• run with the bulls

    get your first month

    of hedgeye free


DKS: Prepare to Whack-A-Mole

Given the disproportionate impact sell-side upgrades/downgrades have had on stocks as of late, when I saw that GS upgraded DKS this morning, I thought it would provide a good ‘ol Whack-A-Mole opportunity on a high-conviction negative fundamental call whose stock I have eased up on as it retraced to the teens.

I guess not. The stock closed down on the day despite the upgrade. Even in a lousy tape – this is a bad signal.

Granted, the call sounded something like “We think the quarter is ugly, and the stock is probably headed lower, but we’re taking the month of August off and want to be in print as having called the miss, and telling everybody to buy into it.” I was a little surprised by weakness of the call itself, as I think the analyst there is one of the better ones in this space. But it’s still a Goldman Sachs upgrade and should have decent impact in itself.

One of the key factors that people hit me with is that DKS is cheap. But they said it was cheap at $30. Then $25. Then $20. Read my 5/22 post for the full thesis on DKS. There’s no reason why 6.5-7x EBITDA needs to be trough value for a name like this – especially if cash flow growth slows and/or goes negative over the next year.

Again, I was hoping for the Whack-A-Mole opportunity, as I fully understand that no story is linear (either up or down). Short interest is 21% of the float now – up from 6% about $15 ago. I’d love nothing more than to see this mole pop on a sandbagged quarter.

Brian McGough


Some interesting observations about Nike/Under Armour footwear from Jeff Dawson, a Research Edge intern who we are begrudgingly letting return to Yale University for his senior year.

Tobacco Road doesn’t offer much in terms of serenity. The hostile eight mile stretch along the “Fifteen Five-o-One” country road has been stamped by the “Just do it” travelers. It reminds all that one thing is for certain: Nike is boss. Whether you are a Dukie or a Tar Heel, you have the power of the swoosh behind you. Although intense rivals, both universities rep the color blue and whole-heartedly back Nike (NKE).

This Nike euphoria allows foes from rival schools to be friendly. Michael Jordan, a product of UNC basketball, stands as Nike’s poster child while Coach Krzyzewski of Duke University currently represents NKE on behalf of the USA Olympic Basketball team. Interestingly enough, 11 of the 12 NBA players selected to the team are endorsed by NKE and will be wearing the blue NKE Olympic jerseys. That’s a whole lotta blue power for NKE.

So how can UA compete against this blue wave? The answer… break tradition. After sitting through the Under Armour 2008 Investor Appreciation Day call on May 29th, I strictly remember UA stating that they would keep advertising consistent with the specialty idea “Protect this House”. It gives people a mantra… no star athletes. No athlete is bigger than the brand and UA stands by that. Well apparently the case of the SWOOSH BLUES is just too contagious.

Under Armour will now be teaming up with The Sports Authority and Chicago Bear’s star punt returner Devin Hester on ESPN. Devin Hester is well known throughout the league for breaking the NFL record of most punt returns in a season. He is a star. Oh, and by the way, he also wears a blue jersey for the Chicago Bears. Stealing a page out of Nike’s blue history book… I think so.

Only time will tell whether UA’s new footwear additions will help win over some of that blue Nike (NKE) market share. At Research Edge, we think that UA will gain share but it will come right out of Adidas’ and Reebok’s pockets. For the meantime, UA better hope Devin Hester doesn’t run out of bounds at only the 25 yd line.

Some recent Nike market share statistics:
• Nike is up 4.9% for this month’s Year over Year change, while its ASP is up a whopping 11.7%.

• While the Athletic Low Performance Industry is down (21%) Year over Year for the month, Nike’s Low Performance category is a positive 24%. (45 point swing Nike boasts over the Low Performance Industry).

• Nike is gaining upward of 3% YoY total market share for the month of July.

Jeff Dawson


Some people were really irritated when I started to write about the hedge fund industry being oversupplied. Usually when I'm irritating people, I am about to be really right.

Tom Cahill at Bloomberg wrote a solid story this morning titled "Hedge Funds May Post Worst Month In 5 Years." From what I am hearing from contacts in the industry, he doesn't look like he'll be far off in that prediction.

In his article he cites the Hedge Fund Research (HFR) Index "of more than 55 funds slid 3.2 percent through July 24, heading for the biggest monthly drop since the measure started in 2003."

Clearly the "meme machine" trades of shorting the Financials and buying everything Commodities caused some problems in July - suffice to say, these "Trades", as some “hedgies” like to call them, were a tad crowded, in retrospect.

The meltdown in the hedge fund industry remains one of the most misunderstood market risks. Many of these funds are managed as compensation structures, not real businesses. You won’t hear about the major blowups, until it’s too late. Stay hedged.


Wacky Wheat Moves: Polish drought, Iranian Rumors, and Putin Power

Wheat prices spiked overnight after a slew of bullish news reports from Eastern Europe and the Middle East were digested, only to give up much of the ground in the face of large volume sellers this afternoon.

The big three data points driving market action in the past two sessions are:
  • • The Government Statistical Office of Poland –the third largest EU wheat producer, has predicted this year’s harvest may be as much as 9% lower than last year’s after unseasonably dry weather in June and July damaged crops.
  • • The continued chatter in western media outlets that Iran is about to announce a large wheat purchase that will be spread amongst the US, Canada, Russia and the EU. For its part, the media in Iran has been reporting heavily on grain stock levels -last Monday’s edition of the newspaper E'temad-e Melli carried the headline "Wheat Import and Management crisis in Agricultural Sector".
  • • Russian Vice Prime Minister Viktor Zubkov was quoted in TASS today assuring farmers that "The Agriculture Ministry has been instructed to create an intervention fund of no less than five million tons of food grain and not less than three million tons of fodder grain by mid-August.” The fund is meant to alleviate price pressure resulting from higher yields in central Russia this season.
  • Andrew Barber
Volume Spiking Over the SEP 08' Contract Prices

KFT’s Prices Enter “Uncharted Territory”

KFT management stated today that their Q2 volume held up well “even in the phase of unprecedented pricing actions.” Despite these already significant price increases, the company raised prices as it entered 3Q in an effort to cover higher input costs and anticipates pricing will remain the primary driver of revenue growth in the near-term. Management highlighted that it has led the way with cost driven pricing actions and that its competitors are now starting to play catch up and narrow the gap so consumers will begin to face higher prices across the board.

Tyson management also alluded to more pain for the consumer’s wallet when it said earlier today, “The consumer really hasn’t felt the effect of the $6-$7 grain market yet. Either on beef, pork or chicken.”
  • Positive for restaurants: Increased prices at the grocery store can only help restaurants going forward.
  • Negative for restaurants: KFT also said that
    Mac & Cheese, which management called its “icon of value oriented mean solutions” grew nearly 20% in the quarter.

    Higher chicken and beef prices for the consumer also translate into higher costs for restaurant operators.


No need to run through the very favorable liquidity situation of Penn National and the very unfavorable leverage position of the rest of the industry. I’ve covered it in my last couple of PENN posts. Here I just wanted to put some math behind my contention that not only does PENN have the liquidity to take advantage of a buyer’s market, management has the track record to do so profitably. The following chart displays the major acquisitions/projects undertaken by the company in its history and the estimated return on investment (ROI). The returns look outstanding.

Investors are usually forced to pay up for management teams that generate these types of returns. With the company trading at around 6x 2009 EV/EBITDA, they won’t have to.

  • PENN has generated a decent to spectacular ROI on every material acquisition/project

  • Despite the recent industry downturn, LTM ROI is equal to or higher than the 1st 12 month (following acquisition) ROI in every instance. I guess PENN can operate casinos too.

  • PENN company EBITDA LTM ROIC of 17.5% exceeds industry by almost 5%

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.