Below are analyst updates on our sixteen current high-conviction long and short ideas along with Hedgeye CEO Keith McCullough's refreshed levels for each.
Please note that we removed the British Pound (FXB) and Lockheed Martin (LMT) from the long side of Investing Ideas this week. We added Exact Sciences (EXAS) and Invesco (IVZ) to the long side and United Natural Foods (UNFI) to the short 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
UUP | XLU
We removed the British Pound (FXB) from Investing Ideas this to take full advantage of our long USD view. Much of the time the Pound trades against the U.S. Dollar. The Pound is a currency we may come back to once we get some clarity on Brexit negotiation talks as the U.K.'s economic set-up is more favorable relative to other European and global economies.
So the two positions we have currently represent an exposure to growth accelerating. Utilities (XLU) is a defensive sector that performs well when growth is slowing. It’s a yield play like Treasuries or Consumer Staples. In other words, higher rates = lower discounted cash flows for high dividend yield, low growth sectors.
Looking at our views relative to consensus macro, we expect a growth surprise for the next several quarters (particularly in 2H 2017), which, among other factors like demographics and relative economic strength, should support the currency and rising interest rates (not good for yield plays like XLU).
Below we show the divergence in year-over-year growth estimates (Hedgeye vs. Consensus Macro):
On the growth front, we saw an important cocktail of economic data this week in Retail Sales, Industrial Production, CPI, PPI, and NFIB Small Business Optimism:
- Retail Sales: The trend remains intact. Headline and Control Group sales up +0.1% MoM while decelerating modestly on a year-over-year but continuing to accelerate on a 2-year basis. The headline number and control group (GDP input) are still tracking +5.7% and +4.0% year-over-year respectively.
- Industrial Production: Year-over-year growth accelerated to +0.3% and held positive for a 3rd consecutive month after ending the longest non-recession streak of negative growth ever in December.
- Consumer Price Index (CPI): The headline CPI number accelerated for an 8th consecutive month to a new 61-month high at +2.7% year-over-year. We would expect this rapid rate of inflation to subdue in the coming months as the U.S. economy moves toward higher inflation-adjusted growth in Q2-Q4 of this year. Growth accelerating as inflation decelerates is the best set-up for growth exposure outperformance.
- Producer Price Index (PPI): Headline PPI accelerated to a 5-year high at +2.2% year-over-year. Again, we expect this growth rate to decelerate from here (remember that crude oil and industrial metals, etc. were at the lowest levels in Q1 of 2016 which led to deflationary PPI readings).
- NFIB Small Business Optimism: Small business optimism retreats a full -0.6 pts off of 12-year highs. For context on this very small retreat, see the third chart below. Current optimism is not what growth bears want to see.
To inflation-adjusted growth in 2017…
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved. No update on Time Warner (TWX) this week but we reiterate our long call on the company.
WFM
Click here to read our analyst's original report.
It has been a tough stretch for Whole Foods Market (WFM) shares over the last week or so as they have trended lower, but we got good news this week with continued improvement in CPI figures to less deflationary and even inflationary in some (dairy).
CPI- Food at Home (FAH) improved by 20bps sequentially to -1.7%. As the reflation trade continues we believe that it will be beneficial to WFM’s business, due in part to the moderation in competitive promotional activity which was a result of severe deflation.
We continue to believe that WFM with John Mackey back in the driver’s seat as the sole CEO, will return back to the great company that it was.
MIC
Click here to read our analyst's original report.
No update on Macquarie Infrastructure Corporation (MIC) this week but Hedgeye Energy analyst Kevin Kaiser reiterates his short call on the company.
HBI
Click here to read our analyst's original report.
Distribution of Hanesbrands (HBI) products is highly consolidated, with Wal-Mart (WMT), Target (TGT), Kohl's (KSS), JCPenney (JCP), and Amazon (AMZN) accounting for ~70%. Question: Why should a company whose primary brand sells through mass channels and department stores have higher margins than some of the best brands in the business? Its customers are questioning this too. Both TGT and WMT have indicated they plan to lower prices and pressure vendors like Hanesbrands.
This is one of the reasons we’re so bearish on HBI’s core business (and other ‘marginal durable and non-durable content)’. WMT is 30% of sales in HBI’s the core business (like many of your packaged goods companies) – and sales to WMT were down 9% last year – most of that in the 4th quarter. The only way sales will materialize (with finished goods inventory at peak) is at a significantly lower merchandise margin, which is NOT baked into a) guidance and b) lender expectations.
As if it couldn't get any worse, pricing pushback from WMT and TGT will be compounded by the rising cost of cotton. The company has been the beneficiary of a seven-year low in cotton prices. Cotton prices fell 55% from the peak in 2011 and Hanesbrands saw about 700bps of gross margin expansion. That's changing.
CRI
Click here to read our analyst's original report.
No update on Carter's (CRI) this week but Hedgeye Retail analyst Brian McGough reiterates his short call on the company.
CFG
Hedgeye Financials analyst Josh Steiner will send a stock report on Citizens Financial Group (CFG) next week. Below are three key takeaways on his long call:
- Relative to other comparable banks, we believe that Citizens Financial Group is strongly positioned to take advantage of increasing rates and regulatory relief efforts expected under the Trump administration.
- CFG continues to trade at or near the bottom of the range of its regional/super-regional peer group, with a valuation of 1.4x tangible equity versus a group average of 2.1x – representing about 50% upside.
- Having previously suffered from a poor management incentive structure under the RBS umbrella, CFG has now mitigated any past principal-agent dilemma and is poised to take advantage of an improving climate.
UNFI
Click here to read the United Natural Foods (UNFI) stock report Hedgeye Consumer Staples analyst Howard Penney sent Investing Ideas subscribers earlier this week.
PNRA
Click here to read our analyst's original report.
Delivery is just one piece of the puzzle, and you have to be careful not to look at it in isolation. Once Panera Bread Company (PNRA) gets to a point of critical saturation (2H17) with delivery and they start advertising on a grander scale, it will spread their reach beyond current borders and bring in additional customers.
The investments in 2.0 they have made over the last few years are ready to be shown off. We believe that looking at Panera as a total package is critical, and when everything is running at top speeds it will be a beautiful thing leading to an acceleration in earnings.
TRIP
Click here to read our analyst's original report.
We are currently working on our deep dive black book presentation on TripAdvisor (TRIP) (presenting next Friday) in which we will be mapping out what we view as underappreciated catalysts for the stock. The sell side continues to capitulate on the name, with TRIP now 93% hold or sell rated – the worst ratings backdrop in the company’s history.
Equally, the buy side feels unconvinced that a turnaround is imminent, which is somewhat warranted given the prior 3 earnings prints. Despite that, we will look to isolate and highlight what we feel the Street is missing. Stay tuned.
KSU
Is Donald Trump going to ignite a U.S.-Mexican trade war? Investors were questioning exactly that on Election Day, when shares of railroad operator Kansas City Southern (KSU) fell as much as -12% intraday. About 48% of the railroad operator’s revenue comes from Mexico.
Kansas City Southern shares have yet to recoup the Election Day losses. Hedgeye Industrials analyst Jay Van Sciver thinks skittish investors are missing the positives:
- Kansas City Southern’s multiple is cheaper than usual.
- Van Sciver sees robust growth ahead (cost savings and favorable profit outlook).
- Van Sciver thinks M&A speculation will heat up again and close the gap between where it is trading now and its historically premium valuation.
But why does Hedgeye assume rationality from Trump administration? Isn't policy still a risk?
To some extent, this risk has been well telegraphed, with numerous front page articles on tariffs and border taxes. Our point is that policy clarity should help KSU’s share price, and Trump’s unpredictability may well be peaking.
So far, just the suggestion of restricted Mexico trade has contributed to 15%-20% underperformance for KSU’s shares vs. Union Pacific (UNP), which equates to perhaps a billion or two of lost equity market value.
A renegotiation of NAFTA could instead result in greater cross border trade, not a restricted flow. That is the Trump campaign promise, as we understand it – to renegotiate NAFTA, build a wall, and get Mexico to pay for the wall. A narrowed trade deficit could be spun to meet the final criteria, or some similar rationale, like transferred border enforcement costs.
We have little doubt Trump can make the narrative work, even if through alternative facts.
BEN | IVZ
Below is a note from Hedgeye CEO Keith McCullough on why we added Invesco (IVZ) to the long side of Investing Ideas earlier this week:
"Post 3 up days, we're getting a slow-volume down day for US Equity Beta.
I'm not at all surprised by that. I would be surprised to see SP500 break down through 2340 TRADE support, however. That's mainly because the low-end of my current SPX risk range (2) is higher than 2340.
Sure, I can wait on 2354 and get more aggressive with “buy” signals there... but, in the meantime, it's common to see single stocks sell off to the low-end of their ranges. One stock on my "buy list" (i.e. my analyst, Jonathan Casteleyn, likes it) is Invesco (IVZ):
We ran the proposed synergies on a Franklin Resources (BEN)-Invesco (IVZ) deal which would be +9% accretive to Franklin on a $40 per share proposed deal for IVZ."
WMT
Click here to read our analyst's original report.
Wal-Mart Stores (WMT) acquired its way into the e-comm game with Jet.com, last year, it added Moosejaw a few weeks back, and this week the company announced it is buying Modcloth, the women’s fashion online retailer.
One key retail macro theme we'd like to highlight is that e-commerce in the US is accelerating, and doing so off a bigger base, at a rate that CEOs don’t appreciate. WMT gets it, 90% of others do not.
Wal-Mart is investing to protect its future market share in this new environment, and for now the costs don’t matter as it is already built into guidance and expectations.
EXAS
Click here to read the Exact Sciences (UNFI) stock report Hedgeye Healthcare analyst Tom Tobin sent Investing Ideas subscribers earlier this week.
