Below are analyst updates on our fifteen current high-conviction long and short ideas. We will send Hedgeye CEO Keith McCullough's refreshed levels for each in a separate email.
IDEAS UPDATES
UUP | XLU
It was a good week on the short-side in Utilities (XLU) in what has been nearly a flat position against the S&P 500 YTD. That's not great in the near term, but little damage has been done and the longer-term thesis remains firmly intact.
In currencies, it was an event-driven week as the expectation of currency volatility begins to pick-up. French elections over the weekend have the potential to be a currency catalyst. Our view is that the volatile scenario will be Dollar bullish / Euro Bearish.
However, a LePen loss could be Euro bullish, dollar bearish in the short-term. Also pressuring the Dollar this past week, U.K. PM Theresa May said she will seek an early election on June 8th, in an effort to strengthen her hand going into talks on leaving the European Union.
The logic for the currency move is that the call for a vote is an indication she’s trying to consolidate power to get the best Brexit deal possible. Her slim majority in the House of Commons has challenged her ability to get complete support on Brexit, but more power could provide more clarity and support in Brexit negotiations.
Our views on the dollar are obviously centered on long-term domestic growth. Our forecasts are most divergent from the central bank and consensus estimates in Q3 and Q4 of this year. This week was pretty light on the data front with industrial production being a big growth accelerating headline on Wednesday:
- Industrial Production growth of +1.5% Y/Y in March was the highest growth rate since February of 2015.
- Capacity Utilization growth of +0.7% Y/Y in March was the highest growth rate since January of 2015.
Below is a snapshot of our detailed industrial production breakdown with the March growth rates highlighted for industrial production and capacity utilization.
In addition, on the hard data front this week, we’ll highlight two data points which are some of the most important indicators of economic growth in the U.S.: Corporate Profits and Wage Growth.
- Q1 Earnings season has gotten off to a fiery start. After a corporate earnings recession for five consecutive quarters through Q2 of 2016, Q1 is setting up to be the third consecutive quarter of earnings acceleration. Reporting season to date, 85 out of 500 companies in the S&P 500 have reported, and earnings growth in aggregate is +14.2% Y/Y. The sector-specific breakdown is included below.
- Aggregate private sector salary and wage income grew 6.0% Y/Y in February, and we’ll get the March numbers in a couple of weeks. The 6% Y/Y growth rate in February was the highest rate of growth since May of 2015.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
As expected, the FCC cleared the transfer of Time Warner's Atlanta broadcast station to Meredith Corporation without addressing any aspects of AT&T's proposed acquisition of the rest of the company. This further confirms that the FCC will not pose regulatory obstacles to the deal. The Senate will hold confirmation hearings next week to consider the next head of the Antitrust Division.
We doubt these hearings will raise regulatory complications and continue to believe a DOJ challenge is unlikely. The transaction should win approval this year.
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.
WMT
Click here to read our analyst's original report.
Wal-Mart Stores (WMT) ‘gets’ #Retail5.0. Read into Wal-Mart’s acquisition binge all you want… it’s defending against Amazon going down the sub-Prime spectrum. It’s a matter of time before Target follows suit, and that ends badly for Cornell.
Recode is reporting that Wal-Mart is in advanced talks to buy Bonobos. Bonobos is about $150mm in revs – so won’t ever be material to the P&L – at least not directly.
- For context, when WMT bought jet.com it acquired Marc Lore, who previously beat Amazon at its own game with diapers.com/Quidsi leading to Amazon buying him out in 2010.
- He now runs WMT US e-commerce.
- Lore is on the record stating that WMT is behind the curve, it needs to catch up, and acquisitions are the way that will help it catch up.
- WMT has already acquired Modcloth, ShoeBuy, and Moosejaw… and is now potentially Bonobos.
- Lore has also noted that it's easy to get assortment in commoditized categories like toys and electronics – and he’s right.
- But the real battle and winners and losers will be determined by the long tailed e-commerce categories like home, shoes, fashion, etc.
Winning in those areas – where the battlefield is still fairly wide open -- will be his/Wal-Mart's goal. I’ll be surprised if we don’t see a deal per month out of WMT for the remainder of the year.
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 ahead of the company's 1Q17 earnings report next Thursday morning.
CFG
Click here to read our analyst's original report.
We'll have analysis of Citizens Financial Group's (CFG) financial results, reported this past week, in next week's newsletter but here's the key takeaway. Even after adjusting downwards for securities gains and a one-time tax benefit from a favorable settlement of certain state tax claims, Citizens Financial Group (CFG) posted first quarter earnings per diluted common share of $0.56, up +42% YoY and +12% above Street estimates for $0.50.
Hedgeye Financials analyst Josh Steiner reiterates his long call.
UNFI
Click here to read our analyst's original report.
United Natural Foods (UNFI) will report earnings results next week. This is the perfect time to review the original short thesis. Here it is in a nutshell: 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.
With Whole Foods Market (WFM) looking to pull back, UNFI is in the crosshairs. Our original UNFI short case was focused on slowing unit growth at WFM which represents 35% of their revenue, and has been the sole source of growth in that segment as WFM’s comps have gone negative.
EXAS
Click here to read our analyst's original report.
Short interest is down from its recent peak of 35% in July of 2016, but remains elevated at 29.8% heading into the 1Q17 print. We would suggest subscribers remain long Exact Sciences (EXAS) into 1Q17 earnings as we believe additional providers will translate into accelerating sales growth. We will be updating our Cologuard-Tracker and detailing our thoughts following the print in the coming weeks.
IVZ
The first quarter of 2017 was more than a record quarter for ETF flows with an eye popping 300% increase from the first quarter of 2016. Passive inflows totaled $134 billion in the first 3 months of the year compared to just $29.6 billion in 1Q last year. Invesco (IVZ) is benefiting from this non-linear move into ETFs with the 4th biggest passive franchise globally in the management of $120 billion within its Powershares business.
Powershares had another solid quarter with over $4 billion of net new money in 1Q17, keeping pace with the growth in the industry. What differentiates Powershares from other ETF providers however is its realization or fee rates with Powershare average fees going out at 45 bps versus the industry average of 22 bps. Thus as passives continue to be the best category in money management, IVZ is disproportionately benefiting with some of the highest grossing passive products in the industry.
BEN
Click here to read the original report.
No update on Franklin Resources (BEN) for this week's Investing Ideas but Hedgeye Financials analyst Jonathan Casteleyn reiterates his long call on the company.
TRIP
Click here to read our analyst's original report.
Due to a lack of visibility on TripAdvisor (TRIP) on an intra quarter basis, it has been important for us to continuously review and flex our long thesis. One area we had received push back on has revolved around TRIP’s review counts (hotel reviews, restaurant views, etc...), and in our black book presentation we pretty much debunked the fear that TRIP reviews were either stale or not growing.
As indicated by the slide below, TRIP ratings and reviews have grown exponentially in the last three years, and the competition isn’t even close. Also note the chart below (on the right) which indicates that “contributions per minute” have also been accelerating, suggesting most of the reviews are new and not stale.
But what does this all mean? TRIP essentially has a monopoly on a dataset that cannot be replicated by its competitors and advertisers (hotels and OTAs) offering a long-term advantage for TRIP with respect to their positioning at the top of the funnel. We continue to recommend accumulating shares of TRIP at these levels.
KATE
"Earlier this week, we were as wrong as wrong can be in being Bullish on Kate Spade (KATE)," writes Hedgeye Retail analyst Brian McGough. Below is a brief excerpt from that institutional research note written by McGough earlier this week on why, despite the short-term drawdown, we're sticking with our long call on Kate Spade:
- I took the view that KATE was playing offense, and was delaying bid until post the earnings report so it could shop better numbers.
- At face value, that is dead #wrong.
- But one thing to consider is that KATE – the company that takes 2x the time as any other company to close its books – is one of the first non-durables out with numbers this reporting period.
- Reporting a number in just 18 days – even if with no forewarning – is ridiculously fast for KATE. It reported on May 4th of last year, fyi. Why would it come out so quickly?
- On top of that, they’re well ahead of COH/KORS results as well.
- In other words, KATE’s bankers are advising the company to get out ahead of everyone else. It’s either front-running (and positioning) ahead of weak numbers (relative to expectations i.e. Easter) from peers, or is committing ‘deal suicide’.
One thing I know…gaming the ‘who is buying and when’ call is not my bag, baby. I also know that I am absolutely not capitulating here when everyone covers on these headlines.
But another thing is for sure… If anyone – especially Coach – is able to buy Kate Spade at a price under $25, I’d want to buy the acquirer on the announcement.
GLW
The Corning (GLW) thesis remains: mostly forgotten cyclical, undervalued on good growth, decent innovation portfolio, and better FCF.
Here's it broken down by the pieces:
- TV doldrums are well documented, but the shift to bigger sizes triggered by 4K, some unit replacement ahead, and glass capex levels that can support half the incremental growth levels compared to the peak, all seem to be a good set up. We think better glass pricing in 2H17 significantly changes direction of OCF margins.
- The optical business, basically in winter conditions since 2001, finally returning to the spotlight as the primary arms supplier in a carrier battle for greater speed and footprint
- GG % penetration of the smartphone market appears ready to step higher.
Re: EPS next week...
The setup on the 2 biggest businesses looks good. Better optical revenue however, may imply lower than Street GM % due to mix. We’ll take that as a mixed blessing. Also, supply chain noise around the timing of the next iPhone launch could delay some healthiness in GG. Net, we think rising LTM FCF and better growth will carry the day.
We remain bullish.
RLGY
High-end: less bad is good: One of the tenants of our thesis is that, for the high-end housing market, less bad is good news. Over the course of the past two years, Realogy’s core market, the high-end, has struggled with falling volumes and weakening prices, but recently we have begun to see numerous signs of positive inflection.
A recent report (HERE) from Douglas Elliman and Miller Samuel notes that number of single family homes sold in Greenwich, Connecticut during the first quarter was +28.6% greater than in the first quarter of 2016. Since Realogy’s NRT segment is concentrated in California, Florida, and the New York Metro, strong results out of more affluent suburbs like Greenwich have the potential to boost NRT’s earnings to the upside.
This uptick in Greenwich home sales is also supported by the recent trend in high ticket discretionary consumption and luxury automobile sales. The chart below looks at the combined US sales volume by year for Mercedes and BMW. Though sales have decelerated for the past five years and 2016 represented the worst performance in recent years, 2017 appears to be bucking the trend.
