Below are analyst updates on our fourteen 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 MSC Industrial (MSM) from the short side of Investing Ideas this week.
IDEAS UPDATES
UUP | XLU
Thematically, with a non-consensus forecast that real US GDP growth continues to accelerate here in Q2 and at a faster year-over-year rate in Q3, we’re sticking with our QUAD 1 playbook which is why we are long the dollar.
We believe you have to go all in on macro to decipher the short-term move in the USD and rates within the long-term growth set-up which have historically been favorable for UUP and XLU. Below we show the ultimate hard data with net futures and options positioning in the Euro and treasuries.
This consensus positioning was definitively bearish of the Euro (bullish dollar) and short of treasuries coming into this year. Remember a growth-driven rising yield curve is a major headwind for XLU relative performance.
We too had this view and following the bouncing ball gives some good evidence as to why the dollar and rates have been under pressure. We suspect much of this stance has been unwound.
Moving into the beginning of 2017 there were…
- US inflation and growth narratives
- Those in turn were perceived as rates bearish and dollar bullish
- With Brexit in the near past, investors were concerned about the future for the Eurozone as far right candidate Marie LePen gained traction ahead of French elections which made investors very weary of Euro exposure
Fast forward to now...
- The French elections have concluded, some European data had a streak of acceleration
- Inflation shows signs of peaking in the US which will help put a lid on treasury rates – remember nominal treasury rates are a result of growth and inflation.
- The short treasury and short Euro positioning has been unwound. The consensus positioning around the Euro is now the most net long it's been in over 3 years
From here we expect Eurozone growth to slow into the back half of the year, with our forecasts widely divergent from consensus'… We’re sticking with our time tested playbook for real domestic growth acceleration for the remainder of 2017 – QUAD 1 USA!
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved. Below is an update from Hedgeye Telecom and Media Policy analyst Paul Glenchur:
Concerns that President Trump may have interfered – inadvertently or otherwise -- with an FBI investigation heightens the political risks of any appearance that the White House would attempt to influence the outcome of any other Justice Department investigation or review. Given the President’s statements opposing the AT&T-Time Warner deal during the campaign, largely driven by animosity toward CNN, we would expect the White House to be particularly sensitive to perceptions that the President may still harbor misgivings about the merger that could affect the DOJ review.
Acknowledging that, at times, perception is reality in a polarized political world, the President’s current troubles probably enhance the overall likelihood of deal approval. AT&T has offered $107.50 a share for Time Warner which closed earlier this week at $96.75. AT&T CEO Randall Stephenson recently affirmed his expectation that the merger will close by the end of the year.
Antitrust Review: The FCC is an independent agency that typically reviews such transactions under its public interest standard but the Commission is not reviewing the AT&T-Time Warner deal because no FCC-regulated licenses will transfer as part of the deal. The Justice Department’s Antitrust Division is the only federal obstacle to transaction approval.
We have consistently held the view that the antitrust case against this vertical transaction is not very strong and, despite the President’s statements against the deal as a candidate last October, we have always believed a DOJ federal court lawsuit to block the merger was unlikely.
The career staff of the Antitrust Division is conducting the investigation while awaiting the confirmation of Makan Delrahim, President Trump’s nominee to serve as Assistant Attorney General. Mr. Delrahim is currently President Trump's Deputy White House Counsel. He breezed through an easy Senate confirmation hearing about a week ago. Nonetheless, members of the Senate Judiciary Committee asked for and received explicit assurances from the nominee that all investigations conducted by the agency would be independent and free of any political influence.
The transaction is not issue-free and Stephenson has expressed a willingness to accept regulatory conditions as part of the approval process. The staff will make its recommendations to the Division’s political appointees when they arrive and a final call will be made. Again, given the merits of the case, we think the DOJ will likely determine that pursuing litigation here would be a questionable commitment of agency resources.
MIC
Click here to read our analyst's original report.
FBO Acquisition……Consistent with its roll-up strategy, Atlantic Aviation recently acquired an FBO in Oxford, CT. Oxford is between Waterbury and New Haven, about a 2 hour drive from Manhattan, and close to below-average fishing in the heavily-polluted Naugatuck River. Macquarie Infrastructure Corp (MIC) also announced that it acquired a small (5 MW) solar facility in Minnesota. In total, MIC has spent $66MM on acquisitions so far in 2017.
WMT
Click here to read our analyst's original report.
Wal-Mart Stores (WMT) reported earnings this week, and it was a good quarter. WMT EPS beat by 4% ($1.00 vs $0.96), comparable sales met expectations at +1.4%, slowing 40bps from 4Q, but steady on 2yr rate at +1.2%.
2Q sales were guided to accelerate to +1.5 to 2.0% on a more difficult comparison from last year implying at least a 40bps 2 year acceleration.
Traffic was up 1.5%, best seen in 6 quarters while the 2 year avg traffic of +1.5% is the best seen in ~5 years, i.e. since coming out of the recession.
Looking at the trend for ecommerce at WMT vs TGT, TGT is being left in the dust. US ecommerce accelerated significantly to +69% in 1Q from 36% last Q, contributing 80bps to comp.
The macro viewpoint and share gain thesis we had for WMT is playing out and shows no signs of slowing down.
CFG
Click here to read our analyst's original report.
Below is a note sent to subscribers earlier this week by Hedgeye CEO Keith McCullough:
Our risk management strategy has been to only buy bank stocks when bond yields selloff to the low-end of my immediate-term risk range.
Finally, that's happening today. So, I'll signal buy on one of Josh Steiner's fav bank stocks!
As a reminder adjusting for securities gains and a one-time tax benefit, CFG posted 1Q17 EPS of $0.56, up +42% YoY and beating street estimates by +12%.
Here's Steiner's recap of the recent quarter:
Prima facie, Citizens Financial Group (CFG) generated first-quarter income of $320 million with GAAP earnings per diluted common share of $0.61, up +43% and +49% YoY, respectively. However, performance was buoyed by a $23 million or $0.04 per diluted common share benefit related to a favorable settlement of certain state tax matters. Adjusting for the former, as well as net gains made on the bank’s available-for-sale securities portfolio, CFG generated first-quarter net income of $294 million with earnings per diluted common share of $0.56, up +36% and +42% YoY, respectively.
On both a GAAP and Non-GAAP Hedgeye-adjusted basis, CFG moved well beyond street estimates of $0.50 EPS for 1Q2017.
EXAS
Click here to read our analyst's original report.
Click here to read our rebuttal of Citron Research's short call on Exact Sciences (EXAS) and why we think "many of Citron's arguments around pricing are factually incorrect."
IVZ
Click here to read our analyst's original report.
Invesco (IVZ) reported AUM two weeks ago with a rebound in April after a dip in March. After what we estimate was tax related redemptions last month, April saw ~$1Bn in Powershare inflows offset by "marginal" net outflows in its active product suite. Invesco benefits from these trends through its ownership of the 4th biggest passive franchise in Powershares which has disproportionate market share in "smart beta" ETF products which have an average realization rate of 0.45% versus "plain vanilla" ETFs at a 0.22% fee.
The company is exposed to the exponential growth rate in ETFs year-to-date, with industry fund raising at +$134Bn in the first 3 months, over 4x the industry's asset growth in 1Q2016. Also, Invesco has an advantage over other managers with an all weather mix of AUM with enough offense, or beta exposure (45% of AUM in equity products), should equity markets continue to run; solid Defensive allocations with 25% in fixed income in addition to the growing ETF franchise we mentioned.
Importantly, IVZ is a takeout candidate in our view with Franklin Resources (BEN) a likely suitor with lots of geographic overlap. In a proposed transaction, we price IVZ at a fair value of $40 per share with $500 million in possible cost synergies. In an M&A given scenario, BEN earnings accretion would be 9%+, implying ~25%+ upside from current levels. On a stand-alone basis, we have earnings estimates +7% above consensus for the company in 2018.
GLW
Click here to read our analyst's original report.
We see positive fundamentals continuing for Corning (GLW), including:
- Re-balancing of the supply/demand factors in the display glass market
- Groundswell of demand from architecture changes, competitive forces, and regulatory accelerators driving the need for more fiber in the coming years
- Upside potential for 2x Gorilla Glass content per phone
- Ongoing buyback will continue to put upward pressure on Street EPS estimates for 2017
KATE
No update on Kate Spade (KATE) for this week's Investing Ideas but Hedgeye Retail analyst Brian McGough reiterates his long call on the company.
RLGY
Click here to read our analyst's original report.
Below is a note sent to subscribers earlier this week by Hedgeye CEO Keith McCullough:
One of our favorite long ideas has been Realogy (RLGY).
Suffice to say, mainstream media botched the details (i.e. truth) about yesterday's Housing Starts number. Here was Josh Steiner and Christian Drake's take:
Total Housing Starts for April came in at 1.172mn, a M/M decline of -2.6%, but a Y/Y increase of +1.5%. March was revised slightly downward (1.215mn → 1.203mn).
While the headline number is being widely reported as unimpressive, it's important to note that the trend in Single Family Starts and Permits remains strong and growing. Single Family Starts increased +0.4% sequentially, and +9% Y/Y in April. The reported 835K SF starts represents the third highest reading in the past twelve months.
Multi-Family Starts tend to be volatile but were de facto weak in April, as the reported 337K MF Starts declined by -9% M/M and -13% Y/Y.
Bigger picture: the underlying LTM trend remains Single Family Starts ↑, Multi-Family → to ↓.
It's worth noting that the comps will be relatively easy for the next five months (through September). For illustrative purposes, if the current level of SF starts persists next month, it would be +14% Y/Y.
In other words, the (now well-worn) lot supply/labor shortage/regulatory burden issues will remain upside constraints to supply, but the twin tailwinds of favorable comps and organic underlying improvement should continue to support housing market fundamentals in the intermediate term.
HST
Click here to read our analyst's original report.
Here's a brief update from our Gaming, Lodging and Leisure analyst Todd Jordan on hotel RevPar growth:
- Influenced by the shift in Mother's Day, RevPAR on a per day basis, was again noisy this past week. Per STR, weekend RevPAR was firmly in the red, but weekday RevPAR posted solid mid-single digit growth (the inverse of the prior week). Just taking an average of daily RevPAR growth in the MTD, RevPAR is up ~5%. However, keep in mind that the weekly numbers are volatile and are subject to revisions at month end.
- Comps remain pretty easy for most of May (low single digits or flat), and we believe that we could see some nice acceleration off the ~2% growth posted in April (final April numbers have not been released yet). Additionally, we remain optimistic for more RevPAR acceleration in Q2, and this optimism is data driven.
For investors keen on gaining leverage to the improving RevPAR environment, we continue to recommend shares of Host Hotels (HST)
DE
Aggressive Sales Guide Is Bearish: Here is the problem for longs – after yesterday, the market should shift focus from what already happened to what will be. And what will be, from what we see, is not pretty.
How, exactly, does Deere (DE) expect to get to Ag & Turf sales +8% for the year? Sales are up only 1% YTD, and crop prices are down. In South America, crop prices are mostly down quite a lot since the start of FY1Q17. By the end of May, US corn, wheat, and soy will be down 15% to 20% without a rally. Farm input costs are mostly higher year-over-year.
But DE just guided an acceleration in sales growth. We’d bet the market turns bearish on that outlook. Just consider the price charts below…. Sales have been up 1% on price, which means there has been no “ag recovery” in demand.
HCA
We continue to see downside for HCA Holdings (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.
Overall, Health Care employment trends continue to weaken year-over-year, which is in line with our negative view of medical consumption. We believe hospital employment will continue to slow in response to deteriorating admissions trends. The slowing growth supports our short thesis on HCA, and the Health Care Sector more broadly, as we continue to see further downside to growth. The upcoming #ACA2.0 policy changes under repeal and replace, and, to a less extend, tax reform, are largely negative for medical spending and for providers specifically.
