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.
Please note that we removed Franklin Resources (BEN) and TripAdvisor (TRIP) from the long side and added Deere (DE) and HCA Holdings (HCA) to the short side of Investing Ideas this week.
IDEAS UPDATES
UUP | XLU
Below is a special Investing Ideas update written by Hedgeye Senior Macro analyst Darius Dale:
According to Plan: With #Quad1 remaining the most likely economic outcome domestically after this week’s spate of economic data – which, to be fair, was nothing to write home about – we once again find ourselves on the positive side of macro alpha:
- UUP: +56bps WoW
- XLU: +19bps WoW
With respect to our updated forecasts for 2Q17E Real GDP growth, we’re now at 2.23% YoY/2.62% QoQ SAAR (down from 2.34% YoY/3.06% QoQ SAAR heading into Friday morning’s CPI and Retail Sales prints). This compares to 2.4% YoY/3.0% QoQ SAAR for Bloomberg Consensus, 2.98%/3.65% for the Atlanta Fed and 2.04% YoY/1.88% QoQ SAAR for the New York Fed.
We continue to think the balance of macro risks points to additional upside in long-term interest rates domestically, which is an obvious headwind to Utilities – the worst performing sector in #Quad1.
We also believe that the short-end is poised to ramp higher as the Fed continues on its tightening path. One additional longer-term factor to consider is a sea-change at the Federal Reserve, which we wrote about in our 5/10 Early Look titled, “Mr. Miyagi or Mr. Magoo?”:
“We don’t have a rule that captures the global economy. We don’t have a simple standard or a perfect model. My friends in Washington think that their model is the best model that ever is, and yet we see them toggling around with many of the dials because the economy and inflation are not working as they’ve forecast… We’re not very good at reducing what inflation is to a tenth or a hundredth of a point. I mean, this is a bunch of pseudo-science. For us to figure out the underlying changes and trends in wages and prices more generally is very imperfect; it’s based on hundreds of millions of choices and decisions made every day and the idea that somehow policy should be looser or tighter because we’re at inflation of 1.71% versus 2.0%, that’s way beyond what the science of monetary policy really has. That sounds more like physics to me than the state of the art in economics.”
-Kevin Warsh (May 5, 2017)
The key takeaway here is that the very visible hand of monetary policy we’ve gotten used to in the Bernanke/Yellen era is likely to get bitten off by a reform gator or, at the bare minimum, find itself resting deeply in a pocket until crisis conditions return.
My gut feeling from interacting with fellow attendees at breakout sessions, etc. is that Warsh is the most likely candidate to be tapped to replace Yellen, though it’s hard to say whether or not that probability is well over 50%."
Lastly, the U.S. dollar remains “undervalued” relative to relative rates of growth and inflation across the G3 economies – especially on a prospective basis and we think key interest rate differentials are likely to continue to widening in the dollar’s favor as we progress throughout the year.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved. There was no news on Time Warner this week but click here to read last week's update.
MIC
Click here to read our analyst's original report.
Torturing the Numbers to Show Desired Growth Rate……The Macquarie Infrastructure Corp (MIC) headlines show “Adjusted Free Cash Flow” +10% YoY. But EBITDA after management fees was up only 1% YoY, adjusted EBITA was (3)%, and operating income was (11)% mostly due to higher SG&A, management fees, and depreciation. And the organic growth rates are lower as MIC completed ~$70MM of acquisitions in 2016.
Reported maintenance CapEx in 1Q17 was just $4MM in 1Q17, (57)% from $10MM in 1Q16. Reported maintenance CapEx is down to 8% of depreciation, contending now with the worst of MLPs. In our view, this isn’t a collection of businesses with an underlying growth rate of anything close to 10 – 15%, and the proof is in the real numbers.
WMT
Click here to read our analyst's original report.
No update on Wal-Mart Stores (WMT) this week but Hedgeye Retail analyst Brian McGough reiterates his long call on the company.
CFG
Click here to read our analyst's original report.
There are a lot of reasons to like the Financials sector (XLF) right now. U.S. economic growth is picking up, which has spurred Fed rate hike expectations once again. Rising interest rates benefit bank profitability, as banks make money lending at the longer-end of the interest rate spectrum from deposits earning a much lower interest rate. In essence, banks make money off the spread. Rising rates widen the spread.
That’s been the bet of most investors for some time now.
If you want to play this macro trend (but get more bang for your buck), you don’t want to buy shares of $235 billion big bank behemoth Bank of America (BAC). What you want to do is buy the much smaller, $18.5 billion Northeastern regional Citizens Financial Group (CFG), says Hedgeye Financials analyst Josh Steiner in the video below from The Macro Show.
“Citizens has been this diamond in the rough with good management… [who’s been] steadily executing on an improvement plan to move from an overcapitalized, inefficient bank.”
For a more thoughtful and detailed breakdown of the divergent investing set-up between Bank of American and Citizens Financial Group, with supporting data and contrarian wit, watch Steiner’s explanation in the video below.
Click the image below or here to watch the video.
But here are the key takeaways:
In addition to its improvement plans, Citizens Financial Group has “better than average sensitivity to Fed tightening, and better than average loan growth.” The company could also see some goodies out of Washington, DC, if the Trump administration can fulfill its tax reform promise. As a full U.S. taxpayer, Citizens doesn’t realize any tax shelter from having foreign subsidiaries. Any corporate tax reform would directly benefit the company.
Contrast this with Bank of America.
Because BofA is a conglomerate, and derives revenue from more channels than a regional bank, big banks get less bang for their buck when the Fed raises rates. As Steiner points out, Bank of America gets about 50% of its revenue from net interest income, versus 73% for Citizens. On the tax side, BofA also benefits less than Citizens if the Trump administration passes tax reform because of its foreign operations.
Bigger picture, Steiner has some interesting thoughts on the regulatory side of the equation. A recent Supreme Court ruling over a case between Bank of America and the City of Miami, for instance, elucidates why “big banks have forever been unable to get out of their own way since the Great Recession.”
Finally, there’s been increasing chatter down in Washington, D.C. to break up the big banks. Once again, Steiner offers his non-consensus insights: “There is a massive conglomerate discount embedded into all of these big money center banks,” he says. “If we ever do go down that path, it would be an incredibly profoundly positive development and these companies would be worth a lot more than they are right now.”
EXAS
Click here to read our analyst's original report.
In 1Q17 Exact Sciences' (EXAS) marketing spend per additional test was sequentially down which we see as a sign of strength for their DTC ad campaign. We expect the sequential delta to continue to decrease as their test per provider rate moves up and their ad spend remains constant per management's guidance. We believe it is more likely that advertising spend will taper over time as physician practice patterns change and integrate Cologuard into colon cancer screening for their patients.
Also, based on discussions with management and a review of the PAMA regulations we believe ASP will remain relatively stable in 2018. PAMA rules include Medicare Advantage test price in the commercial ASP calculation and exclude commercial rates “under appeal.” This would imply non-contracted commercial volume and the net realized price, which is below the Medicare rate, will not be dilutive to 2018 PAMA price calculation.
IVZ
Click here to read our analyst's original report.
Invesco (IVZ) reported assets-under-management (AUM) last night with a rebound in April after a dip in March. After what we estimate was tax related redemptions last month, April saw ~$1 billion in Powershare inflows offset by "marginal" net outflows in its active product suite.
Money funds flows hit -$3.1 billion in ongoing tax related redemptions in the month. Overall, we calculate the Invesco franchise experienced a -$716 million redemption in April (excluding currency impact and money market fund flows) in comparison to the -$6.0 billion redeemed from Franklin over the same time period.
GLW
Click here to read the Corning (GLW) stock report we sent Investing Ideas subscribers earlier this week.
KATE
The Kate Spade (KATE) board and management should fire itself if $18.50 is the price. Maybe it just did. The KATE board’s lack of accountability to a pro-shareholder process accrues to Coach (COH). This is near 30% accretion for COH.
I’ll be floored if nobody else steps in. If not, COH as a multi-year growth engine for the best price I’ve seen for a Retail deal.
- So long as nobody steps up and pays a price for KATE that is anywhere close to the realm of what we’d consider ‘appropriate’, Coach will have pulled off the Retail ‘deal of the cycle’.
- This deal gives Coach an organic growth pillar for the next 3-5 years – something it has not had in well over a decade – at a price that is simply mind-boggling.
- Implied multiple for KATE on this offer is 8.3x EBITDA.
KATE stock is now likely to stay locked just below $18.50 until either COH tenders for the shares or another bidder steps up and takes it higher, in which case they’ll have to go high enough to offer a better premium and cover the $83mm COH termination fee.
RLGY
Click here to read the Realogy (RLGY) stock report we sent Investing Ideas subscribers earlier this week.
MSM
Step 2 = Amazon Business, Competitive Intensity Narrative Emerges: Stories matter in stocks (e.g. Robots are taking over, buy ROK. Amazon is taking over, Best Buy trades at 12x.) In our view, MSC Industrial (MSM) is frantically expanding SKU counts and fighting tough independents, GWW/FAST entry into metal working, and Amazon Business’s “land grab”.
That is all quite serious, and is reflected in pricing in the quarter. If this continues as sales move higher, we would expect Amazon and greater competitive intensity to emerge as a defining narrative. We suspect that it would only take just a few ‘Amazon Business success’ related headlines to drive a substantial share revaluation, perhaps to half the current valuation. Of course, adjacent competition from existing competitors can have a similar impact.
HST
Click here to read the special update on Host Hotels (HST) Hedgeye Gaming, Lodging and Leisure analyst Todd Jordan sent Investing Ideas subscribers earlier this week.
DE
Below is a note from Hedgeye CEO Keith McCullough on why we're added Deere (DE) to Investing Ideas earlier this week:
"With the SP500 (and Nasdaq) at all-time highs (again) and volatility (VIX) smashed to generational lows, I'm not signaling "buy stocks" up here.
We've done that, however, on every "market correction", for 6 months.
With the squeeze comes overbought signals and I've been waiting on Deere (DE) as it's one way to express our Reflation's Rollover Q2 Macro Theme. Timing matters.
Jay Van Sciver wants Institutional Investors to get out of this name before they issue guidance on their conference call later this month. As he wrote in an Institutional Research note:
"With FY17 guidance likely to be updated in the May earnings report amid deteriorating credit, rising input costs, and ongoing unit declines, we believe investors should position accordingly. DE shares have risen sharply providing an unusually favorable opportunity."
Unusually favorable, indeed. Ostensibly there is no better price to sell into than the all-time high!"
HCA
Below is a note from Hedgeye CEO Keith McCullough on why we're added HCA Holdings (HCA) to Investing Ideas earlier this week:
After covering it on the oversold signal, now we can re-short more HCA on the bounce towards the top-end of its immediate-term risk range.
From a research perspective, here's an excerpt from Tom Tobin's most recent Institutional Research note:
"We continue to see downside for HCA as investors adjust to declining Managed Care volumes, ACA disenrollment in both Medicaid and Exchanges, and rising Medicare mix, while their poor competitive positioning we discussed in our December 2016 presentation positioning is leading to more explicitly negative commentary regarding share losses and the need for greater defensive capital investment."
