I think most Hedgeye clients get our process – as if we were on the buy side (which most of us used to be) – we vet nearly every company in our respective sectors. For the retail team that’s about 210 tickers. We have new tickers every day.
The ‘vets’ start off ‘position agnostic’ (what I call V1 – vetting level 1), in other words they can go long or short. We have no bias. If a name screens one way or another, then we take to V2. This is where we’ll see that either; a) it’s not worth taking to the next level and then we boot it, or b) it looks like it could be a promising long/short – and we take it to V3. On the Retail team, we have SIX Vetting stages in all. I’m happy to share them in depth…our process is an open book. Ping me and we’ll hit on it.
Once a name finds some real estate on our Idea List, McLean leads our team in challenging (or validating) our calls based on pushing a) the Research #process, and b) our models. Here’s our exchange over the weekend.
1. WMT (Long)
JM: We’re long WMT over TRADE and TREND duration. Why not long TAIL as well? Long term expectations are still low in the TAIL, company is investing to win. If we’re right on #Retail5.0 earnings should turn up when retail (incl TGT) turns down. Also #growthaccelerating.
BM. All fair points. McMillon might be the CEO of the year, and handled expectations masterfully. But to get positive TAIL, I need a dramatically improving earnings and cash flow algo, and not just ‘low expectations’ off a weak growth rate. Let’s not forget that AMZN is gonna kill WMT in grocery, which is 55%+ of the biz (AMZN only 6% market share going to 20%).
2. CRI (Short)
JM: Why aren’t we moving CRI lower on our short list? Short interest has spiked to near all-time highs over the last month. 1Q expectation is low, TREND set-up is not as bearish as TAIL.
BM: Fair point on TREND expectations. I did not realize the consensus came down so much post-print for the upcoming quarter. Let’s keep in mind, however, that CRI is beating to a lesser degree on a declining growth rate. I’m comfortable sticking with that. I think the key here is the acquisition impact on the quarter. I worry that this could be one of those HBI sits where people look through weakness in the core bc of deals. I’m staying Short given the conviction on TAIL, but let’s take it down a notch until we make sure we have the math nailed on the acquisition.
3. JCP (Short)
JM: It’s time to take this higher. Failing industry, levered, KSS-ish credit exposure, and stock was up 13% this week. This can’t work when KSS starts to de-lever credit this year.
BM: Stocks only move like that when someone knows something, or they THINK they know something. That concerns me short side. But I agree, the real estate is borderline worthless – or the real estate that JCP owns, at least. What do they have something like 145 stores in ‘A’ malls? The ones they own are punk…bc Goldman securitized those leases when RonJon put lipstick on the pig. Let’s take this up (opposite of CRI).
4. HIBB (Short)
JM: Should HIBB be higher? Desperate Academy coming into play, doesn’t need to exist. Will BKs hurt or help?
BM: Let’s keep HIBB where it is. KKR might take it Ch11 instead of 7– if anything at all. HIBB just blew up. We know it’s going to blow up again – and margins will ultimately get cut by 500bps. BUT let’s make sure Nike’s not going to stuff it with product and drive comp as FL share erodes. That happened w FINL 14 years ago. The magnitude is bigger than anyone thinks. The ‘Nike stuffing the losers’ call is out of consensus. I’m not getting burned on the short side of HIBB TREND while hinging on the TAIL. Let’s watch the stock closely (obviously) and hammer it if sentiment improves, or if the company comps up by accident.
5. VFC (Short)
JM: What’s your thinking here? Any change since the analyst meeting?
BM: Nope…I’m as negative on this thing as I’ve been in my entire career. This is a Best Idea candidate if I’ve ever seen one. It’s not an HBI, but could be a really good call. Margins are going to go down, not UP 200bps in the company’s LT plan that it (sloppily) laid out last week. Mark my words, this thing will test trough multiples again – if not set new ones – as the Street ultimately sees that a miss, and another miss, and another miss and then a big reset – is written in the cosmos. This is like Tiffany – but with brands that used to be ‘above average’ and are now just ‘meh’.
