Below are analyst updates on our fourteen current high-conviction long and short ideas along with Hedgeye CEO Keith McCullough's refreshed levels for each.
Please note that we removed Whole Foods Market (WFM) from the long side of Investing Ideas this week.
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 measure and map high frequency domestic macro data on a daily basis, and the positive rate of change in growth is the key to our strong currency and growth accelerating outlook.
To rehash, with our estimates for growth and inflation from Q2-Q4 of 2017, the U.S. economy is tracking in QUAD 1 (i.e. Growth accelerating as Inflation decelerates) for all 3 of the remaining quarters in 2017.
Historically in a QUAD 1 environment, the Utilities sector (XLU) has underperformed every other sector by a wide margin. The average quarterly return in QUAD 1 for Utilities is +1.5% vs. +3.3% for the S&P 500 Index.
We dissect key domestic data releases from this week below (hint: #GrowthAccelerating):
- Consumer Confidence: The Conference Board’s consumer confidence reading hit a 196-month high this week. You have to look back two cycles to find a more optimistic reading
- Corporate Profits: After corporate profits decelerated for 5 consecutive quarters during a prolonged corporate earnings recession, corporate profits jumped +9.3% year-over-year for Q4 of 2017 after barely moving positive in Q3 2016.
- Income & Spending Growth: This was the one mixed bag in this week’s data release as wage growth spiked but real consumption growth declined. Aggregate income growth accelerated for a 2nd month, rising to +6.0% YoY (fastest pace in 22-months). Meanwhile, real consumption is slowing with an elevated savings rate & higher inflation. The consumption capacity of households continues to improve, though. This trend should persist as income growth accelerates alongside the acceleration in employment growth through May, at least.
When confidence and corporate profits are acclerating it’s much more likely that businesses will increase hiring, grant sizeable wages increases or ramp investment. It’s easy to following the bouncing ball of growth acclerating.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
President Trump's nominee to head the Justice Department's Antitrust Division, Makan Delrahim, is known as a solid conservative with excellent political smarts. He'll likely inherit antitrust review of the $85 billion AT&T/Time Warner deal.
We continue to believe the transaction is on track for approval before the end of the year. An effort to block the deal in federal court would be an uphill fight, a battle that would probably be a questionable commitment of DOJ resources.
Separate review at the FCC is still unlikely, frustrating opponents of the deal. Regulatory conditions involving assured wholesale access to popular programming (like HBO) could be difficult for rival distributors to obtain absent FCC engagement. Democrats on Capitol Hill want the FCC to find a way to assert jurisdiction over the merger, but the legal basis for FCC authority is too much of a legal stretch.
MIC
Click here to read our analyst's original report.
Contract Duration Still Coming Down at IMTT… Macquarie Infrastructure Corporation (MIC) disclosed that IMTT’s weighted-average contract length at YE16 was 2.3 years, down from 2.5 years at 9/30/16 and 2.8 years at YE15. On the earnings call, management attributed this to the “non-renewal of some longer-dated contracts for rail service,” and noted that, “Qualitatively, contracts for storage and services at IMTT continued to renew for slightly longer durations than they had been early in 2016.”
It remains to be seen how these different factors impact IMTT’s profitability in 2017, but with the shortest contract length that IMTT has had since at least 2012, it is likely more vulnerable to the Louisiana competitor Pin Oak Terminals, which should have the first phase of its 10 MMbbl facility operational this summer.
HBI
Click here to read our analyst's original report.
This week a news story came out discussing the price battle between WMT and Amazon in grocery/packaged goods. There’s nothing new here.
Maybe people are just realizing it now, but if anyone thinks that all of a sudden the brands that sell into AMZN and WMT are in for a world of hurt, then they simply have not been doing their homework. We still think that the call here is on the brands and retailers that have not proactively planned and prepared for the next phase of retail.
Hanesbrands (HBI) isn’t prepared. This price war is going to continue to put pressure on the business and margins.
WMT
Click here to read our analyst's original report.
The same price war story (mentioned above in our Hanesbrands update) may seem bearish for Wal-Mart Stores (WMT) at face value.
However, price pressure is already built into expectations for WMT, and the reason Wal-Mart is investing in price is to maintain traffic growth and ensure its future market share. With growth and consumer confidence accelerating, investing to gain share is the right move for WMT.
CRI
Click here to read our analyst's original report.
This is not a terminal story. Carter's (CRI) has a great brand, good management, just not margin-accretive growth, which means definitely not a good stock. Share gain is slowing at the tail of the economic cycle, it's running out of meaningful US growth, with margin pressures and demographics going the wrong way.
Also, there's the serious risk of a massive shift in the apparel consumption paradigm from potential Trump border tax adjustments. Here’s a quick hit on why we continue take the short side:
- US store growth is saturated. Moving to Canada.
- Structurally, the company can’t comp consistently at a time when stores are in the sweet spot of the maturation curve.
- 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.
- In 3Q16, the company just missed its first quarter in 7-years.
- Seeing demographic pressure with core wearer AND buyer
CFG
Click here to read our analyst's original report.
We are hosted a Black Book presentation Friday at 11 am EST to discuss our new long thesis on the U.S. super-regional bank Citizens Financial Group (CFG).
Our presentation assessed CFG's unique position among peers as it stands to disproportionately benefit from generally improving macroeconomic conditions and a more favorable regulatory climate:
- Superior initial conditions: We believe that an attractive valuation, greater asset sensitivity to peers, and a strong capital position present CFG with the ability to uniquely capitalize upon improving conditions in the financials space.
- Potential catalysts on the horizon: While recent gridlock in Washington has tempered investor expectations about the magnitude and timing of future, accommodative fiscal policy, we believe the repricing in financials to be advantageous for our CFG call, allowing for a more favorable point-of-entry as investor optimism experiences a prudential softening. Nonetheless, we believe that accelerating U.S. growth data and favorable regulatory reform on the horizon will, in the aggregate, prevail and give impetus to CFG's unique position among peers.
UNFI
Click here to read our analyst's original report.
Below is a note Hedgeye CEO Keith McCullough sent to Real-Time Alerts subscribers earlier this week:
"It's been a while since I've had more shorts than longs in RTA, but after markets move to the top-end of my risk range, that can happen.
One of Consumer Staples analyst Howard Penney's favorite shorts remains United Natural Foods (UNFI). I particularly like the macro exposure it gives me to Reflation's Peak & Rollover. Unit #GrowthSlowing at US Food Retail is another cornerstone to the bear case.
Unit Growth Decelerating In Food Retail – United Natural Foods has become increasingly dependent on unit growth, as same-store sales in the food retail space have evaporated. What happens to UNFI when their customers unit growth begins to subside? We are about to find out.
Unit growth in the industry is not what it used to be, but in our opinion we are due for meaningful contraction in new unit development at critical customers like Whole Foods."
TRIP
Click here to read our analyst's original report.
We will be sharing some of our insights from our most recent Black Book event that we hosted for institutional clients. Our deep dive work on TripAdvisor (TRIP) added to our confidence in the potential turnaround.
One component of our work focused on ad spend propelling revenue growth, but then also helping skew the mix of hotel shoppers back to desktop (desktop users monetize at a much higher rate).
Additionally, with the bar set so low by the sell side, if TRIP is able to recapture even 20-30% of Pre IB revenue/shopper, they will setting up for a big top line beat in 1Q. While we see this is a longer-term turnaround story, a big 1Q print would definitely be enough to scare some of the shorts that piled in post 4Q print.
KSU
Click here to read the Kansas City Southern (KSU) stock report Hedgeye Industrials analyst Jay Van Sciver sent Investing Ideas subscribers earlier this week.
EXAS
Click here to read our analyst's original report.
Last Friday, Aetna announced commercial coverage of Cologuard for patients over the age of 50 on a three year interval. This is an addition to Aetna's coverage decision of Cologuard for their Medicare Advantage plan under the same criteria back in March of 2015.
Aetna's decision along with increased sell-side sentiment was driving Exact Sciences (EXAS) higher this week. We continue to expect additional commercial coverage to drive physician adoption and currently project accelerating sales growth in 1Q17.
EXAS will discuss their first quarter results on their earnings call scheduled for April 27th.
BEN | IVZ
Click here to read the Franklin Resources (BEN)/Invesco (IVZ) stock report Hedgeye Financials analyst Jonathan Casteleyn sent Investing Ideas subscribers earlier this week.
