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 Hanesbrands (HBI) from the short side and Kansas City Southern (KSU) 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 introduced our top 3 Macro Themes to watch for the second quarter this week along with an extensive slide deck. Below, we summarize the key conclusions and takeaways by theme.
On a high level, we want exposure to growth accelerating over the intermediate to long-term which is exactly the opposite of Utilities (XLU). We also feel the U.S. is set-up much more favorably long-term with a number of strong currency catalysts (especially relative to Japan and Europe).
A brief note on Friday’s jobs report. It was objectively not a good number and not what we expected, but it was one data point. Jobs growth slowed from 1.65% in January to 1.52% on a year-over-year rate of change basis for March. We expect acceleration in jobs growth during April and May on easier comps.
1. USA, USA! #Quad1: In QUAD 1 of our Growth, Inflation, Policy model, growth is accelerating as inflation decelerates. After calling for a positive inflection in both Growth and Inflation in 1Q17 we expect the transition to QUAD 1 in 2Q17, the preponderance of hard (i.e. not survey based), fundamental macro data is inflecting positively. Below we have a slide from the deck to help contextualize the current fundamental reality domestically with a chart showing the rebound in industrial activity:
2. Reflation’s Rollover: In our Q1 2017 macro themes presentation we made the case for both the reflation trade and headline reported inflation to peak in Q1 on top of the easiest compares of the year. We built on that theme with #Reflation’s Rollover. The CRB index, crude oil, breakeven inflation rates, etc. have all put in their respective Q1 peaks and are set-up to continue rolling over from a growth rate perspective through Q2. It’s not all that hard to track. Figure out key components of headline CPI, and follow the progression of prices on a daily basis to get a good idea on where inflation is going. Below we built a series that predicts CPI with commodity-related indices – The chart would suggest “past peak growth rates”:
3. Europe/Japan #Divergences: This theme is key for our long dollar (UUP) thesis. Contrary to our positive outlook for the U.S. economy and generally sanguine expectations for global growth, our GIP Model is forecasting a negative inflection in European and Japanese growth here in Q2 that should trend for at least the next 3-6 months. As such, we expect our policy divergence theme to gather steam in favor of the U.S. dollar. Below we show the large divergences in our GDP estimates for the Eurozone relative to consensus:
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
We continue to believe the AT&T/Time Warner merger is on track for regulatory approval. We doubt the Justice Department will make a serious attempt to block it in court. AT&T’s deal for Time Warner has also increased speculation that Verizon could make a major content acquisition beyond its Yahoo deal.
MIC
Click here to read our analyst's original report.
Macquarie Infrastructure Corporation's (MIC) businesses are mediocre, with a combined pre-tax ROIC of 10%.
- IMTT has limited growth opportunities and pricing power has faded. IMTT faces a new competitor in Louisiana starting in summer 2017 which may pressure its pricing and utilization.
- Atlantic Aviation’s roll-up strategy may not create value given current M&A valuations, and we see little evidence of network effects.
- BEC is a merchant power facility; spark spreads and capacity prices are weak.
- Hawaii Gas is likely a dying business given the state’s aggressive push to renewables.
And this haphazard collection of businesses is externally-managed, adding a layer of management fees, ~$70MM p.a. at the current market cap, which MIC adds back to all non-GAAP measures.
WMT
Click here to read our analyst's original report.
Wal-Mart Stores (WMT) released its 10-K last week, and one of the first things we noticed was the decrease in the company’s average lease duration. WMT’s average lease duration dropped to 8 years versus 20 years for TGT. Both companies own the majority of their stores: 60% for WMT (86% in the US), and 94% for TGT.
Lower lease portfolio duration means ‘Pay More Today, Owe Less Tomorrow’. In other words, long term liabilities come down, and current payments go up. Most would call this bearish as it relates to hitting estimates. But when a management team opts to pay more over the near-term instead of being up against a wall in 3-5 years, we call that proactive risk management.
Ultimately, we think WMT is taking the right strategic actions (investing in stores, e-comm) to continuously win the market share battle, and will continue to win as it invests ahead of TGT and the rest of its competitive set.
CRI
Click here to read our analyst's original report.
Carter's (CRI) is highly exposed to cotton prices. As cotton prices fell from the peak in 2011, the company saw about 350bps of gross margin expansion. Low product costs (cotton) played a material role in margin expansion. Now that 4-year margin tailwind is inflecting to a headwind.
Cotton continues to rise from the bottom, and that will have a direct impact on gross margin. We think margins are headed lower in 2017 at the same time organic growth slows.
CFG
Click here to read our analyst's original report.
We continue to maintain that the recent tempering of momentum across the financials space represents a favorable point-of-entry for our Citizens Financial Group (CFG) long call. With the labor market continuing to hold tight and other macro indicators showing improvement, CFG remains poised to meaningfully benefit from its attractive valuation, greater asset sensitivity, and strong capital position going forward.
UNFI
Click here to read our analyst's original report.
No update on United Natural Foods (UNFI) this week but Hedgeye Consumer Staples analyst Howard Penney reiterates his short call.
EXAS
Click here to read our analyst's original report.
UnitedHealth Group (UNH) recently issued an updated medical policy for fecal DNA testing which is effective starting April 1, 2017. This policy, which was UNH’s first fecal DNA policy to cite the most recent USPSTF recommendation in June of 2016 stated “there is insufficient published evidence in the clinical literature supporting the diagnostic accuracy of fecal DNA tests to screen for colorectal cancer in asymptomatic, average-risk patients”.
While this is negative for Exact Sciences (EXAS), it should be noted that EXAS continues to submit test payments from out-of-network payors like UNH, and payors are paying for an undisclosed portion of each claim. Over the long-term we project Cologuard’s adoption to continue to increase despite this negative coverage decision from UNH.
BEN | IVZ
Click here to read the Franklin Resources (BEN)/Invesco (IVZ) original report.
We think BEN is experiencing an underappreciated performance revival with asset weighted Morningstars for its Top 100 funds up 1 full notch. This has historically resulted in a +50% improvement in flows within 6 months. Importantly, the firm's flagship Global Bond product has regained its 5 star rating, which should mean that outflow trends will improve.
On Invesco, we ran the proposed synergies on a Franklin/Invesco deal which would be +9% accretive to Franklin on a $40 per share proposed deal for IVZ.
TRIP
Click here to read our analyst's original report.
No update on TripAdvisor (TRIP) for this week's Investing Ideas but we reiterate our long call on the company.
KATE
Below is a note from Hedgeye CEO Keith McCullough on why we added Kate Spade (KATE) to Investing Ideas earlier this week:
"Do you like to buy things on sale?
Kate Spade (KATE) is getting smoked -15% today and this is what our Retail/Apparel guru, Brian McGough, just had to say about it:
“The latest KATE deal banter is bullish the way I see it.
KATE was on the tape after the close Monday via a Reuters article that KATE will spend ‘a few more weeks negotiating a sale’, and that it has a bid from Coach. It's down hard here, and I’m scratching my head as to why...
Clearly, it’s outside of expectations. That’s obvious by the stock move.
But consider this…
a) We now know it has at least one bid in hand,
b) If the article is right, KATE is the one controlling this process. It is choosing to take it more slowly.
c) If business was horrible, wouldn’t it want a deal in hand ASAP? If business is good, won’t it want more time to shop? If I was KATE’s banker I would.
You want my opinion? Well you’re getting it anyway!
The stock has been trading off of Deal Reporter and WSJ speculation about ‘final bids due…etc’. I think that was all banker-fed bantering and positioning via the press. The ‘final bid’ will never be due until the last bidder comes in. Period.
I think KATE thinks it will be in a better bargaining position after the print (quarter closed 3 days ago). My contention is still that we see an initial deal close to $25, and a final deal closer to $30.”
GLW
"Back in the saddle it is with one of Technology analyst Ami Joseph's best ideas on the long side: Corning (GLW)," Hedgeye CEO Keith McCullough wrote earlier this week. "GLW is signaling immediate-term TRADE oversold within its bullish intermediate-term TREND today."
Here's a brief excerpt from Joseph's latest institutional research call on Corning:
"The Unknowns here are around TV Units. We see the setup for a classic replacement cycle bubbling up, and in this deck we walk you through the math and the catalysts as well. If we are right about the direction of TV units, Corning revenue gets a boost from units + faster shift to larger screen TV + tight glass market yielding to better pricing. 2017 is the first year in a while not facing a down year in Display GM...how will all this translate to 2018 GM."
