Below are analyst updates on our sixteen 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 Host Hotels (HST) from the long side of Investing Ideas this week and added shorts Genesis Energy (GEL), Snap (SNAP) and Cheesecake Factory (CAKE).
IDEAS UPDATES
UUP | XLU
After 6 months of underperformance relative to the other major global currencies (-4.8% YTD for the U.S. Dollar index), we’ll take this Memorial Day weekend update to get back to the wood on outlining our longer-term structural case for the dollar...
In hindsight, what was extreme bullishness and crowded positioning in the U.S. dollar heading into 2017 has been unwound. It was a healthy correction and a reason in and of itself why the U.S. dollar has upside from here. The 1st chart below is a good look at the unwinding of the long USD / short Euro net futures and options positioning. Net positioning in the Euro swung from extended net short position around election time, to the highest net long level in over three years currently (+2.6x and +2.7x extended on a TTM and 3Yr Z-Score basis).
Expanding on the behavioral psychology shift exclusively, we believe there are a few key fundamental reasons for the shift. Our deep dive on Growth, Inflation, and Policy (GIP Model) suggests this fundamental set-up, which has weighed on the dollar YTD, is long in the tooth:
- The consolidation has been largely driven by fundamental expectations, as economic fundamentals in the Eurozone, Japan and the U.K. have been supportive of market participants increasingly anticipating tightening out of the ECB, BoJ and BoE. A great way to see just how negative consensus was with regard to European fundamentals is by viewing our second chart below. The chart outlines the economic surprise indices for the U.S., Eurozone, and Japan. The divergence in results vs. expectations in the U.S. vs. the Eurozone has been a large currency driver.
- From a structural economic and financial market risk perspective, the U.S. economy scores in line with Japan, slightly worse than the U.K. (though it’s hard to factor in Brexit in the absence of any relevant data) and noticeably better than the Eurozone. This underpins our long-term TAIL bullish bias on the U.S. dollar which we’ve maintained since late-2011.
The U.S. dollar’s broad-based decline throughout the YTD has been for a variety of core fundamental reasons. More importantly, those reasons appear poised to inflect materially over the next 2-3 months. This has dour implications for commodity-based reflation and emerging market asset inflation.
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved. Check out last week's update from Hedgeye Telecom and Media Policy analyst Paul Glenchur for more.
MIC
Click here to read our analyst's original report.
No update on Macquarie Infrastructure Corp (MIC) for this week's Investing Ideas but Hedgeye Energy analyst Kevin Kaiser reiterates his short call on the company.
WMT
Click here to read our analyst's original report.
Nobody should be surprised that Target (TGT) is investing in Casper. We can all agree that it’s completely ridiculous and dilutive. But not unexpected.
Simply put, TGT is making a pathetic attempt to catch-up to Walmart's (WMT) deal-binge. WMT is on track to do a deal per month.
- While there’s no way I could prove this one out – I’d bet anyone that TGT wouldn’t be looking to buy Casper if WMT was not on track to buy Bonobos (and bought jet, Modcloth, Shoebuy, Moosejaw).
- You can’t sell Sweaters, Advil, Nespresso’s and Fruity Pebbles anymore? Then Sell mattresses -- why not?
- Who cares it has zero crossover with your core business?
- Who cares if there are no synergies for your struggling online business?
- If Casper was a deal worth doing, Wal-Mart would have done it already.
Wal-Mart is way ahead in the battle to invest in e-commerce, TGT will have a tough time catching up. That’s bullish for WMT’s continued share gain.
CFG
Click here to read our analyst's original report.
No update on Citizens Financial Group (CFG) for this week's Investing Ideas newsletter but Hedgeye Financials analyst Josh Steiner reiterates his long call on the company.
EXAS
Click here to read our analyst's original report.
On HedgeyeTV this week, our Healthcare team discussed their top long and short ideas, including an update on their long Exact Sciences (EXAS) call. Click here to watch the presentation.
KEY TOPICS INCLUDED:
- Healthcare Macro and Policy
- Employment and Utilization
- Repeal and Replace: What’s Next?
- Price and Sentiment
- Top Idea Updates
- Mednax (MD): Press The Short
- athenahealth (ATHN): Activist Risk and Opportunities
- Exact Sciences (EXAS): Citron Short Debate
- AMN Healthcare (AMN): Tight Labor Pool
Click the image below to watch our Healthcare team in our Sector Spotlight segment.
IVZ
Click here to read our analyst's original report.
Invesco (IVZ) shares continue to be attractive on a “growth at a reasonable price” basis. With the Department of Labor’s (DOL) Fiduciary rule now having a June 9th deadline for implementation as of this week, IVZ’s Powershares ETF business should continue to prosper. The DOL’s rule disallows 3rd party distribution of mutual funds without a performance forecast, thus many financial advisors are simply selling mutual funds and using ETFs for equity exposure.
Thus IVZ stock is a good proxy for this ongoing robust trend for passive investments and the stock trades at a 3x P/E multiple discount to BlackRock (BLK).
GLW
Click here to read our analyst's original report.
In an update note sent out this week, we went through the puts and takes on commentary from Corning’s (GLW) optical food chain customers, and other channel participants. While there was some cold water splashed in the immediate term due to further slowing of Dycom’s 12-month backlog growth, the generally bullish signals coming through the end of this year and into next make us continue to see stronger forward signals for Corning’s optical demand. We would view a summer lull as an opportunity to buy more stock in Corning.
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 an update on the Housing market from our Housing team which has implications for high-end housing company Realogy (RLGY):
Existing Home Sales fell -2.3% sequentially and decelerated -400bps to +1.6% YoY in April.
Statistical Adjustments – which are supposed to adjust for calendar effects – incompletely correct for the shifting Easter holiday. This dynamic, empirically, manifests as optically disappointing growth in the month containing Easter and rebound strength in the subsequent month as the effect resolves.
The fact that the empirical tendency over the last few years is for EHS to recouple in the direction of PHS following short-term dislocations between the two series only added to the negative asymmetry for April.
To be clear, we’re not expecting some moonshot acceleration chased by further step function increases in demand growth. We are expecting some rebound strength off negatively distorted April growth and steady modest-to-moderate improvement similar to that which has characterized the last couple of quarters as demand remains robust and supply shows further, trudging improvement.
DE
Beat Quality Is Poor: We can’t wait to see how Deere (DE) deals with the SiteOne gains when those profits make the comps look bad. The $176 million gain is about 45% of the operating profit gain in Ag & Turf and ($111 million after-tax benefit) is about $0.34 cents of EPS. The gain isn’t the only low quality source of earnings growth. Other dubious sources of better profitability include a cut in R&D spending, lower losses on residual values after a charge in FY4Q16, a slightly lower tax rate, a larger year-over-year inventory build for the quarter, and a small drop in provision for credit losses despite worse past dues at the start of the quarter.
HCA
Click here to read the stock report on HCA Holdings (HCA) our Healthcare team sent Investing Ideas subscribers earlier this week.
GEL
Below is a note from Hedgeye CEO Keith McCullough on why we added Genesis Energy (GEL) to the short side of Investing Ideas earlier this week:
I've been waiting, patiently, for Oil to get back to the top-end of its risk range before sending you SELL signals on some of Kevin Kaiser's Best Ideas (see Institutional Research product for his entire list of ideas).
One of his better short ideas, Genesis Energy (GEL) recently reported - and this is part of what Kaiser wrote in an Institutional Research note:
"EPS – which we believe is the best measure of GEL’s economic profitability – was down 29% YoY in 1Q17. GEL’s 1Q17 CapEx was $61MM and FCF was $32MM or $0.27/unit. Net debt ticked down slightly to $3.0B due to a $140MM equity raise in March. Net debt to annualized 1Q17 EBITDA stands at 5.7x – the Company is still way over-levered."
This is another way to play our Reflation's Rollover Macro Theme.
SNAP
Below is a note from Hedgeye CEO Keith McCullough on why we added Snap (SNAP) to the short side of Investing Ideas earlier this week:
I actually feel bad for whoever got sucked into selling at last week's politicized lows...
Let them eat cake. Let's keep taking advantage of what remains a fantastic market, selling at the top-end of the risk range and buying/covering lower.
One name we have not liked is Snapchat (SNAP). Hesham Shaaban is our analyst on this one and wrote the following in an Institutional Research note:
"The monetization potential is there, but not nearly as much as the highly-touted ARPU differential b/w SNAP and FB would suggest. The reason why FB's ARPU is multiples higher is because its average user spends far more time on the platform than SNAP's users, and also because Instagram revenues are included in FB's ARPU calculation while those users are not. We estimate the actual monetization delta is only 3x correcting for the above variances best we can. Closing that delta will take some time since SNAP's reported usage metrics suggest its users live on the left side of the app, which creates fewer monetization opportunities."
CAKE
Below is a note from Hedgeye CEO Keith McCullough on why we added Cheesecake Factory (CAKE) to the short side of Investing Ideas earlier this week:
Now that we're letting them "eat cake"...
Let's focus on shorting Cheesecake Factory (CAKE) on this bounce to the top-end of my risk range.
Restaurants analyst Howard Penney remains The Bear on this one. In his most recent Institutional Research note he wrote:
"It seems clear to us that the management team is more focused on driving incremental margin and only paying lip service to the ability of their business to drive traffic growth. Over the long-term, only the strongest concepts drive positive traffic! CAKE has seen declining traffic for 17 of the last 18 quarters.
On a 2-year stack, traffic has been down 13 of the last 14 quarters. Also important to note, there has been notable deceleration in 2-year trends beginning in 2Q16, and there is no recovery in sight. Saying that A-mall locations are still going strong seems to be an exaggeration about the strength of the mall business."
