Below are analyst updates on our sixteen current high-conviction long and short ideas. We will send Hedgeye CEO Keith McCullough's refreshed levels for each in a separate email.
In case you missed it, click here to watch McCullough discussing our current economic outlook and how that impacts all of our Investing Ideas in this week's Macro Overlay.
IDEAS UPDATES
FXB | UUP | FXC | TUR | EWW | XLU
Click here to read our analyst's original report on Turkey, here for our note on Mexico, and here for Canada.
Another positive week of domestic data helped propel the U.S. dollar higher. Stronger domestic data and a heightened expectation for a rate rise at the Fed’s March meeting that was supportive of U.S. dollar strength came at the expense of other major currencies (namely, the Yen, and two of our long ideas, the Canadian dollar and the British Pound).
Seeing that our three currencies are about the longer term bull case for each respective economy, the week-to-week fluctuations between the three shouldn’t be concerning.
In the U.S., both the hawkish commentary out of various Fed members (including Yellen) and strong data juiced the implied probability of a Fed rate at the next FOMC meeting in March. The probability that the Fed Funds rate will increase by 25bps in March went from 40% last Friday to 96% to close out the week.
When economic growth accelerates and rates rise, across the interest rates curve, the currency will strengthen. Period. This growth set-up is our call on the U.S., British, and Canadian economies heading into the back half of 2017.
As for growth accelerating in the U.S. specifically, ISM Manufacturing and Services, Durable Goods Orders, and personal income and spending data this week were all good indications that the positive inflection in the U.S. continues. Below are several corresponding charts.
TWX
Click here to read our analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
Earlier this week, Hedgeye Telecom & Media Policy analyst Paul Glenchur wrote an institutional research note updating his thinking on the AT&T-Time Warner deal:
Takeaway: The FCC confirms it will not review the deal and the President softens his tone toward the merger.
Earlier this week, new FCC Chairman Ajit Pai confirmed that the FCC was not going to review the AT&T/Time Warner transaction, noting that the deal has not been presented to the FCC for license transfer approval. Separately, in an interview with Breitbart News, President Trump was asked about the merger and declined to make specific comments about it despite being highly critical of the deal on the campaign trail. He only said he wanted to see competition in the media industry.
These events reinforce our view (from the day this deal was announced in October) that the merger is destined for regulatory approval (Hedgeye Potomac, AT&T-Time Warner Deal Should Get Regulatory Okay, Oct. 23, 2016).
As we noted last week (Hedgeye Potomac, AT&T/Time Warner: Some Turbulence But Should Land Safely, Feb. 22, 2017), the FCC under Chairman Pai was not likely to indulge in legal gymnastics to assert jurisdiction over the transaction. AT&T, as we long expected, is divesting Time Warner's sole broadcasting license in Atlanta and leaving internal satellite communications licenses out of the deal. With no license transfers at issue, the FCC's review power is avoided unless the Commission wants to pursue novel theories of jurisdiction. As we explained, Chairman Pai, in contrast to the Democratic FCC leadership he replaced, is not inclined to expand the agency's merger review powers.
Dodging the FCC is helpful because the FCC's public interest standard for clearing transactions has been interpreted by the agency to require an affirmative showing of consumer benefit. The Justice Department, confirmed now as the sole federal agency with review authority in this case, can only win a challenge to a merger in federal court if it proves the deal will substantially reduce competition in the relevant market. The burden of proof, also in contrast to FCC review, rests with the government. There is no obligation to prove the deal will enhance competition.
We continue to believe the antitrust case against this vertical transaction (not involving the merger of direct competitors in any part of the media distribution chain) is not strong.
WFM
Click here to read our analyst's original report.
Whole Foods Market (WFM) founder John Mackey is taking back control of the company and has called for a slowing in store growth, focusing efforts now on costs and cash flow. This pivot for an industry leading growth company doesn’t happen often (think SBUX, MCD, TGT). It requires a period of revaluation and reset expectations. But it is also followed by significant outperformance if done correctly. That’s the road ahead we see for WFM.
HEDGEYE OPINION
Whole Foods reported another disappointing quarter last month, but more importantly they laid out a new path forward for the company. We published a note recently that explained why cutting capex is exactly what they need to do in order to improve the performance of this company. With John Mackey back in charge, he is taking the bull by the horns and returning this company to its roots by focusing on the core Whole Foods consumer.
This first cut is deep, but they can go deeper once they work through sites that are already in development, cutting capex to only maintenance and other necessary expenditures. We have seen this story before. Pulling back on growth capex for a couple of years will allow them to refine their current footprint and accelerate profitability.
The core Whole Foods consumer is still alive and well, and by no means do we believe that the Whole Foods brand will die in the face of conventional competition.
LMT
No update on Lockheed Martin (LMT) for this week but we reiterate our long call on the company.
MIC
Click here to read our analyst's original report.
Hedgeye Energy analyst Kevin Kaiser spent much of the last few weeks meeting with investors in Boston, Connecticut, and NYC. Here are some key takeaways:
Pushback on our Short Macquarie Infrastructure Corporation (MIC) Call… Our newest idea, short MIC, was received with mixed reviews. The pushback from current MIC shareholders is actually not so much a pushback as it is “we look at this differently,” i.e. through a “yield plus growth” framework and nothing else.
That makes sense, as only the dividend (or its cousin, non-GAAP free cash flow per share) – which we consider to be ~50% return of capital – can justify a price close to where the stock is currently trading.
Pushback from those not involved was that there is not an obvious calendar catalyst to threaten the dividend, thus the short will take an unknowable amount of time to play out. We always knew that and agree with it – usually that’s how these situations are when you first find them.
On the other side, we don’t see any bullish catalysts. The Company has already reiterated 10-15% free cash flow per share guidance for 2017 and 2018, which we think it’s more likely to miss than beat.
And when Atlantic Aviation rolls over, the dividend growth story is completely gone, the dividend may be cut (or that will at least be the fear), and no one will value this stock with a yield-based framework. It’s not a catalyst-rich story, but we do think it’s an accident waiting to happen.
MD
Click here to read the Mednax (MD) stock report Hedgeye Healthcare analyst Tom Tobin sent Investing Ideas subscribers earlier this week.
CRI
Click here to read our analyst's original report.
Here's some more details on the Skip Hop acquisition Carter's (CRI) announced in sync with its 4Q earnings results. It is notable that this acquisition will contribute over half of the guided revenue growth in 2017.
- Acquisition will add about a 3-4% boost to revs, which was INCLUDED in guidance.
- A brand in its infancy should be doubling annually, not every 5 years. That probably means it’s underinvested. So when management says ‘double sales and earnings’ on the deal by 2021 – again, a wimpy goal – it might actually be very realistic.
- Do the math on the company taking that $140mm and investing in its own content. If it could actually sustain its 17% return on capital, it would suggest an additional $0.50 in EPS – not the implied $0.30 down the road (despite this year being insignificant, we're estimating an 8% op margin).
- Skip Hop has $86mm (wholesale) in sales [in a $9bn market]. A young brand that just got a great distribution boost is only targeted to grow around 10% Yr 1? It’s got only 2% share today, and is targeted to be at just 3.5% in 2021?
- Sometimes ‘a great opportunity’ is always a ‘great opportunity’ unless the company spends against it. i.e. will the deal end up costing $200mm+?
We don't believe that this acquisition will be enough to offset the slowing growth and margin pressure in the CRI core. CRI’s earnings expectations need to come down for the company to beat this fiscal year.
TRIP
Click here to read our analyst's original report.
We continue to recommend shares of TripAdvisor (TRIP) on the long side at these levels. Our favorable view on the stock is predicated on a fundamental phase transition that we believe is currently taking place.
With sell side estimates coming down and investor sentiment remaining at all-time lows, we see the potential for a massive upgrade cycle over the next twelve months.
Additionally, we will be doing more deep dive work on TRIP and will share any updates on our fundamental view over the next month. But for now, we view TRIP as the best risk/reward opportunity in the entire OTA space.
HBI
Click here to read our analyst's original report.
Hanesbrands' (HBI) ‘comment volley’ with the SEC is worth watching. On Wednesday, we saw the release of several SEC comment letters to HBI and the company's responses:
Comment topics included:
- Liquidity and cash held by foreign subsidiaries.
- Income in foreign jurisdictions and tax rate impact.
- Continual Non-GAAP charges, notably on Hanes Europe Innerwear (DBA)
- Purchase accounting items on inventory
- Information technology charges within both acquisition and integration and foundational costs.
HBI provided satisfactory answers for the comments and we don’t see any smoking gun here, but ultimately we think it is notable that the SEC is putting more scrutiny on the HBI’s accounting practices that we think are as aggressive as any (solvent) company in retail.
Even though this short has worked since last summer it should work a lot more. Once the dust clears from the acquisitions, special charges, and cotton prices normalize from the 7-year low, we think we’ll be looking at lower multiples on lower earnings and cash flow.
CFG
No update on Citizens Financial Group (CFG) but Hedgeye Financials analyst Josh Steiner will send out a detailed stock report next week.
PNRA
Click here to read our analyst's original report.
Panera Bread Company (PNRA) – At this point we’re probably starting to sound like a broken record, but we have to drive home the point… DELIVERY IS THE NEXT FRONTIER!
In our PNRA Black Book from January, one of our key points was that the brand was undertaking critical initiatives to get ahead, namely in the form of Panera 2.0. Additionally, in our most recent PNRA note, entitled Digital Done Right, we stated the following:
“Panera now leads the industry in digital sales, with 24% of sales in company cafés occurring digitally; this 24% figure is the highest outside of the big three pizza brands….the Company has started delivery at 15% of system bakery-cafés, with sales approaching $5,000 per week in company cafés within six to nine months of delivery implementation.”
Clearly, PNRA is pulling the right levers, and we continue to view technology/delivery as one of the brand’s leading differentiators going forward.
