Keith's PM View:

  • COST was up over +3% today with the market bouncing but this market bounce comes within the lens of a new Bearish @Hedgeye TREND signal for the SP500. While that may or may not change, my job is to risk manage the market I currently have as opposed to the one I’d like to have. Independently, COST is also signaling lower-highs.
  • RDFN was up approximately +2.6% today on #decelerating volume. When I look for re-entry points in Best Ideas shorts, that’s what I’m looking for – bounces within Bearish @Hedgeye TRENDs. This has been an excellent short call by Josh Steiner and Christian Drake.
  • Reminder that my strategy with a Top 10 Ideas product is to consistently re-order and re-fresh my rankings of ideas (I’m picking the Top 10 out of my Top 50 Research Team Ideas – ping your sales person @Hedgeye if you’d like that list) based on both market moves and moves within the ideas themselves.

Josh Steiner's Analyst View on Redfin Corp. (RDFN):

  • Slowing growth has been a trend this year, with the core Real Estate business having decelerated annually in each of the past 3 quarters. For the fourth quarter, Redfin real estate revenue increased +35.4% Y/Y, down -1240bps vs 4Q16.
  • Unfortunately for Refin, the current macro setup is such that the tightening inventory conditions push competitors to be even more aggressive in their tactics. 
  • Our Redfin short idea is grounded in the belief that Redfin's above-industry growth rate was bought by losses and short-term technological advantages that the competition could and would catch up with.

Howard Penney’s Analyst View on Costco Wholesale Corp (COST):

  • Robust sales figures should prove that this is a retailer in a class of its own, yet many prefer to point to an uncertain future. Given COST’s limited SKU count of roughly 3,800 items per warehouse and strong volumes, they have the ability to negotiate for the best possible price with producers, and they pass most of those savings onto the consumer, creating a value equation that can’t be beat.
  • Despite a competitive price environment, COST was able to achieve a relatively flat gross margin YoY at 10.98%, down just 2bps YoY. Equally as impressive was the 22bps improvement in SG&A as a percent of sales, despite investments in ecommerce, as a result of strong sales performance.
  • We also want to highlight the improvement in renewal trends, which ticked up 10bps sequentially to 90.1% in the U.S. and Canada and 87.3% worldwide, up from 90.0% and 87.2%, respectively at 2Q end. It is clear to us that COST has plenty of levers to pull to improve the business, and there is a seat reserved for them in the future of food retail. 

Since being added as a long to the Hedgeye Top-10 Best Ideas List on 3/14, COST has traded up 1.40%, outperforming the benchmark S&P 500 by +471bps.

***Stay tuned for Josh’s 3-page summary of his short thesis on RDFN.***

Kind regards,

-The Hedgeye Research Team