Below are analyst updates on our eighteen current high-conviction long and short ideas. Please note we added Hanesbrands (HBI), Starbucks (SBUX) and United Continental (UAL) to the short side of Investing Ideas this week. We also removed Air Products (APD), Teladoc (TDOC) and Cree (CREE) from the long side. We will send Hedgeye CEO Keith McCullough's refreshed levels for each in a separate email.
IDEAS UPDATES
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
According to published reports, AT&T may consider calling the head of the Justice Department's Antitrust Division to the stand, escalating the issue of a politically-motivated enforcement action against the Time Warner merger.
As we noted recently, assertions of political motives for the DOJ challenge are not directly relevant to any of the core legal elements of the antitrust case. The case must be decided on the economic theories and evidence presented at trial, assuming the case proceeds to full litigation and does not settle. Nonetheless, AT&T has focused on widespread concerns that this antitrust enforcement action is driven more by the President's hostility toward CNN rather than a genuine antitrust concern about the vertical integration of AT&T and Time Warner
Threats to call the Assistant Attorney General for Antitrust, Makan Delrahim, could affect the credibility of the DOJ's case, particularly as Mr. Delrahim, prior to the election, said publicly that the merger did not raise major antitrust concerns. More likely, identifying the antitrust chief as a potential witness for AT&T signals the prospect of a constitutional battle over executive privilege or a similar doctrine to withhold from evidence any communications between the DOJ and the White House regarding the AT&T/Time Warner transaction.
Note that Mr. Delrahim served as Deputy White House Counsel prior to his confirmation as the head of the Antitrust Division.
Whether AT&T would seriously consider calling Mr Delrahim as a witness is far from clear. Testimony under oath raises the stakes substantially and the company could believe that it will increase pressure for a settlement, particularly as the merits of the antitrust case are questionable. As we've previously noted, theories of vertical foreclosure are not novel, but the dynamics of the current media environment raise serious doubts about AT&T gaining sustainable market power to inflict competitive harm on distribution rivals and over-the-top alternatives.
RRR
Click here to read our analyst's original report.
The strong economic and demographic data for the Las Vegas metro area keeps us steadfastly bullish on both Red Rock Resorts (RRR) and the Locals gaming market. Home prices have continued their relentless move higher, which is finally generating positive wealth creation for many Local citizens, and very importantly, the mix of new employment gains are heavily weighted towards high paying blue collar construction jobs. Clark County added some 11K construction jobs in 2017, and that’s without the real boost that should take place in 2018/2019 via the Raiders Stadium buildout, Project Neon expansion, LV Convention Center expansion, and other development projects in the area.
All in, we expect another 30-40K construction jobs will be added in the Clark County metro area (over the next 3yrs), and as such we also expect the historical (positive) relationship of construction jobs growth = eventual GGR growth to further materialize. RRR remains our favorite US centric gaming operator.
HST
Click here to read our analyst's original report.
Most recent STR results indicate that Hotel RevPAR slowed vs. the strength seen in the prior two weeks. For the week ended 2/10/18, total US RevPAR grew 2.6% YoY. As usual, we would caution not to be too reliant on STR's weekly data as they are incomplete and represent only a short period of time; the monthly results are more comprehensive.
We expect true run rate of RevPAR to be stronger moving forward, as comparisons remain easy for the next 4-6 weeks before we face the Easter calendar shift. Our estimates suggest US Hotels grew RevPAR by ~3% in January. We definitely noticed an uptick in HLT's tone during today's earnings conference call.
For last week, we estimate that Top 25 Market RevPAR outperformed the total index and was up ~3% YoY. This past week included the strong Super Bowl Sunday result in the Twin Cities of MN and the sluggish YoY numbers out of Houston where the Super Bowl took place in the year prior.
We continue to reiterate our conviction that a positive inflection in RevPAR is ongoing. Host Hotels (HST) remains one of our top picks in the space as both looked poised for RevPAR and earnings beats in the coming quarters. Click the links below for our recent notes on the industry's leading indicators/Hedgeye RevPAR model update, and a note on our top pick, HST. We like both these stocks on the market's recent pull back.
MLCO
Click here to read our analyst's original report.
Thanks to market volatility in the prior week, we’re seeing another opportunity for investors to add exposure to the highest growth space in GLL. Visitation and mass revenue growth are accelerating and the visitation mix toward first time visitors and visitors in the outer provinces bolster the longer term growth thesis. Near term fundamentals are likely better than expected which should lead to another quarter of strong earnings in Q1. As we highlighted in our note this morning, “MACAU | MASS TRACKER SUGGESTS STRONG JAN MASS, WILL FEB FOLLOW THROUGH”, January mass was very strong and here in February, the pre-CNY numbers were strong on a CNY comp basis. We think Macau’s best days are yet to come, but we do see a strong Chinese New Year celebration as a near term positive catalyst for our top picks in the group, Melco Resorts (MLCO) and LVS. With LVS down 9% and MLCO down 14% from its 52wk highs, we think today is a good buying opportunity for our favorite two names in Macau.
TWTR
Click here to read our analyst's original report.
Twitter (TWTR) Takeaway: The turn came quicker than we expected, and TWTR didn't go nuts with its guide, so good to go.
- Autoplay becoming less of a drag on pricing: Ad engagements and CPE both accelerated on a q/q basis, which has only happened twice before. We estimate that Autoplay represented the overwhelming majority of ad engagements over the LTM, so there will be less pricing pressure from mix shift moving forward.
- Didn't go nuts with the guide: The mid-point of TWTR's revenue guidance only calls for ~6% revenue growth. We now believe it's even more likely that TWTR puts up double-digit ad revenue growth in 1Q (see scenario analysis in deck), especially with the Olympics providing an additional tailwind (as it did 4 years go).
KR
Click here to read our analyst's original report.
Seven months after grocery stocks tumbled on the news of Amazon’s (AMZN) huge acquisition of Whole Foods, $25 billion supermarket chain Kroger (KR) is bouncing back.
During a recent Kroger presentation, Hedgeye Consumer Staples analyst Shayne Laidlaw explains that the supposed imminent death of supermarkets appears overblown.
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Amazon is not taking over grocery any time soon,” Laidlaw says in the video above. “Kroger and other competitors aren’t sitting still. They’re expanding and growing their convenience points.” |
Combine that with recent supply issues at Amazon-owned Whole Foods, as well as a glitchy start for its AmazonGo store in Seattle, and Laidlaw sees no reason why Kroger can’t successfully fight back.
Watch the full video below for more.
ORLY
Click here to read the O'Reilly Automotive (ORLY) stock report Retail analyst Brian McGough sent Investing Ideas subscribers earlier this week.
MD
Mednax (MD) reported a reasonably positive 4Q17 last week consistent with our pivot from bear to bull. The one complaint we have, and consensus was only moderately interested in, was the lack of operating leverage from the same unit revenue growth upside. Improving same unit revenue growth and less-worse margins put the company on a path for a positive revision cycle and sequential improvement in 2018. We believe maternity trends will be positive for 2018 as we comp out of Zika. Maternity could be an even bigger driver if we are finally seeing a broader and long overdue recovery. With maternity recovering and management finally tackling productivity problems at American Anesthesiology, the margin opportunity is substantial.
CERN
Click here to read our analyst's original report.
Recently, Cerner (CERN) reported 4Q17 results and provided 2018 guidance that disappointed across most metrics. While 4Q17 bookings of $2,329 million came in well ahead of management's guidance of $1,750 - $2,000 million, the upside was driven by long-term service contracts or "Works" deals that are wreaking havoc on Cerner's margins. Meanwhile, higher margin, new client bookings declined -3.6% YoY in 4Q17. Further, 2017 marked the second consecutive year of negative new client bookings growth, with declines accelerating YoY in 2017 to -4.5% YoY from -0.8% YoY in 2016. We continue to believe commercial new client bookings are headed back to $1 billion due to a saturated EHR market with little replacement opportunity.
VIRT
Click here to read our analyst's original report.
While most investors translate the elevated volatility environment as always being beneficial to the market structure sector, we highlight the empirical evidence that even the agency exchange sector and especially the principally driven brokerage sector can also be a source of funds in market drawdowns. Looking at the iShares Broker/Dealer and Exchanges ETF (the IAI), the trading community's equities historically experience losses in ultra-high vol environments, so we think that the trading opportunity set in the current environment for the company is now overstated.
We also highlight that the $1.4 billion in trading capital at Virtu Financial (VIRT) (targeted to be taken down to just $750-850 million over time per management's guidance) is dangerously low compared to the multiples of that level at other market making firms. Virtu runs its trading operations on just $1.4 billion in total capital on just over $300 million in tangible equity. This compares to Goldman Sachs with daily trading capital of over $540 billion supported by tangible book value of $82 billion. Simply said, the current high vol environment is also a detriment to principal traders, and Virtu sits on very thin levels of capital.
HCA
Click here to read our analyst's original report.
BLS released the Job Openings and Labor Turnover Survey (JOLTS) for December 2017 last week. Health Care & Social Assistance Job Openings accelerated slightly to -0.3% in December but remains negative and well below its most recent peak of +56.9% in December of 2014. We have found a strong relationship between job openings in Health Care to overall medical consumption generally, and hospital same-store admissions specifically. However, a worse flu season, improving maternity trends and higher acuity may end up driving a divergence in the fourth quarter. We've added several charts to the "Chart Book" linked below that elaborate on this trend as well as increasing RN unemployment.
Historically, demand for labor follows growth in the insured population and medical consumption demand. Health Care Job Openings decelerated to -2.8% YoY on a rolling 3-month basis through December 2017, below its peak of +38.1% in December of 2014. Health Care and Social Assistance JOLTS rate of change continues negative to -12.8% in December. As a percentage of Health Care Employment, Health Care & Social Assistance Job Openings increased to 6.7%.
This continued slowdown bodes well for our short call on HCA Healthcare (HCA).
DPZ
Click here to read our analyst's original report.
When we first unveiled our official Domino’s Pizza (DPZ) short idea, the international issues facing the Domino’s brand were too big to overlook. In a far more mature delivery environment, Domino’s has been hit hard by competition. As the U.S. food delivery space continues to grow at a very impressive clip, we continue to gain confidence in our position that Domino’s domestic business will meet the same fate.
Earlier this week, Domino’s Australian franchise business (Domino’s Pizza Enterprises) reported 1H18 earnings figures for its Australia, EU, and Japan business and the numbers were not pretty. Group SSS came in at +4.0%, a sequential deceleration of 720bps. On a two-year average basis, Group SSS saw a 460bps deceleration. The Australia/New Zealand and Japan portions of the business also saw similar decelerations (see below for metrics and graphics), further showing that DMP-AU has continued to aggressively cede market share. It is also worth noting that management has tapered ANZ’s FY18 same-store sales guidance, now projecting 6-8%, as opposed to a previous guidance of 7-9% (guidance for EU and Japan have remained consistent).
All eyes will be on DPZ when they report next week (Feb 20th).
TSLA
Click here to read our analyst's original report.
Shares of Tesla (TSLA) have not responded well to positive catalysts in recent months. TSLA’s share price barely moved on the showy introduction of the Tesla Semi and Roadster. Heck, Tesla only inched higher on the SpaceX launch of a Tesla Roadster into space. Negative catalysts have had more sway, such as 4Q17 results. Tesla now faces a steady stream of severe and largely irreversible negative catalysts, including tax credit expiration, broad competitive entry, and platform quality issues.
While we came reasonably close to the top in our first two Tesla black books, reflecting that “story stocks hate dates with reality” and that Tesla was “an objectively horrible manufacturer”, we now expect downside acceleration. Tesla is not an affordable luxury with endless pricing power. It is a capital goods manufacturer whose core competency is turning $1 into $0.80 while looking cool. Unfortunately, as a business, Tesla is a structurally disadvantaged zero.
MC
Click here to read the Moelis (MC) stock report Financials analyst Jonathan Casteleyn sent Investing Ideas subscribers earlier this week.
AMN
Click here to read our analyst's original report.
We view the upcoming 4Q17 earnings release and 1Q18 guidance as likely positive for AMN Healthcare Services (AMN) in the short term. As a result, we're less comfortable with the short into the print, but continue to see negative issues over the intermediate term. Our estimates for 4Q17 and 1Q18 in the Nurse & Allied segment are $313M and $328M, compared with consensus estimates of $317M and $329M. Our forecast is based on the rate of change in Hospital Employment, which produces a 1Q18 pricing and volume forecast of +2.4% and +2.3%, respectively.
HBI
Click here to read our analyst's original report.
Below is a note written by Hedgeye CEO Keith McCullough on why we added Hanesbrands (HBI) to the short side of Investing Ideas earlier this week.
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You're not going to make money on every market move you make... but you can save yourself a lot of money by not making sales at the low-end of the SP500's @Hedgeye Risk Range (Friday), then covering those shorts post a big 4-day bounce! Don't do that. Stay with the #process and execute on it. After waiting and watching, my signals are saying today is a much better day to re-engage on the short-side. One of our BEST (longer-term) SELL ideas from Brian McGough (Institutional Research product) remains Hanesbrands (HBI). Here's an excerpt from Brian's recent recap of another dicey HBI quarter:
Sell green, KM |
UAL
Below is a note written by Hedgeye CEO Keith McCullough on why we added United Continental (UAL) to the short side of Investing Ideas earlier this week.
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The bulls call UAL a "cheap stock", but we think you can call anything cheap if your analyst is using the wrong numbers! The Bear (Jay Van Sciver) says the stock is going lower. I say it's signaling immediate-term TRADE #overbought within a Bearish @Hedgeye TREND. Here's also what Jay said about the United's (UAL) recent analyst day: "The UAL Investor event last night was exceptional in that it completely reversed course on many key prior initiatives. We’ll review a few, but it puts analysts in the awkward position of having told investors and PMs that doing “X” (e.g. cutting high cost regional flying) is the way forward, only to find a year or two later that doing the opposite (e.g. more regional flying for connectivity) is the way forward. Basically, UAL told investors they are going to try harder on things like asset utilization and employee productivity." Lovely, KM |
SBUX
Below is a note written by Hedgeye CEO Keith McCullough on why we added Starbucks (SBUX) to the short side of Investing Ideas earlier this week.
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After markets bounce, Mr. Market gives you an opportunity to reset both your positions and exposure. What you do on the bounce is absolutely going to determine how you do during the next selloff. If you don't think there will be another selloff, then you shouldn't be setting up for one like I am! A big 4-letter name that Howard Penney no longer likes is Starbucks (SBUX). It's a Best SELL Idea @Hedgeye. Here's how Penney described the recent SBUX quarter, which was not good: "Consolidated SSS came in at +2.0% vs Consensus +3.0%, showing a continued slowdown in the overall business. On a two-year average basis, same-store sales have slowed by 300bps since 1Q17. In the Americas, SSS was +2.0% vs. Consensus +3.2%, showing a slowdown of 350bps since 1Q17. With the comps slowing by so much, management will be hard pressed to find a viable growth engine in the Americas going forward. Adding to their problems was the margin compression experienced during the quarter as a result of a slowdown in transactions during the holiday program launched in mid-November, which included holiday gifts cards and merchandise. According to the Company, “We saw a slowdown in transaction comps, bringing total comps for the back-half of the quarter to roughly 1% with transaction comps slightly negative.” With the effects of this holiday program still being felt into 2Q18, margins will continue to be pressured." Sell the bounce, KM |
