MCM Macro Intraday Trades, 1/8/08... 'Just Stocks'

Stocks Discussed: HNZ, SONC, WMT, AXP, and CL...

Keep trading aggressively, and from a position of mental strength - this market doesnt look like it owes anyone anything.

MCM Trades/Fades
1. shorted Heinz (HNZ) yesterday, $46.18...
-Similar to the recent short calls I've made on McDonald's (MCD) and Nike (NKE), Heinz (HNZ) is a company that I've followed very closely since we bought it in 2003 (in the low $30's). At that time, everyone hated it, and it was the cheapest big cap global food asset you could buy
-Fast forward 5 years and now we have an overowned and overvalued stock ($14.7B in mkt cap, $19.4B EV, and trading at 11x LTM cash flow) on what look to be peaking sales growth numbers, that has found the sell side's love (2 Strong Buys, 4 Buys, No sells).
-Yes, their performance has been great since Nelson Peltz's Trian Fund took their 6% stake, but unfortunately all great runs eventually come to an end.
-HNZ's recently reported FYQ2 was stellar; printing 13% sales growth and beating the Street's earnings estimate by 4 cents ... the devil is in the details however, and that's that 3 of the 4 cents in their beat came from a shockingly low tax rate, 5 of the 13% sales growth came from currency, and gross margins were down 100bps y/y.
-So what's changed since the quarter? A) the US$ bottomed and B) commodities have risen.
-Why Now? - The timing here is critical to appreciate as last year around this time HNZ's ornery CEO Bill Johnson had a Nelson Peltz fire hose chasing him down into his board room. As you remember, this is when Wall Street's fascination with "Activism" was at an all time high, and Trian had recently filed their ownership. Suffice it to say, Johnson was going to print the biggest "I told you I'm not the problem here" numbers possible into his FY end board meeting - and he did. In hedge fund speak, we call this a tough year over year comparison, one that the company will finally have to report against.
-The Bulls will say three things 1) Consumer Staple safety stock, 2) Peltz, and 3) a play on the "its Global this time" narrative.
-The MCM bear says 1) Consumer Staple stocks are sensitive to the economic cycle slowing (pull up all of the charts from 2002), 2) Peltz owns 6%, and should book the gain before his Mutual Fund Followers flinch (Cap Re owns almost 14%!, State Street is close to 6%), and 3) yes 54% of HNZ sales come from outside the US, but only 13% come from where the juice is (Emerging Markets). If you go back in the HNZ income statement to the years that I owned it, the only reason I was able to buy it on the cheap was because the UK "blew up", and as good as Trian's research is, they are not going to trump the economic slowdown that's underway in Europe right now.
-On HNZ's last conference call Johnson guided to what has to be the all time peak for this enterprise in terms of sales growth at 9-10% for this FY. As our friend Shakespeare said: "Expectations are the root of all heartache."
-Short interest is only 1.6% of the float, so we already know few people agree with us.

2. shorted Sonic Corp (SONC) yesterday, $21.99...
-Straightforward MCM Momentum Modeling short with considerable earnings risk to consensus estimates.
-SONC is one of the most expensive stocks in a group (US Restaurants) that gets cheaper by the day. This valuation is a massive liability for the mutual fund community who continues to support the stock (mkt cap $1.3B, EV $2.1B; trading at 11x LMT cash flow).
-The opportunity presented itself in the last few days as the stock was getting squeezed higher in the face of what was an ostensibly positive surprise in the company's earnings reports ( i.e. they didn't guide down). With almost 13% of the float held short by hedge funds who have the patience of puppies, it pays to pick your trading spots in this name.
- The company just closed up another successful fiscal year, and the good news for us is that their fiscal year ended in August. Thus, their full year guidance is based on a US Consumer spending environment that has changed, and they'll be lapping very difficult margin comparisons with limited room for a sales miss.
-For this upcoming quarter, the sell side has their operating margins modeled flat y/y, and that's an aggressive assumption that has been driven by management's outlook, not inflationary reality.
-To top it off, insiders have been selling, but that will be nothing compared to the tidal wave of selling to come if you see Fidelity or T.Rowe find reason to flinch (they own 13.7% and 7.6% of the stock respectively).

3. sold another 1/3 of my WalMart (WMT) into todays strength, $46.98... nothing fundamental or company related; more a market call than anything else. I downgraded the MCM Trade on the market to negative, and wanted to reduce gross long exposure.

4. covering all of my American Express (AXP) here into the close, $48.21... gains on the short side are meant to be taken, and this stock is miserably under performing the US market today, trading down another - 2.5%. Short thesis remains; re-short it on up days.

5. shorted Colgate (CL) today, $81.48... Note to follow...

Thanks for the continued support,
KM
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Closed Out Positions (realized gains in green, losses in red)

Long
EWH (bought 20.70, sold 21.35) = +3.1%
BBY (bought 46.60, sold 49.40) = +6.0%
MLHR (bought 26.70 , sold 27.65) = +3.9%
HOG (bought 45.10 , sold 49.96 ) = +10.8%
EAT (bought 21.54, sold 22.44) = +4.2%
EBAY (bought 31.70, sold $34.91) = +10.1%
TOL (bought 22.30 , sold 21.51) = - 3.5%
EWH (bought $22.73. sold 21.98) = - 3.2%
COST (bought 69.67, sold 68.74) = -1.3%
RSX (bought 49.32, sold 51.36) = +4.0%
HOG (bought 48.20, sold 46.55 ) = - 3.4%
KGC (bought 17.33, sold 17.74) = +2.4%
GLD (bought 78.60, sold 82.69) = +5.2%
TIP (bought 104.68, sold 106.64) = +1.9%

Short
RIMM (short 113.90, cover 111.60) = +1.0%
DAVE (short 14.24 , cover 13.60) = +4.5%
DLTR (short 28.51, cover 26.47) = +7.2%
HTZ (short 19.29, cover 18.58 ) = +3.7%
TGT (short 57.93 , cover 59.04 ) = - 1.9%
SPG (short 90.60, cover 94.10) = -3.9%
LIZ (short 25.58, cover 24.19) = +5.4%
BKC (short 26.74 , cover 25.80 ) = +3.5%
EWP (short 68.03 , cover 67.47) = -0.82%
HAS (short 27.51 , cover 26.35) = +4.2%
DLTR (short 29.52, cover 28.18 ) = +4.5%
CPB (short 35.62, cover 36.76 ) = -3.2%
IPAR (short 20.48 , cover 16.47) = +19.6%
TLF (short 4.04, cover 3.27) = +19.1%
AN (short 16.99, cover 16.70) = +1.7%
WYN (short 28.19, cover 27.39) = +2.8%
MCD (short 63.35, cover 61.22 ) = +3.4%
DLTR (short 29.46, cover 27.66 ) = +6.1%
MA (short 219.44, cover 212.72) = +3.1%
SHLD (short $112.51, cover 104.37 ) = +7.2%
BKC (short $28.02, cover 27.70 ) = +1.3%
EWW (short 59.40, cover 55.83 ) = +6.0%
GE (short 37.60, cover 36.48 ) = +3.0%
JBX (short 28.49, cover 25.74) = +9.6%
BAGL (short $20.15, cover 16.43) = +18.5%
KSS (short 52.64, cover 45.37) = +13.8%
TLF (short 3.25 , cover 3.05) = +6.2%
TGT (short 55.23, cover 49.99) = +9.5%
RIMM (short 103.53, cover 116.98) = - 12.99%
HAS (short 27.15, cover 25.80) = +4.97%
BONT (short 12.26, cover 9.49 ) = +22.6%
WYN (short 25.01, cover 23.31) = +6.8%
NKE (short 67.01 , cover 64.18) = +4.2%
ATML (short 4.59, cover 4.28) = +6.8%
EWY (short 66.06, cover 61.70) = +6.6%
CAT (short 71.49, cover 70.23) = +1.8%
AN (short 15.49, cover 14.67) = +5.3%
TCO (short 52.73, cover 47.86) = +9.2%
SHLD (short 106.09, cover 97.79) = +7.8%
AXP (short 52.65, cover 48.21) = +8.4%

MCM Disclosure/Disclaimer: This email and/or blog is for a select group of my friends, and represents a beta test of an idea that i am incubating. My email and blog writings are prepared without regard to the unique circumstances or goals of those who read them. They do not provide investment advice that should be specifically acted upon without considering the all encompassing range of investment information and/or considerations available in the public domain and/or without considering all appropriate professional advice. This should not be considered a solicitation to buy or sell any security or to participate in any investment strategy. The information and editorials in these writings are not necessarily complete or perfectly accurate and are not guaranteed by Keith McCullough or MCM. This information is protected from disclosure and constitute opinions only as of the date of their issuance. Opinions are subject to change without notice, and Keith McCullough or MCM do not accept any liability whatsoever for any losses estimated to be attributable to any use of this content. Keith McCullough and/or McCullough Capital Management, Inc. likely owns and/or is currently trading in all of the securities cited in these emails and/or blogs.