“I was so much older then, I’m younger than that now.”
- Bob Dylan
That quote from Dylan’s ‘My Back Pages’ always gets my blood pumping… Makes me realize all the stupid mistakes I made early in my career, and consistently brings to mind one of my mantras – a mistake made twice, is not a mistake – it is a choice.
You will make mistakes…learn from them with a solid dose of humility.
Back to the Retail Macro Grind…
At the ripe age of 48, I’m going on my 27th year playing this game. When I do the math, that gives me about 99,144 hours of analyzing companies, picking stocks and communicating my thoughts to key decision makers on the Street. And yeah, I made plenty of mistakes. But man, have I learned from them…
Roughly 7,000 of those hours was as a Consumer Sector Head at a NY Hedge Fund about 18 years ago. I was actually pretty good at that job. I wasn’t always right, but had a huge slugging percentage. When I was right, I was right in a big way. My problem at that time was that I never celebrated the victories – just stewed over the losses. Maybe McGough had Mommy issues. Needless to say, as a Sector Head at Hedgeye my team and I have gotten pretty good at celebrating the wins, and learning from the losses.
But one thing I’ve definitely done over time is honed my process and to maximize my win percentage. Hedgeye’s Macro process as a backdrop has been huge in that regard. And while I would strongly argue that there are better analysts at Hedgeye than me, my slugging percentage remains on the ‘pretty damn impressive’ side.
That brings me to ‘The Over 40 Club’. I recall growing up on Old Wall and having strict price target parameters to neatly fit ideas into what was, and still is, a horribly broken rating system. Let’s look at some numbers. If you look at our long ideas, the average upside by sell side bulls for the basket of stocks is 10%. How an analyst can look a PM dead in the eye and pound the table on a mere 10% return over a TREND or TAIL duration is beyond me. That’s intellectually embarrassing. From where I sit, if I can’t get to enough of a variant view in my model to get me to at least a 40% move in a year, then I’m simply not interested. The 2-3 year double is always the goal. But ‘The Over 40 Club’ is the pre-requisite return for my key ideas.
The pandemic has been awful on so many levels. But there’s been one benefit for stock analysts – virtually every company in Retail (and the broader market) has pulled guidance. That means that people have to actually do real research and modeling work instead of just plugging company assumptions into a model. Think of it this way, over the past 20-years, industry analysts on average overestimated the final EPS number by 7% one year in advance per Factset. And that’s with explicit guidance from CFOs. What happens when guidance turns into a black hole? Yeah…that’s a huge opportunity for Alpha generation from where we sit.
In that regard, I’m proud of the scoreboard over the past two months.
- GameStop (GME): Went long at $14 in mid-December with estimates of $2.70 per share vs the Street at ($0.17). We said that fundamentals/console cycle would take this to $25-$35, and that the Board face lift and activist/strategy change put $100 in play. The stock is currently trading above $300 pre-market. This call worked at warp speed, far more than we could have imagined. We’ve since taken it from our Best Ideas list to our Long Bias. More research to come on this one to add some real analytics to an otherwise emotional debate.
- Designer Brands (DBI): Went long this week at $9, and see upside to $30-$40. Basically calling for a 3+bagger over 3-yrs. Huge footwear recovery play upon reopening, combined with gross margin upside from newly acquired wholesale footwear group should result in $2.50-$3.00 in EPS power vs the Street at $1.09. Stock is only up 15% since our call…lots more upside to come here.
- Dillard’s (DDS): Went long on 1/18 at $65 noting that the fundamentals should take it to $100 as our recovery estimates were 3x the consensus, with a call option on a double as the company repurchases all of the adjusted float. The stock closed yesterday at $104 (up 60%). Only ~6.5mm shares in the free float, with 4.4mm held short. DDS repo’ing 3-5mm shares this year alone. Likely headed higher.
- Nordstrom (JWN): With meaningfully higher recovery estimates ($5.25 vs Street at $1.70) we called for 50%+ upside on this name on 11/17. It’s clocked in 94% thus far.
- L Brands (LB): New Best Idea this week with 50-60% base case upside as the business accelerates into the separation of Victoria’s Secret from Bath and Body Works. If Macro Quad 2 rages on, this name could double. Stock is flat since our call.
- Children’s Place (PLCE): On 1/18 we called for 60% upside in PLCE on our base case estimates – which are 2x consensus. The stock is up 22% thus far – still a long way to go here as it benefits from a consolidated Children’s wear marketplace, lower rents, and people start to do the math on accretion form its store closure program. Complex model, but there’s the opportunity for people willing to do the work.
- Citi Trends (CTRN): Management laid out a 3-year target to include at least 100 new stores (MSD growth), 3% comps, 20%+ EBIT growth and 25%+ EPS growth. We think 2021 could look more like 20% Rev growth and 50%+ earnings growth. We see $3-$4 in NTM earnings power here (with very little stock buyback), given the longer term algorithm the company has laid out, no reason this shouldn’t trade at 25x-30x. The stock is relatively flat since we made our call. Stock at $57 with upside to $100.
- Yeti (YETI): Our lone new short call with 60-70% downside over a TAIL duration. The company benefitted from the ‘drink at home’ element of the pandemic, which took its handheld cooler business to 58% of total sales. Upon reopening, competition increases, high margin business slows, and the business annuitizes to sub-$2.00 in earnings. That’s worth a $20-$30 stock vs its current $68. The quarter to be reported next month should be strong, so we’re early, but we’d be shorting strength. Over 6-12 months the sentiment should change dramatically around this name.
There’s much more to come. I have more ideas sitting on my desk today than I have in years – so much that I have a new analyst joining my team next week to increase our at-bats. Though we’ve got some tasty longs in the works, we think that 2H is setting up for some epic shorts – and yes, with few exceptions those shorts will have to buckle up and prove that they’re worthy of ‘The Over 40 Club’ before I make the Best Idea call for our clients.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.03-1.17% (bullish)
UST 2yr Yield 0.11-0.15% (neutral)
SPX 3 (bullish)
RUT 2115-2180 (bullish)
NASDAQ 13,020-13,836 (bullish)
Tech (XLK) 129.24-136.09 (bullish)
Energy (XLE) 40.43-44.98 (bullish)
Financials (XLF) 29.61-31.77 (bullish)
Utilities (XLU) 61.97-64.06 (bearish)
Gold Miners (GDX) 34.23-36.31 (bearish)
Shanghai Comp 3 (bullish)
Nikkei 286 (bullish)
DAX 134 (bullish)
VIX 20.63-24.72 (bearish)
USD 89.77-90.74 (bearish)
Oil (WTI) 52.01-53.98 (bullish)
Nat Gas 2.43-2.83 (bullish)
Gold 1 (bearish)
Copper 3.57-3.69 (bullish)
Make it a great one…
Brian McGough
Managing Director
Retail Sector Head
