Investing Ideas Newsletter - 11.25.2020 Happy Thanksgiving Team cartoon

This week we removed Ulta Beauty (ULTA) and Coca-Cola (KO) from the Short side.

Below are updates on our 11 current high-conviction Long and Short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.


Short Thesis Overview: Medical Properties Trust (MPW) is not a traditional triple-net REIT, rather an investor in hospital systems ("WholeCos" using the company's own words). In the process MPW removes the arbitrage from a traditional PorpCo-OpCo arbitrage. These investments are structured as loans + equity investments to the operator tenants, which are in many cases distressed and owe significant rent payments back to MPW as landlord. The arrangement is circular and depends on MPW's ability to raise attractively-priced external capital. The equity is very possibly completely worthless, as we think the assets are worth no more than ~$9 billion (updated) to true "arm's length" third-party buyers vs. pro forma net debt of ~$10.5 billion at share.

Medical Properties Trust (MPW) - The only thing propping the structure up had been extremely liquid debt markets and artificially low borrowing costs. The bonds are perhaps a more interesting story than the equity right now, and we think bondholders need to start thinking about recoveries here. Longer-dated maturities beyond 1Q25 look especially precarious. Too many issues to count at this point. Fade the narratives! MPW remains a Short.

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Short Thesis OverviewPebblebrook Hotel Trust (PEB) has a highly leveraged balance sheet, challenging exposures (heavy urban mix), extremely difficult resort property comps, and rather full valuation as compared to peer set + history. We see regression toward the mean in the cards on valuation + estimate reductions, which makes for a challenging combination over the NTM.

Pebblebrook Hotel Trust (PEB) - In last week’s hotel deck, we hit on some of the setup for industry revenue per available room (RevPAR) growth where we outlined how the key drivers of leisure and business transient are simply not giving the industry enough incremental growth right now.  Our own data suggests room rates are rolling over for the midweek in future months, hotel bookings (forward looking) are also sluggish.  Our weekly check up on the air bookings side for corporate is again soft.

Corporate air ticket bookings (volume only), which we track every week and actively comment on it, have reverted to their existing trend after a calendar and timing impacted bump in the prior week.  As noted below, the first week of November was soft and the broader is merely in line with where it was 9mths ago.  On a YoY basis, forward sales volumes are now up slightly due to easing comps, but that shouldn’t mean much for incremental RevPAR. We remain Short PEB. 

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Short Thesis Overview: Rexford Industrial Realty (REXR) Potentially vicious reflexive share price move for a ~3.5% cap rate asset likely beginning a RoC slowdown right now.

Rexford Industrial Realty (REXR) - Uniquely vulnerable in a decelerating and historically macro-sensitive subsector. Net effective rates signed with new leases have peaked/are peaking. 3Q23 results validated our concerns around a faster-than-average market rent growth RoC deceleration. REXR remains a Short.

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Citizens Financial Group (CFG) - In their Oct 18th earnings, the bank's non-GAAP earnings per share fell short of expectations at $0.89, primarily due to reduced revenue from both net interest and non-interest sources, and higher operating expenses. There was a notable decline in net interest income, partly due to increased funding costs. Loan growth slowed, and deposits decreased slightly due to interest rate impacts. Although overall credit quality was stable, there was a minor uptick in non-accrual loans, especially in commercial real estate. These factors contribute to the current challenges in the regional banking sector, including increased deposit costs and regulatory changes affecting capital requirements. CFG remains a Short.


On Holdings (ONON) - ON may be a hot brand, but the awareness is still incredibly low. Some consumers know the silhouette but don’t know the brand and others only know the brand as On Cloud, rather than the Cloud being just one of the styles it offers. The company makes a product, which is different from being a brand. It is known for the cloud sneaker, and once that style is no longer on trend, demand will drop and sales will rollover. This is not a performance sneaker, no matter how much the company wants to make it one. Demand has already started to slow and the company guided Q4 growth to slow further. We expect this stock to rerate lower as sales slow and margins weaken. ONON remains a Short.

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Knight-Swift Transportation (KNX) - The recent earnings report from KNX had an initial surprising bounce, but the stock has since fallen by approximately 6%. Despite beating consensus on the surface, their downward revision of guidance suggests potential challenges in the fourth quarter. This is reflected in their shrinking profit margins, signaling a tough environment. The trucking industry as a whole is facing a profit recession and dealing with structural overcapacity. High barriers to exit mean this overcapacity issue may persist. Earnings estimates for KNX have sharply declined, now barely exceeding $2 per share.

Moreover, the trucking industry is in a difficult phase, evidenced by a 33% year-over-year drop in Class A truck orders for October. This overcapacity, challenging to offload in the current climate, afflicts the entire sector. 

This downturn aligns with a broader macro deceleration in transport data, especially in North America, where reduced government spending and a slowing consumer market are evident. KNX remains a Short.

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Helen of Troy (HELE) - The company continues to operate at the mid-tier levels, while not spending on advertising or R&D to improve the brands and brand awareness (see slide below). The company grows through M&A, but now that we’re no longer in a zero-interest rate environment that’s a risky avenue to rely on. As other brands grow and invest in newness and awareness, HELE is taking a backseat. It rides the wave when it gets a trendy or viral product, like hydro flask and the Revlon blow dry brush 2-3 years ago, but those trends are over. HELE will continue to lose share in the categories it operates in as consumers either trade up or trade down because there is no reason to stay in the middle. HELE remains a Short.

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Kimco Realty Corp. (KIM) - Recently acquired RPT at or near peak earnings for the retail REITs, paying a full price heading into a consumer led recession. We think forward earnings are at risk from rising debt costs + small tenant defaults that always accompany a recession. KIM remains a Short.


Marriott International (MAR) may face a weaker recovery in revenue per available room (RevPAR) due to limitations in business travel. Marriott's growth may be hindered by various factors, including a decline in construction mix, underperformance of growth brands, and delays in the full-service segment. As a result, MAR's growth is expected to lag behind its peers, and the current stock valuation may not be justifiable.

Consensus estimates for Marriott's performance may be overly optimistic and could require downward revisions in the near term. This leads to the suggestion that Marriott could be a good candidate for short selling due to expected underperformance, estimate reductions, and a cut in valuation. MAR remains a Short.


DraftKings (DKNG) - When it comes to Sports Betting, DKNG might the #2 player to FanDuel (on an NGR basis) but there is mounting evidence pointing to their prowess on product and player engagement.  Recent performance in OH and MA – two marquee state launches in ’23 – suggests that DKNG is making very solid headway went it comes to growing its share of the pie.  Though not directly discussed on the Investor Day, DKNG is objectively crushing it in both markets and Q4 Is off to a very good start.  In MA, DKNG’s home state, the company is putting up monster share in both handle and GGR terms and controls >55% of the market in terms of hold % and GGR.  In OH, as seen below, DKNG seems to be gaining critical mass and making a lot of progress vs its peers, especially FanDuel.

For the seventh consecutive month, DKNG is the #1 market share holder in terms of OSB handle and its GGR share.  What’s also noteworthy about MA is that there has been an active push from new entrants but it has not put a dent in DKNG.  In fact, as more competition has come to market, DKNG has gained incremental share - another encouraging datapoint for future launches and ahead of new competition (ESPN Bet).  DKNG remains a Long.

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Ocado Group (“Ocado”) has announced a deal for Ocado Intelligent Automation (“OIA”) to provide automated fulfilment technology at a distribution site for McKesson Canada (MCK). The deal will see Ocado sell its proven, unique warehouse fulfilment technology in a sector outside of grocery retail, and provide the AI-powered software applications necessary to operate that technology long term. McKesson Canada is a leading diversified healthcare provider in Canada and is the largest pharmaceutical distributor in the country. We remain Long MCK.
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