Short: MPW, PEB, TSLA, ULTA, REXR, CFG, KW, CMG, ONON, BUD
Long: DKNG, MTCH, ATVI, NYT
Below are updates on our 14 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. Assuming all goes perfectly for MPW and there are no tenant issues, and with an updated distressed cost of capital, we estimate the stock is worth no more than $5-$6/share today.
Medical Properties Trust (MPW) - We estimate that the assets are worth no more than ~$8 billion to a true arm’s length third-party buyer vs. pro forma net debt of ~$10.5 billion at the company’s share. This gives them credit for all contemplated transactions and no additional tenant issues. We expect there to be tenant issues. The equity is worthless, and the company is in desperate need of capital.
Short Thesis Overview: Pebblebrook 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.
Seasonally, it’s go-time for business travel but based on the weekly data, there’s not much going right now. Absent holidays and calendar shifts (as seen recently), the short term trend in corporate travel proxies like business market weekday RevPAR continue to trend poorly. Group demand has been a decent offset to the softer transient business but even group’s contribution has been more centered around leisure destinations and only a few select urban markets. This is year 3 to see if the post-Labor Day return to office shift is coming and travel trends will fully normalize across the total US or if the new normal is just here to stay. We think the US is more in store for the latter based on all our indicators and work. We continue lean negative regarding business travel and see the RevPAR backdrop for the NTM as likely to be challenged. Pebblebrook Hotel trust (PEB) remains a Short.
Short Thesis Overview: Tesla (TSLA) numbers are messy with far too much inventory, improbable OpEx containment, and flat to lower margins. But Musk’s salesmanship has become increasingly goofy. Tesla is just a "pandemic liquidity" driven bubble stock that is likely already in the midst of a downward revaluation.
Tesla (TSLA) was discussed in the Industrials 3Q Themes Update this week. TSLA has seen the stock rebound despite many things going wrong for them due to its liquidity dynamic, but Industrials analyst Jan Van Sciver thinks this is no different than crypto and NFTs in terms of the stock displaying signs pointing towards it being a bubble. One such example is Morgan Stanley analyst Adam Jonas upgrading Tesla and claiming the automaker could add $600bn in market cap with their plan for AI implementation. There is no particularly relevant thing he's talking about in our opinion, and has overvalued the move tremendously. Hedgeye CEO Keith McCullough touched on this topic during a recent edition of The Macro Show, saying, "There's nothing else for Adam Jonas to do than pump Tesla."
The reality is that TSLA has aging models, increased competition, and collapsing margins. The brand is weaker and at the same time, we see inventory going up by $500m per quarter, giving reason for their recent aggressive price cuts. They recently built two expensive factories in Germany and Texas to produce mainly the Model Y while they can't sell the existing production. This is "really bad," says Van Sciver, especially at a time when the rest of the auto industry is making record profits. TSLA remains a Short.
Kennedy-Wilson Holdings (KW) is overvalued by at least ~30-35%, and just delivered by far the worst performance among the multifamily owners. We are considering doing an institutional black book on this in mid-September. This week KW's President and Director of the Board Mary Ricks retired after 33 years. KW remains a Short.
Retail sales out this week showed deceleration from +3.7% to +2.7% in discretionary retail (ex. food, gas, and auto). We’ve seen the beauty space start to slow, and now consumer spending in discretionary is starting to slow, with still further headwinds to spending levels to hit in the next month. We don’t think beauty will be an exception to the trend. There is still a lot of downside in spending from here. With lower spending, demand and sales comps will be pressured along with margin hit just to pad the earnings. With this stock trading around $415 today, we think this easily has downside to the low-$300s. ULTA remains a Short.
Rexford Industrial Realty (REXR) had a potentially vicious reflexive share price move for a ~3.5% cap rate asset, likely beginning a RoC slowdown right now. Uniquely vulnerable in a decelerating and historically macro-sensitive subsector. Net effective rates signed with new leases have peaked/are peaking. REXR remains a Short.
Citizens Financial Group (CFG) continues its negative trend since being downgraded by Moody's, down nearly 8% since the event. Their position is worsening from a funding cost standpoint. They continue to carefully watch for signs of stress in CRE general office, with 98.5% of CRE general office borrowers remaining current. Within CRE office, Citizens' office exposure ($6.2B or 4.1% of total loans) is located in suburban areas in the southern U.S. and away from MSAs like San Francisco where office is expected to be met with much greater distress based on the proliferation of remote work. CMG remains a Short.
Chipotle Mexican Grill (CMG) 2Q23 was strong, with sales growing by 14% to $2.5 billion, and SSS increased by 7.4%. In-restaurant sales rose by 16%. Digital sales accounted for 38% of total sales. Restaurant-level margin was 27.5%, up by 230bps YoY. Adjusted diluted EPS was $12.65, marking an increase of 36% YoY. The biz model will have significantly less leverage in 2H23 and 2024, 3Q32 SSS guidance is expected in the low to mid-single-digit range, and for the full year, mid to high-single-digit comps are anticipated. The midpoint of the range of SSS guidance for the forward quarter has gone from 8.5% in 1Q23 to 3.5% in 3Q23. Post reporting its 2Q23 results, Revenue Revisions are up 30bps, and earnings revisions are down 110bps. 3Q23 COGS is expected to be around 30% due to higher beef and avocado prices. CMG remains a short.
We have seen an uptick in ON’s discounting as of late. Both DTC and wholesale channels seem to have an increase in styles and colorways for sale. The company does try to give the impression that they are old styles, but regardless there is a broad range of products discounted. This is dangerous as the brand has had exponential growth over the last few years and now needs to comp that along with maintaining margins, which in this discounting environment we just don’t think they will be able to do. Too much product out in the channel with minimal tiering or differentiation between retailers. We think estimates need to come down and this stock will rerate lower. On Holdings (ONON) remains a Short.
Short Thesis Overview: Anheuser Busch (BUD)'s Bud Light brand is permanently impaired. Bud Light volumes have been consistently 30% lower YOY since the social media marketing mistake. Making matters worse, some customers are also avoiding other AB InBev brands pressuring sales. With lower velocity the company is losing shelf space ahead of the spring resets. Management has told stakeholders that it is pulling marketing dollars from international markets to support domestic sales. International markets had been the strong part of the portfolio as various regions recover from the pandemic. What was a brand specific problem has become a problem across all U.S. brands and international markets.
Anheuser Busch (BUD) was added to Investing Ideas on Friday. Below is a note from Hedgeye CEO Keith McCullough from "Real-Time Alerts":
Another simple example in risk managing your Short Book (if you have one) here...
1. Cover 1 unit of SBUX, Add 1 unit of BUD on the Short Side
2. Question for you: what is 1 incremental unit?
3. Is it 25 bps (basis points), 50, or 100? What's your MIN/MAX size per short?
I'm going to keep trying to coach you into thinking this through professionally,
Make sure to tune in to the GLL team's Call on Friday, September 22nd @ 10:00AM ET as they take a deeper dive into the world of OSB and iC. They will discuss their outlook for the entire industry and what's next for stocks like DKNG. As Wk1 of the NFL season kicked off last weekend, it will take some time to let the dust settle and see what meaningful ground has been gained by DKNG and the OSB industry as a whole. A large download base and new state launches earlier in the year can skew the data when analyzing such a short duration.
DraftKings (DKNG) is still making very solid headway went it comes to growing its share of the pie. In MA, DKNG's home state, the company is generating significant share in both handle and GGR and controls about ~50% of the market. In OH, DKNG is also gaining share as shown by the data below which was just released. In fact, DKNG is now the #1 market share holder in terms of OSB handle and its GGR share continues to expand, from the high 20%’s up to 33% in August. What’s also noteworthy about OH is that Bet365 has made little to no progress and CZR and MGM despite having a B&M presence in the market have not had much progress either. OH is a fiercely competitive market and yet DKNG is doing a lot of heavy lifting, with less external marketing and building off its initial launch. Encouraging to see for future launches and ahead of new competition (ESPN Bet). DKNG remains a Long.
Long Thesis: Match Group (MTCH) Management has taken actions to turn Tinder's growth around, particularly through pricing actions the past two quarters. Hinge's growth has accelerated due to new country launches and the recent launch of a new premium subscription tier, HingeX. If we're right directionally, we expect to see the MTCH EBITDA multiple rerate back to the low-end of its historical range (15-20x) whereas it is currently trading around 12x FY 2024 EBITDA (up from 9x in May when the stock was around $30).
Match Group (MTCH) recently appointed Mark Kantor as Vice President of Innovation. Kantor comes to Match Group from Zynga, where he was the head of growth. He will be responsible for integrating and innovating AI solutions into Match Group’s portfolio of apps, specifically Tinder and Hinge, their flagship dating apps. This hire comes on the heels of Will Wu being appointed Chief Technology Officer in January of this year. AI will be used to increase engagement, create new features, and enhance safety and accessibility on Match Group’s apps. MTCH remains a Long.
New York Times Company (NYT) was added to Investing Ideas on the basis that their transition to a digitally driven journalism brand has been a success, and they have the potential to grow even further in the digital space. Furthermore, strategic acquisitions have diversified their product offerings, and an aggressive bundling and promotional strategy will accelerate this subscriber growth and drive ARPU expansion as the subscriber base matures. We also have cyclical tailwinds over the next 9-12 months, as anticipated strength in digital advertising and a U.S. Presidential Election cycle are upon us. We see The New York Times as the strongest digital journalism brand at the moment and anticipate 30% upside to its current price. We will be presenting a black book on NYT Friday, September 22 at 12:30PM ET.
On Aug. 22 the Competition and Markets Authority (CMA) in the UK opened a new regulatory review for final approval of the Microsoft acquisition of Activision Blizzard (ATVI). We continue to believe the UK regulators are likely to approve the revised transaction at the end of Phase 1 of the CMA, and are still aiming for approval before the current merger agreement expires on October 18. Head of Microsoft Gaming, Phil Spencer, made positive comments last week indicating confidence the regulators will clear the deal the acquisition. This dispels the sentiment that further merger agreement extensions (beyond the current October 18 expiration) do not appear necessary at this point. The FTC is still appealing the denial of the preliminary injunction to block closure of the deal, but the appeals court denied the FTC request to freeze the deal pending the appeal. So the UK process is the only obstacle to closure, and we anticipate the deal will soon get the green light there.