Below are analyst updates on our fifteen current high-conviction long and short ideas along with Hedgeye CEO Keith McCullough's refreshed levels for each.
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
This morning we’ll attempt to distinguish between domestic growth acclerating and, what we see as temporary weakness in the U.S. dollar and rates.
Here's a brief recap of the post-Election macro market moves:
- Out of the election, optimism prevailed and the market reflexively re-priced growth and inflation expectations. Dollar Up, Rates Up, Stocks Up dominated with reflation and policy-levered exposures getting bid. Also, domestic growth data has backfilled that narrative.
- Across the pond, European political risk further supported the base narrative associated with that price action. This helped to proel the first point above. How? The odds of Le Pen winning the French election became the proxy for Eurozone risk. As odds increased, the Euro fell, German bonds got a bid and US-German spreads widened vs. Treasuries. The dollar rose.
- In mid-February the dynamics above began to stall. Le Pen’s odds rolled over, the Euro got a relative bid, German yields moved up, US-German spreads tightened and a “dovish hike” from Yellen put some short-term pressure on the USD and US Treasuries.
So the conclusion is that a lot of the move in Treasury yields and the dollar may be directly related to less perceived political risk in Europe. It’s changes on the margin that matter in macro.
Unfortunately for long-term U.S. Dollar bears a market event is not a long-term catalyst. We try to block out the political noise whenever possible and focus on the rate of change in fundamental high frequency data. This week was no exception:
- Headline Durable Goods, Durables Ex-Defense & Aircraft and Capital Goods reported Friday all accelerated on both a year-over-year and 2-year basis in February. The fact that the hard growth data is now backfilling the optimism is a good sing for growth bulls. Headline durable goods accelerated to its fastest pace of year-over-year growth in ~2 years at +5% year-over-year.
WFM
Click here to read our analyst's original report.
No update on Whole Foods Market (WFM) for this week's Investing Ideas but Hedgeye Consumer Staples analyst Howard Penney reiterates his long call on the company.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
"What happens during bull market corrections is you get to buy "deal stocks" at discounts to their proposed takeout price," Hedgeye CEO Keith McCullough wrote earlier this week. "One of my favorite takeout stocks remains Time Warner."
Here's our Telecom and Media analyst Paul Glenchur's take on "deal risk":
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 yesterday's election, suggesting it will not be a policy priority. Moreover, much of the President-elect's attack on the deal was probably driven by his broader criticism of bias in the mainstream news media (i.e., CNN).
At the end of the day, 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.
Also, we would expect cooler heads to counsel the President-elect that DOJ's review of the merger is a civil prosecutorial investigation and that impulsive statements of opposition are simply inappropriate in this context. Generally, the White House stays out of such matters and, most likely, the Administration will do nothing that attempts to influence or affect the conduct of this investigation.
MIC
Click here to read our analyst's original report.
No update on Macquarie Infrastructure Corporation (MIC) for Investing Ideas 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.
In this retail earnings season we saw the following data points:
- JCP stores closing 130 stores, meaning 5% of its sales goes away.
- WMT is pressuring vendors on price, while HBI is at a peak margin spread between its wholesale partners.
- TGT also investing in price and guiding negative comps.
- CRI spring and fall wholesale bookings down MSD; CRI wholesale has correlated closely to HBI innerwear.
- KSS launching Under Armour likely means share loss for Champion, Maidenform, and Hanes.
- Gildan continues to make share gains. This time last year they were around 8%, now at 10.9%. We think this is why you are seeing HBI sales down 9% within WMT.
Now we can add on the possibility of all Payless Champion sales going away. This week it was reported that Payless ShoeSource is likely headed for Bankruptcy. The main athletic shoe brand that Payless carries is Champion.
Hanesbrands (HBI) owns the Champion brand, licensing the rights to Payless to sell footwear. Footwear is not a large piece of Champion’s business -- but even if it is just 1% of sales, it adds yet another headwind to organic growth in 2017, in addition to several HBI is already facing.
Meanwhile, HBI is expecting 0-2% organic growth when it hasn't grown organically in the last 2 years.
In light of all this evidence, we don’t believe HBI will hit this growth target.
CRI
Click here to read our analyst's original report.
The Hedgeye Demography Team hosted a call last week discussing the slowing in the U.S. fertility rate in 1H16. Fertility rates are falling in the younger age brackets and rising in the older age brackets, a sign that millennials are putting off childbirth until later than older generations.
The provisional fertility numbers for 3Q16 indicated another sequential decline. Fertility continues to decline even as the economy has shown signs of recovery, leading the Demography Team to suspect that this could be a generational secular change, and not simply cyclical in nature.
Lower fertility rates = less demand for baby/children’s apparel, which has the potential to be a significant headwind for Carter's (CRI). Carter’s has a great brand and has invested to grow its market share. However, as the barriers continue to fall, market share gains slow, and births decline, that means profitable growth is becoming harder to find.
CFG
Click here to read the Citizens Financial Group (CFG) stock report Hedgeye Financials analyst Josh Steiner sent Investing Ideas subscribers earlier this week.
UNFI
Click here to read our analyst's original report.
The proliferation of natural and organic does not just affect the retail environment, but it also has had an effect on the distributor landscape. As natural and organic become more main-stream, big conventional wholesale distributors, such as C&S and Supervalu, have been picking up more natural and organic SKUs in an effort to take advantage and cater to this business segment.
This is essentially encroaching into a territory that United Natural Foods (UNFI) and KeHe had controlled for quite some time.
TRIP
Click here to read our analyst's original report.
The inflection actually started in January, but no one seemed to care since TripAdvisor (TRIP) guided to flat EBITDA growth for 2017, which it already flagged on the 3Q print. TRIP'S 2016 wounds were largely self-inflicted, but are being remedied this year, and we're not even talking about the comps. Couple that with a more aggressive marketing budget, and TRIP's Hotel segment could be a 20-30% top-line grower this year.
TRIP realizes that it has been letting TRVG eat its lunch by trying to preserve EBITDA margins while TRVG has essentially been buying/reselling its traffic. TRVG is forcing TRIP to get in the fight, and the flat EBITDA guide means TRIP is serious. The increased marketing spend will only strengthen TRIP's competitive position at the top of the funnel, which is increasingly becoming the most important part of the value chain in this space. Significant profit growth should be realized in 2018 as meaningful revenue growth leverages likely flattish ad spend.
The reason we're not pairing a TRVG short (yet) against our TRIP long is the combined backdrop suggests there may be enough room for both. We view the next 6-12 month macro setup as a tailwind for the travel industry. Already, management commentary, sentiment, and data we are seeing suggests that leisure travel will continue to be the industry’s largest source of growth – a favorable environment for TRIP as it reaccelerates its business.
KSU
Kansas City Southern (KSU) has been heavily discounted on policy concerns (Border Adjustment Tax) compared to peers, which we think is overblown and presents an attractive entry point. The overall picture for rail names is better for 2017 with CapEx down and focused more on productivity with rail equipment relatively young along with other cost savings.
As the policy picture becomes clearer, we expect the market to refocus on the profit outlook for companies helping to remove the policy overhang. We see opportunities for KSU in more favorable energy policies and growth platforms like inflight factory builds, petrochemicals, and port/terminal expansions providing significant fundamental tailwinds.
Looser antitrust regulations could help KSU become an acquisition target, particularly at its relative discount, further facilitating M&A speculation amid CSX/EHH activism. We see significant upside in the shares from current prices.
BEN | IVZ
With $12 per share in net cash and $2 billion in annual free cash flow, Franklin Resources (BEN) has great opportunities for strategic M&A, share repurchases, and dividend increases. We ran the proposed synergies on a Franklin/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.
No update on Wal-Mart Stores (WMT) for this week's Investing Ideas but Hedgeye Retail analyst Brian McGough reiterates his long call on the company.
EXAS
Click here to read our analyst's original report.
Exact Sciences (EXAS) saw some volatility this week after word got out that they won’t be attending Deutsche Bank’s Health Care conference in early May. An EXAS representative said this was due to a scheduling conflict and we believe the cancellation is a non-factor event.
We continue to see upside into the mid $20s and expected our projected 10K sequential provider adds in 1Q17 to translate into accelerating sales growth.
