"Driving the ball is more fun, but making those putts is way more satisfying."
- 13yr old golf student, on her first day.
The above quote is from a golf student of mine from about 10 years ago. It's one of the most profound and pertinent statements on the game I have heard, and it came on her first day after her first lesson.
After an intro to both the long game and the short game in golf, I asked which she liked more, and that was her response. I think it's telling as to why people in finance are drawn to games/sports like golf and poker as much as any.
Could it be finance types like to gamble, drink cocktails, and smoke cigars in small groups? Perhaps.
But I'd argue that these games reward a player that uses process, creative thinking, and patient/persistent determination more so than those where gifts of size, strength, speed can make the playing field less level. They have an important element of chance playing a big role as well.
It’s the grind we’re hooked on. We chase perfection all the while knowing deep down it will never be reached. Not every trade will produce gains, not every well struck putt will fall in the hole, and even dominating poker hands will lose sometimes. You have to embrace the uncertainty and commit to your process to drive the results. That process, creativity, patience, determination, are what give you the best chance to win in a world of uncertainty.
As much as holing out from the fairway, flopping quads, and making a Long call on GME that goes up 5x in 5 weeks are all fun… it's not why we play the game.
We play the game for sweating over a 6-foot par putt to halve the match, calling a players’ bluff with a moderate hand, or nailing a stock call after months of people (and the market) telling you you're wrong, all because you built, executed, and trusted the right process.
That’s what is most satisfying. Keep Grinding…
Back to the Hedgeye Process Grind…
#Quad2 has been very good to Hedgeye Retail Institutional. Longs have done extremely well, the Chart of the Day shows the XRT return vs that of the S&P since we made the Quad2 pivot around early November. XRT up 60%, the S&P up 16%. Not surprisingly in Quad2 some of our long-term shorts like KSS have gone against us, but top shorts introduced in 4Q20 (BBY, HD, and W) have been huge Alpha generators. Will we be as successful with a transition out of Quad2? If we keep building, executing, and trusting the process, we think so.
We hosted our Retail monthly Q/A call yesterday. Beyond the usual questions on current ticker thoughts, there were couple repeated and consistent topics.
- What do we like right now amidst the recent market pullback?
- What do we do in retail as we transition from Quad2 to Quad4?
Given investors have different durations, risk tolerances, etc., the first question could be answered many ways. We highlighted some top ideas on an intermediate term TREND view and a couple on the long-term TAIL. (all on the Long side, we’re still in Quad2 after all):
The more actionable intermediate term TREND ideas (on top of those found in the Investing Ideas product)…
- LB: Two banners where we think the market is undervaluing the independent earnings streams. Strong business trends heading into easy compares for both concepts lapping store closures last year with the stimulus consumption kicker. An impending separation catalyst with Victoria's Secret being shopped to private equity where a fair price is much higher than the implied value the market is assigning.
- UAA: Accelerating trends with easy comparisons with the company correcting its previously over extended endorsement obligations. Huge upside to NTM street earnings with the catalyst being large earnings beats over next two quarters.
- AAP: Industry tailwinds intensifying. DIFM (Do it For Me) business recovery amid miles driven inflection to YY growth happening now and incremental stimulus support. High probability beating the quarter into a positive catalyst in the April Investor Day where management should outline path to material margin upside.
A couple still big TAIL ideas…
- RH: A US large-scale high-end furnishings company evolving into a global luxury home brand and just launching its international expansion. Long Term Double or more.
- DLTR: Breaking the buck at Dollar Tree is the most powerful earnings lever we can find in retail. It would mean a big acceleration in comps, at high incremental margins, an accelerated unit growth story, and a higher probability of success at a Family Dollar turnaround from cross merchandising. Long Term Double or more.
On the second question, after the Hedgeye Macro Team affirmed the Quad2 call on the 1Q21 Themes call in January, we had a note reviewing the performance of retail subsectors and key stock ideas in the various Quad environments. At a high level, the 2 to 4 Quad transition means a flip flopping of the sub sector performance. Growthier retail segments like ecommerce and luxury usually do very well in Quad2, but poorly in Quad4. ‘Staple’ like retail (like WMT/COST/DLTR) and rate sensitive retail (home/durables) do poorly in Quad2, but do well in Quad4.
Beyond the risk management process indicator from the Q/A topics is the impressively evident utilization of the various Hedgeye process tools. Pro subs are marrying the fundamental analysis, the Quad framework, and the market signaling process to make better investment decisions for themselves. It’s a continuous balancing act to weigh all these key factors and make the determinations that give the best probability of a positive outcome.
It’s not easy, but one thing I know for sure is we're getting better at it every day and as good as the research process has become, there are much better days are still ahead. Hedgeye Nation will play an important role in taking the process to the next level. As our community grows and our products evolve, the interaction and sharing of ideas between subscribers and the Hedgeye Team will further augment the process of research and idea generation.
One such product evolution we are excited to have coming down the pike is the Arena, which will be discussion boards exclusively for subscribers of a product and the corresponding analyst team. The distribution and accumulation of knowledge and the collegial debate of ideas will make us all better. I for one am excited to see how far Hedgeye can go in the pursuit of unachievable risk management perfection.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.33-1.58% (bullish)
UST 2yr Yield 0.11-0.17% (bullish)
SPX 3 (bullish)
RUT 2115-2307 (bullish)
NASDAQ 12,516-13,549 (neutral)
Tech (XLK) 124.61-132.90 (neutral)
Energy (XLE) 47.20-52.23 (bullish)
Financials (XLF) 32.02-33.99 (bullish)
Utilities (XLU) 57.75-60.90 (bearish)
Gold Miners (GDX) 29.91-33.53 (bearish)
Shanghai Comp 3 (neutral)
Nikkei 285 (bullish)
DAX 137 (bullish)
VIX 19.94-30.95 (bearish)
USD 89.56-91.98 (bearish)
EUR/USD 1.191-1.222 (bullish)
Oil (WTI) 59.42-65.48 (bullish)
Nat Gas 2.61-3.04 (bullish)
Gold 1 (bearish)
Keep your eye on the ball, and finish balanced.
Jeremy McLean
Retail Sector Analyst
