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 Invesco (IVZ) and Citizens Financial Group (CFG) from the long side and added Red Robin (RRGB) to the long side of Investing Ideas this week.
IDEAS UPDATES
UUP | XLU
Below is some essential perspective to help broaden your thinking about our Macro call for U.S. #GrowthAccelerating from Hedgeye Senior Macro analyst Darius Dale. Key callouts include our preference for stocks with the following factors: High Beta, Momentum and Growth. We also provide our updated GDP estimates for 2017.
"By now, most of you have hosted Keith and I in your offices for a meeting(s) and I’m sure you’ve probably noticed either subconsciously or overtly that I’m almost always taking more notes than anyone else in the room. I can assure you it’s not because I’m being creepy or socially awkward; it’s simply because I’m executing part of the process by which we derive answers to the following three questions:
- What’s the single most critical factor or catalyst investors are focused on and/or outright worried about?
- What’s the most thoughtful pushback to any of our existing views?
- What’s the most consensus macro bet being made, either explicitly or implicitly?
In reviewing my notes, the answers to the aforementioned questions are as clear as the London sky usually isn’t:
- What is, “the FAANG” (as in when does it break)?
- What are, “U.S. interest rates” (specifically the narrowing yield curve)?
- What is, “Long Europe” (in all its various forms)?
With respect to why we still see considerable upside in “FAANG” stocks from here:
- Fundamentally speaking, this in the PERFECT market environment for the components of FAANG to outperform in that Tech and Consumer Discretionary are the two best-performing U.S. equity sectors in the current and prospective growth and inflation regime as identified by our proprietary, four-quadrant GIP Model process (i.e. #Quad1). Specifically with respect to the trailing 20 years of quarterly observations, Consumer Discretionary and Tech have positive expected values of +4.4% and +4.0%, respectively, in #Quad1 (i.e. GROWTH ↑; INFLATION ↓), which are the first and second best return profiles across the ten GICS Level 1 sectors.
- Isolating GROWTH as a style factor, when YoY Real GDP growth is: A) above its structural trend and B) accelerating sequentially as our model is forecasting for 2Q17E through 1Q18E, Tech and Consumer Discretionary boast the two best return profiles at the sector level with expected values of +9.3% and +5.3%, respectively. Further compounding this fundamental tailwind is the fact that the three best-performing U.S. equity style factors in the aforementioned GROWTH regime are (in order): High Beta, Momentum and Growth with expected values of +7.0%, +6.9% and +5.3%, respectively. What is the “FAANG” if not high-beta, growthy and momentous ways to play the aforementioned sector exposures? Bingo. At least with respect to identifying investable patters across economic and financial market history, the market has this trade 100% correct.
- If you’re not big into fundamentals and all you care about is when the tide turns on sentiment, you can rest assured knowing that the NASDAQ 100 and XLK ETF boast implied volatility premiums of +65.8% and +56.8% on a 3M-by-3M basis, which are the first and second steepest premiums across the U.S. equity indices and sectors we track. Moreover, those figures represent Z-Scores of +1.63 and +1.59 on a TTM basis, which implies that buyside consensus is increasingly bidding up protection (relative to realized volatility) from a material correction over the intermediate term.
Juxtapose this wall of worry with our [current] forecast for Real GDP growth to meaningfully accelerate from +2.37% YoY/+2.73% QoQ SAAR here in 2Q17E to +2.77% YoY/+5.05% QoQ SAAR in 3Q17E."
EXAS
Click here to read our analyst's original report.
Click here to watch a video of Hedgeye Healthcare analyst Alex Ross providing a brief update on Exact Sciences (EXAS). In it, Ross explains why Citron Research's short call continues to misunderstand the bullish thesis on the company.
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 Telecom & Media Policy analyst Paul Glenchur:
New Antitrust Chief: This afternoon, the Senate Judiciary Committee should vote out the noination of Makan Delrahim, President Trump's current Deputy White House Counsel and his nominee to lead the Justice Department's Antitrust Division. Mr. Delrahim breezed through his confirmation hearing about a month ago and we expect full confirmation on the Senate floor.
We believe Mr. Delrahim will bring a mainstream antitrust approach to the position, including a Republican edge that suggest a less ambitious competition policy agenda than the one prevailing toward the end of the Obama Administration. Deals raising antitrust concerns will be scrutinized and investigated, but we do not expect antitrust enforcement to become a tool of larger economic policies embraced by the Administration. Under President Obama, by contrast, industry consolidation was viewed as a contributor to national income inequality, setting a tone that justified greater skepticism of big mergers.
With Mr. Delrahim's arrival at the DOJ, the AT&T-Time Warner (T-TWX) transaction should receive a final vetting as staff recommendations are prepared for actionable decisions. As we've noted before, in an academic capacity, he has indicated the merger is a vertical deal that should not set off antitrust alarm bells. Nonetheless, he and his deputies will review the work of the staff lawyers and economists and make the call on whether the case against the deal is compelling. Reaffirming the view we have held since the deal was announced last October, we continue to believe the substantive basis for a challenge is not very strong and anticipate the transaction will ultimately be cleared. We also note that AT&T has expressed a willingness to negotiate conditions if necessary. There is no companion review underway at the FCC, a factor significantly boosting the likelihood of government approval.
WMT
Click here to read our analyst's original report.
No update on Wal-Mart (WMT) for this week's Investing Ideas but Hedgeye Retail analyst Brian McGough reiterates his long call on the company.
MIC
Click here to read our analyst's original report.
Below is a review of recent Macquarie Infrastructure Corp (MIC) developments:
On the 1Q17 Results……MIC’s 1Q17 was in-line quarter with no surprises. Adjusted EBITDA of $180MM (adding back $18MM of manager fees) was ahead of consensus $177MM. EPS of $0.44 missed consensus $0.46. CapEx was $60MM and economic FCF – by our calculations – was $73MM or $0.88/share. 1Q17 economic FCF was +4% YoY. Business trends at the major assets – IMTT and Atlantic Aviation – were consistent with recent periods and our expectations. IMTT continues to operate at a very high 96% utilization rate. IMTT's average contract life at the end of 1Q17 was 2.2 years, down slightly from 2.3 years at 12/31/2016 and 2.5 years at 3/31/2016. Atlantic Aviation was MIC’s best performer in 1Q17 with segment EBITDA +10% YoY due to acquisitions, increased flight volume (market is growing at ~+1 - 2%), and market share growth. The Power segment was weaker on warmer-than-normal weather and reduced contribution from wind facilities. Hawaii Gas was flat.
Torturing the Numbers to Show Desired Growth Rate……The 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.
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. 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.
Valuation……No change to our Fair Value estimate for MIC of ~$40/share based on our DCF and SOTP analyses. At the current price of $80/share, MIC is trading at ~15x 2017 EV/EBITDA and ~33x 2017 FCF to equity. If you really like MIC at this price you will love our Best Idea long Royal Vopak (VPK-NA) trading <9x EV/EBITDA, and US FBO leader BBA Aviation (BBA-LN) trading at 12.5x EV/EBITDA.
RLGY
Click here to read our analyst's original report.
No update on Realogy (RLGY) for this week's Investing Ideas but Hedgeye Housing analyst Josh Steiner reiterates his long call on the company.
DE
Click here to read the stock report on Deere (DE) Hedgeye Industrials analyst Jay Van Sciver sent Investing Ideas subscribers earlier this week. Below is also a brief update from Van Sciver:
It can be hard to look at data below objectively when the stock is ‘working’, but the data and disclosures in the 10-Q are not supportive of either the “trough” or “cost cut” narratives. We continue to see evidence of weaker farmer finances amid lower crop prices year-on-year. We think Wirtgen is a blinking red light, thrusting DE away from its core market and prior non-acquisitive strategy. That is typically a warning sign that a down-cycle will persist, with the company looking to fill a hole in core markets.
GEL
Click here to read the stock report on Genesis Energy (GEL) Hedgeye Energy analyst Kevin Kaiser sent Investing Ideas subscribers earlier this week.
RRGB
Click here to read the stock report on Red Robin (RRGB) Hedgeye Restaurants analyst Howard Penney sent Investing Ideas subscribers earlier this week.
SNAP
We will be sending a full stock report on our Snap (SNAP) short call next week but below is a brief thesis overview from Internet & Media analyst Hesham Shaaban:
Despite SNAP’s success in a relatively short period of time, both it’s near-term and longer-term prospects are more questionable. Incremental user growth will prove much tougher from here, especially since SNAP has boxed itself in to a fairly restrictive user metric (daily vs. monthly). Further, while SNAP is currently growing revenues at a triple-digit growth rate, consensus is asking way too much of them for both 2017 and 2018 revenues, largely because of inappropriate comparisons to Facebook. We expect the hype train to come to a halt as we get closer to year end.
CAKE
Click here to read the stock report on Cheesecake Factory (CAKE) Hedgeye Restaurants analyst Howard Penney sent Investing Ideas subscribers earlier this week.
RRR
Below is Hedgeye Gaming, Lodging and Leisure analyst Todd Jordan's most recent update on why we like Red Rocks Resorts (RRR):
"We are currently in the midst of an LV locals refresh study and continue to come across compelling data points that suggest the local economy remains on a solid footing. Evidence of such strength is well publicized in the media via the typical indicators: home prices, wages, job growth, etc. In addition to the strength in those indicators, we’ve come across additional datasets that supports continued growth in the locals gaming sector.
Driver’s license surrenders, a proxy for immigration to Clark County has improved over the last 18 months and is now growing in the high single digit range – slightly ahead of historical averages. Additionally, total gasoline demand (# of gallons sold per month) has finally surpassed its prior cycle peak and is finally growing at its normal expansionary run rate.
Long term, RRR should be the primary beneficiary of the increasingly favorable supply/demand environment in the LV locals market."
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.
