dollar is nearly flat month-over-month (+30bps), but the data continues to support our bullish dollar call:
- CPI: Headline & Core CPI beat consensus estimates, with both accelerating to the fastest pace in 5 years! Headline CPI came in at +2.5% Y/Y in January and Core CPI printed +2.3% Y/Y in January.
- Retail Sales: The Retail Sales “Control Group” series (the one that’s relevant for GDP) accelerated to +4.0% Y/Y in January which is the fastest pace in 25 months! Headline retail sales accelerate to +5.6% Y/Y.
- Philly Fed: The Philadelphia Fed Business Outlook survey for the month of January hit its highest level since 1973
- Industrial Production: Came in positive Y/Y for the 2nd consecutive month. Last month snapped a 15-month streak of negative Y/Y growth
This positive economic data bodes well for the U.S. dollar but, for emerging markets, not so much. The relationship between emerging market economies/currencies/equity markets and the dollar is obvious. Below we show slide 57 from our Q1 2017 macro themes deck. The strong negative correlation between the U.S. dollar and the MSCI Emerging Markets Index is very straightforward over time:
Also in the same section of our Q1 macro themes presentation (called “Trump Trades), we built an Emerging Market Crisis Risk Index for various emerging market countries. We analyzed 20 emerging market economies through the lens of 20 predictive economic and financial market indicators to gain clues as to which economies are positioned poorly for the next phase of #EmergingOutflows.
Our focus on incorporating both stock and flow-based metrics is a key differentiator in this latest refresh of the model.
Mexico & Turkey are # 1 and #2 among emerging market economies with the highest crisis index readings. That's good for our short calls on the countries but not for those economies, especially if you buy into our strong dollar call:
TWX
Click here to read our analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
The Justice Department is reviewing the AT&T/Time Warner deal even though a permanent head of the Antitrust Division has yet to be announced. AT&T has no plans to submit the deal to the FCC despite a more favorable regulatory environment at the Commission with the appointment of Republican Ajit Pai to the Chairmanship.
The new Chairman told Fox News this week that he would review any deal submitted to the FCC to ensure it promotes the public interest. But it still appears the AT&T-Time Warner deal will not need FCC approval as no licenses will transfer from Time Warner to AT&T.
Meanwhile, Time Warner shareholders approved the transaction and AT&T CEO Randall Stephenson insists the deal is on track for approval before the end of the year.
President Trump’s fight with CNN heightens speculation that the Administration could oppose the deal as a vendetta against the news network, but plenty of talking heads (not with CNN) raise concerns about a potential abuse of power. Regardless, the antitrust case against the deal is not very strong, a point that discourages an independent DOJ challenge in federal court.
WFM
Click here to read our analyst's original report.
In last week's newsletter, we discussed what Whole Foods Market (WFM) needs to do in order to grow it's business. Here are the initiatives that suggest to us the company is well on its way.
INITIATIVES
Focus on the Core Consumer: “Going forward, Whole Foods Market will focus on serving this growing niche of customers better than ever before.” (John Mackey, WFM CEO) John was adamant that they are doubling down on this core consumer, the "whole foody customer" as they put it. They “are going to create more value than they ever created for them.” John is back in the driver’s seat and he is perfectly comfortable refocusing on the core customer and decelerating their growth in order to do so, and we love that. They will continue to make more price investments where they see fit, but will not participate in a race to the bottom.
New Media Campaign: You have already probably seen it on TV, WFM has launched a new brand campaign called ‘Eat Real Food’ and they are pleased with the early indicators that show positive results. WFM plans to increase their marketing spend in 2017 to improve the awareness of what they offer. “We are investing more money in marketing than we’ve ever really invested before.” (John Mackey, WFM CEO)
Category Management: Last week, they announced plans to accelerate the time line for fully implementing category management having inked a deal with Dunnhumby to lead the efforts. Developing this consumer-centric data will be vital to enhancing merchandising, pricing, marketing and affinity strategies.
Growth Strategy Reset: WFM no longer sees a vision for 1,200 units. We can all stop thinking about that number out there on the horizon, because let’s face it, not many people believed it to begin with. In fact, they closed 9 stores this quarter that were underperforming, near the end of their leases or in areas where they had too many units.
LMT
No update on Lockheed Martin (LMT) this week but we reiterate our long call on the company.
MD
There may be a long thesis here in 2017, but not yet and we still expect a stock in mid $40s from here. In terms of metrics, our Maternity Tracker continues to trend negative which resulted in -1.8% decline in NICU days for the quarter.
The vRad narrative continues to disappoint, which we believe is now spearheading a quality dilution in the MD physician portfolio as they turn to brick and mortar radiology acquisitions. Radiology may present a green field opportunity for cheaper acquisition multiples compared to Anesthesiology (which remain elevated), but they are cheap for a reason.
MIC
Click here to read the stock report on Macquarie Infrastructure Corporation (MIC) that we sent to Investing Ideas subscribers earlier this week.
CRI
Click here to read our analyst's original report.
Below is a note from Hedgeye CEO Keith McCullough earlier this week on why we added Carter's (CRI) back to the short side of Investing Ideas:
"I've been waiting on Carter's (CRI) to bounce from its bombed out oversold level (where I removed it from our Investing Ideas product on the short side) and now it has. Looks like an Old Wall upgrade to sell into today too!
We think the 4Q earnings report will be a tough one. Especially considering the weakness shown when CRI reported its third quarter, missing for the first time in 25 quarters where they had actually guided up the full year. CRI is historically a beat and guide down company, to keep the bar low each quarter. They almost never miss and they have never missed and guided up. This deviation from the norm is concerning.
Additionally, cotton prices have continued to rise, from the bottom seen in March, and this margin pressure has to start flowing through to the P&L. We think that happens as soon as the 4Q print."
TRIP
"As I remain bullish on both US growth and inflation accelerating, I'm looking for big sales to buy into," Hedgeye CEO Keith McCullough wrote earlier this week. "Today's comes in a stock that our analysts, Gaming analyst Todd Jordan & Internet & Media analyst Hesham Shaaban (co-coverage), have been waiting on - Trip Advisor (TRIP)."
Here's a quick take from Jordan and Shaaban's Institutional Research note (just published):
"4Q16 = ANCILLARY WEAKNESS: TRIP missed top-line results again. The source of the miss was concentrated in its Display Advertising and Other Hotel Revenue segments; both suddenly declined on a y/y basis with mgmt offering no real color as to why in its prepared remarks; we’d be more concerned if not for its soft 2017 guide.
TRIP’s core Click-based & Transaction (CBT) revenue accelerated to flat growth (vs. -10% y/y in 3Q16) on moderated declines in revenue/hotel shopper (we expected growth, but at least positive in the US) and accelerating hotel shopper growth, which was likely due to its expanded marketing campaign. EBITDA missed badly in response, which we’re ok with. Mgmt made a point to change the narrative toward revenue growth rather than profitability."
