The Daily Alpha - 10.07.15

The Daily Alpha - 10.07.15

Garrett Baldwin

Here's today's Alternative thinking on Yum! brands, oil investment, hedge fund woes, resource stocks, and daily fantasy football sites...

“Another embarrassing print further assures activist action at December 10th NYC meeting.”

A bloodbath of a sell-off has rocked Yum! Brands today, proving that you can’t paper over results in the face of crisis. The restaurant stock is down 18% today and alarm bells are ringing about the company’s performance.

Stifel’s Paul Westra says that Yum! Brands is poised to see more pressure from activist investors in the coming months in the wake of a dismal quarterly earnings report for the global restaurant provider. During a somewhat testy conference call between analysts and executives, the company blamed economic problems in China and internal marketing executions.

Activist investors like Keith Meister’s Corvex Capital and Dan Loeb’s Third Point have been building stakes in Yum! Over the year, and following the firm’s recent underperformance, the company assured that it would focus on increasing shareholder value.

The firm announced that it was going to raise its dividend by 12.2% to $0.46, a move that some have argued is a “forced hike.” It failed to instill much confidence. It certainly isn’t enough to generate more enthusiasm at a time that one analyst remain convinced that the firm has “downplayed the roles played by both intensifying restaurant competition and a more modest consumer growth backdrop,” as noted by Wells Fargo‘s Jeff Farmer.

So what should the company do?

Nomura Securities’ Mark Kalinowski is pushing for a spin-off of Taco Bell as a starting point…

“We believe that there would be a built-in constituency for a separately and publicly traded Taco Bell stock," Kalinowski wrote in a note to clients. "Some investors who like the Taco Bell concept have not invested because of Yum! Brands' China-related risks. Furthermore, it is possible that KFC and Pizza Hut might be better managed if those were the only two big brands in the Yum! portfolio.”

But what would that mean for the rest of the company? CEO Greg Creed, who took over the company on January 1, probably doesn’t want to go that route.

That makes December’s shareholder meeting one to watch…

“Mapping out the area was important "to mark (our) presence in the North and to safeguard national interests."

Oil prices are on the rise after Russia announced plans to speak with members of OPEC about the impact of the low-price environment on global producers.

Non-OPEC producing nations have witnessed harsh consequences due to low prices, including a significant slump in their commodity currencies.

Now, Norway is ringing the alarm bell. The country’s currency has fallen more than 30% against the dollar since oil prices began to slide in June 2014.

Now, due to the low-price environment, the nation said it expects oil-and-gas investments to fall by 21% by 2017. Just last year, energy accounted for 46% of the nation’s exports.

Norway’s not the only country to raise concerns. Cratering prices are threatening Colombia’s “Door to Paradise.” The exporting nation is worried that it may run out of extractable oil in the next few years should low prices remain a constant and companies cannot justify production below breakeven prices.

Perhaps the most important question is how the lower price environment will affect technological innovation, which was poised at Market Realist on Monday.

The high-price environment helped engineer the boom in fracking technologies that has fueled a global boom in production and glut of oil. Naturally, some worry that a low-price environment would lead to less innovation in the space.

However, that sentiment could be displaced, based on some analysis from Bloomberg last week. As Eric Newcomer explains, oil-and-gas technology has been one of the hottest areas of startup investment in Silicon Valley.

It shouldn’t be a surprise that Peter Thiel and his Founders Fund are at the center of this trend.

“…the environment for macro strategies ‘continues to be challenging.’”

On a day that CNBC is talking about Ken Griffin’s divorce settlement, here’s some actual important news.

Bain Capital announced plans to shut down its multi-billion dollar hedge fund.

Jonathan Goodman and Jeff Woolbert’s Absolute Return Capital hedge fund is closing after three-straight years of losses.

Events in August have pounded some of the hedge fund industry’s biggest names. Ackman’s Pershing Square is down more than 12.5% through September 30, while David Einhorn’s shop Greenlight Capital has fallen 17% year-to-date.

“Those growth rates are clearly decelerating pretty rapidly, and so over the near term, it doesn’t look particularly compelling, and the price action is telling that.”

In an interview with the Globe and Mail, Sprott Asset Management CEO John Wilson said he doesn’t anticipate a turnaround for resource stocks any time soon.

That’s bad news from one of Canada’s top investment shops. The low-price, low-commodity oil environment has weakened Canada’s currency and some of its biggest resource stocks, raising concerns about the broader health of the nation’s economy and whether it can reemerge from a recession.

But the counter argument to resource companies comes from Morgan Stanley.

The investment firm helped fuel a surge in Tinto and BHP Billiton stock today after two upgrades, and expectations that commodity prices will rise 19% by 2017.

You be the judge of who’s right…

“It’s something we’re taking a look at — fraud is fraud.”

Finally, it didn’t take long for the New York Attorney General to flex its muscle yesterday after the announcement that a DraftKings’ employee had earned $350,000 on its rival daily fantasy site FanDuel over the weekend. The New York Times on Monday suggested that Ethan Haskell may have used company player data in order to gain an edge  on his competition in the unregulated gambling [sorry we’re not allowed to call it that] “game of skill” contest.

Yesterday, we pilloried ESPN about the company’s association with the sites. And we called on them to take action immediately in the wake of this situation.

We’re happy to say that they heard our calls and the concerns of others who remained worried about the optics of a sports journalism network offering daily gambling tips…

According to The New York Times, ESPN has reduced its association with DraftKings.

Yesterday, Bob Ley, host of “Outside the Line,” said that the company will no longer run editorial segments that are sponsored by the company, although it will continue to run the company’s advertisements.

That’s a start. It will be interesting to hear what the Attorney General’s investigation discovers.

That’s all for today…

Check back tomorrow for more insight…


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