Investing Ideas Newsletter

Long: EXPE, BYD, AMN, POAHY, IHRT, GME, BLDE, PLCE, ATIP, PLBY, PENN, PSA, FFNTF, FWONK, BFLY Short: PLUG, CMG, CCK

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

EXPE

OTAs seem to be taking a breather at these fully recovered levels, but as the industry heads into peak leisure season we’d suspect the contribution to RevPAR remains elevated and goes higher.  But either way, even if the US sees some slow down, the implications are very bullish as other parts of the world are just starting to kick into gear, and AA is off the charts; thus, operating trends for Expedia (EXPE) should be looking much stronger than consensus and what the stocks are currently implying.  EXPE remains a Best Idea at Hedgeye and we see significant upside born out of accelerating operating trends in the near term, cyclical and secular forces driving normalized growth higher, and robust cash conversion that should come right back to shareholders – we’d be buying on any additional weakness.   

BYD | PENN

Last Friday our Gaming, Lodging & Leisure team went through their bullish regional gaming case and highlighted Penn National Gaming (PENN) and Boyd Gaming (BYD) and spent considerable time dissecting the drivers of the LV Locals market. They believe that the drivers for gaming revenue growth and margins are sustainable in the LV Locals region and BYD will stand to benefit significantly – the positive wealth effect, population growth accelerating, jobs / wage gains, and all against a backdrop of limited, rational, competition. The environment in Las Vegas Locals creates a very fertile set up for same-store EBITDA growth and value creation for BYD.

Despite the earlier May releases from other regional gaming markets and PENN's huge pre-announced Q2 beat, the stocks continue to underwhelm.  So what gives? If you believe that the results are due to short term factors and unsustainable, then it doesn't matter how strong the near term looks.  But at some point, the Street can't keep chalking up the top line strength to pent up demand and federal stimulus.  There's a demographic sea change going on here that we believe the market is missing. 

Sure, it's unlikely that the regional markets continue this torrid pace but with the new and younger customers added to the mix, the top line should continue to grow.  Further, in the LV Locals market population growth and macro factors represent near and long term tailwinds.  And it's not just the top line, the Street doesn't believe in margin sustainability (partly because they are not correctly modeling flow through).  Only time will tell but we're firmly in the sustainability camp.

AMN

Propelled by the four demand cycles laid out in our initial thesis, AMN Healthcare (AMN) has gone up and stayed up. With that in mind, AMN still looks good to us. The company itself is hiring into demand, and we can see hourly rates staying "sticky" to the upside (physical offices). Also, for hospitals, we look at production and non-supervisory and that is up quite a bit y/y and sticking. The hospital system jobs board data we stacked looks good, and even quits (from JOLTS) are suggestive of strength.

Following another article on regional nurse strikes, we are expecting the level of conflict between labor and management in the Health Care Industry is heading higher. The level of sustained demand and shortage of available supply make for an unfavorable situation for anyone on the bid side. The decision to pay a premium for the next hire extends to the entire staff. The decision not to hire means share loss, lower service levels, unhappy staff.  All to say positive for AMN and anyone on the ask side of Health Care Labor.

POAHY

Below are the three key thesis points behind Industrials analyst Jay Van Sciver's Long Porsche Automobil SE Holdings (POAHY) Call:

1. VW Made Exceptional Investments In EVs, Charging, Batteries, AI/Autonomy

As an outcome of Dieselgate, VW has pushed into electric vehicle development. VW is building Electrify America, a charging network competing in an industry with high peer valuations. VW owns about 1/3 of QuantumScape, a promising solid state battery maker that picked up about $25 billion in market cap this month *without* VW shares responding. VW owns about a third of Argo AI, an autonomous vehicle firm likely worth ~$7.5 bil. VWs’s TRATON stake, 10% of which floats, is worth another ~Eur 10 billion. This is before considering VW’s profitable operations, a cyclical recovery, self help opportunities, finco, and exceptional brands. We doubt that the market will ignore these EV/transport tech assets for long.

2. VW Shares Are Cheap, But Even Cheaper Through Porsche Holding

Porsche Automobil Holding SE (Porsche SE) is a family controlled holding company that has voting control of VW and holds ~157 million shares (~31%), and little in the way of relevant other assets or on balance sheet liabilities. Those shares are worth about Euro 25 billion vs. Porsche’s cap of about Euro 17 billion, a sizeable discount despite the same functional control position (or better, since Porsche SE holders are in the same position as the Piëch/Porsche). The Porsche car brand is owned and operated by VW. The Porsche SE holding company just holds controlling shares of VW, although it somehow feels more confusing. The gap need not close, but it is a discounted way to buy shares of VW, which already appear to trade for about half what they should.

3. Macro/Cyclical Line-Up Well For Pandemic Recovery

We anticipate a macro backdrop that is more hospitable for Auto OEMs in 1H21, with the pandemic recovery helping global auto sales. When we add up the sum of the parts for VW, it is hard to avoid a number north of EUR 350/share, and potentially EUR 400/share. VW has been a value name for some years, but the recent EV and transportation technology successes, as well as fading Dieselgate concerns, should attract the market’s interest. VW is expected to produce more EVs in coming years than Tesla, but with much greater scale and resources in an industry where that matters. VW & TM also appear to be the furthest along in solid state batteries, the likely next step for EVs.

IHRT

iHeartMedia (IHRT) announced last week they will voluntarily prepay about $250M or about 10% of its combined $2.5B in term loan debt with cash on hand while simultaneously repricing their term loan with a close set for the middle of July. As a reminder, IHRT is highly levered at 6x Net Debt / EBITDA assuming they get back to $1B annual EBITDA. But they are also FCF positive for 2 out of the last 3 quarters, and on a track to get back to the $400M or so in FCF per year they were generating pre-pandemic. The move to voluntarily prepay is a signal of confidence management has in the business and could be a sign of more prepayments to come.

By itself, a $250M in debt reduction doesn’t do too much, albeit they are paying a pretty high coupon. It takes net debt down closer to 5.5x, which every half turn translates to about $3.5 in equity. And with $400M in FCF a year, if the bulk of that goes toward debt repayment then the deleveraging part of the story we flagged as a possibility earlier in the year can really start to kick in. The stock is right in the high-$20s where we thought it could go. The rate of change is still on our side at least through this quarter, but deleveraging/cash flow can really get us to a stock into the $30s.

GME 

Another mild setback for game console supply this week as covid cases in China have slowed some port operations.  We’re likely to see more months of consoles being in limited supply. GameStop (GME) is still getting portions of the supply flow and selling out online bundles nearly instantly, so sales are happening, but we’re far from seeing the full revenue and traffic potential that could happen when GME is able to get its hands on as many units as it wants. 

The question now might actually be do we see the console supply ramp by holiday time, that’s a long way out, so who knows, but its possible we’re still seeing near instant sellouts of drops then as well. The low console supply is hitting GME near term sales potential, but it leaves a long runway of sales demand as the company is investing in online and store shopping experience to better cater to gaming consumers.

BLDE

Blade (BLDE) has a real, rapidly growing, revenue generating business that is, most likely, of strategic interest to several travel and aerospace companies.  It also has, depending on how an investor chooses to mark it, a bit less than $4 of cash per share.  That’s what SPACs do – push cash into companies that can use the funding. 

• Would an Uber, Lyft, Gett, an Airline, private aviation company (e.g. XO, Wheels Up, parts of BRK), or an EVTOL/EVA entrant be willing to buy at the current valuation? We think it is a potentially strategic franchise for many competing or adjacent brands, and wouldn’t be surprised if some enterprising bankers were putting pitches together. 
• Is it still at a ‘high revenue multiple’?  On pandemic impacted results, yes.
• Following a travel recovery and continued mid-double-digit growth? Probably not. 

We see BLDE as a worthy allocation here. It's a potential multi-bagger.

PLCE

On The Children's Place (PLCE), in January we said that a better full price selling climate after the industry had consolidated and the company had rationalized the butt-end of its money losing store base store would take margins up materially that would result in a one-two punch to revise earnings materially higher.

And that’s exactly what happened. Back then, the Street was at ~$3.19 for the year, and is now sitting at $8.36. But we think that the company is tracking to blow past those numbers, and put up better than $10 per share this year. In fact, for the upcoming quarter, the Street is looking for $0.31 per share in 2Q, while we’re sitting here at $2.44, with a bias to the upside. That’s far better than any barometer of earnings beats that we’ve seen in the latest quarter of ‘blow away’ retail earnings.

And then there’s the cash flow…This company is the poster child for companies that were debt-laden during the pandemic and now will turn around the balance to squeeze the 20% of the float that’s short the stock by repaying the ‘pandemic note’ and buying back stock at current levels, or higher.  

Is this a multi-bagger over the next 2-3 years? No. We’ll get off this horse at some point – likely over the next year. But we think that the catalyst calendar is lined up to put this stock at $130-$140 over the next 6-9 months.

ATIP

The merger vote for FAII occurred last week with no lack of excitement. Originally set to appear on Hedgeye TV the following day, FAII’s target company, ATI Physical Therapy (ATIP), cancelled the appearance. As a result, we sent out a cancellation and the stock traded all over the map shortly after. Despite many emails/calls regarding speculation for canceling, we are not concerned. We have connected again with the company and have already rescheduled, as well as been offered more access.

Additional fallout from the de-SPAC includes lots of activity around the redemption, trading volume, etc. We've been doing a lot of work around digital health and think there's an underappreciated digital health/direct contracting angle.Things are changing in the US Medical Economy and ATIP is well-positioned (e.g., for providers participating in value-based, at-risk programs as therapists do more - i.e., operate at the top of their licenses). We will have management in the studio on July 7th and still think the stock could trade up to the $30s.

We are looking forward to the call which we expect to focus on the drivers of our positive outlook for the company and revenue growth over the remainder of 2021 and into 2022. We believe physical therapy is a great way to play the re-opening, and therefore, remain long ATIP on our Hedgeye Health Care Position Monitor.

PLBY

We were expecting an M&A deal to be announced by Playboy (PLBY) in the wake of its recent equity offering, and overall, we like what the company bought. PLBY is buying Australian luxury lingerie and bedroom accessories brand/retailer Honey Birdette.

• The price tag is reasonably high at $333mm, using cash and stock. That's about 4.5x revenue but only 12x EBITDA for the fiscal year ending this week.
• We like what this company brings to the PLBY sexual wellness portfolio.  It’s an upscale brand, higher end than the prior Yandy and Playboy/Yandy products, giving Playboy lingerie products at all price levels (perhaps there is an even higher priced offering to come with the Big Bunny sub-brand).
• The company is expected to deliver $73mm in sales and $28mm in EBITDA this year, growing 40% and 95% respectively.  The private equity firm owner noted it has seen 105% annualized return on investment from the company’s dividends.
• It has international exposure with 60 stores in Australia and a couple stores in the UK and US (with new flagships coming in Dallas, Miami and New York), but it also has more than half of its sales online, so it provides an infrastructure and a platform to market Playboy sexual wellness products globally.
• You can already see the ”Honey Bunny” collaboration name being one to come. Playboy can leverage its brand awareness and fashion momentum to sell Honey Birdette product in several global markets. This is another means of tapping into the Playboy brand reach and relevance in sexual wellness, and getting 100% of retail sales onto the P&L. 
• In addition, Honey Birdette has some brand similarities as it relates to freedom of expression and brand perception.  Honey Birdette advertising gets criticism for being “pornographic” while the brand deems this reaction as censorship of women’s free expression and the female body.  Honey Birdette is female founded, with a majority of female employees.  However it has also gotten some pushback from employees about sexist selling practices for the sales people called “honeys”.  So, much like Playboy, the brand is no stranger to controversy and debate, and as long as PLBY takes the message and policies in the right direction, that controversy can be a revenue driver. 

We expected an acquisition to be announced in the sexual wellness space, and this one gives PLBY a lot of options and assets for growth.

PSA

Public Storage (PSA) remains the cheapest self-storage name relative to forward growth. There is also the ongoing materialization of several catalysts. These include...

1. Initiation of first-ever company guidance for FY21 which blew away expectations to the upside
2. Accelerating external growth in the form of a $1.8 billion acquisition
3. Financing of that acquisition 100% with unsecured debt
4. Ongoing rationalization of the cap structure vis-a-vis a huge slug of preferred stock and
5. Presence of a shareholder activist

FFNTF

NJ is in a severely underserved state.  There are only just 23 active dispensaries licensed to service some 106,000 patients, with a recreational market opening in the coming months. While more dispensaries are on the way, including awards issued through a heavily delayed request for applications process launched by The New Jersey Department of Health in 2019.  We believe that 4Front Ventures (FFNTF) is in a strong position to be awarded one of those licenses. The NJ legalization law caps the number of licenses that can be awarded to cultivators at just 37 through the first two years, making this potential license very valuable which will drive significant revenues for 4Front. If the license is awarded, it would make our $4-5 dollar target look low!

FWONK

Since our Black Book on Liberty Media Formula One (FWONK) on 5/15/21, we have seen three out of our four key thesis points improve: 

1. New Race Formats Support Broadcast and Promotion Revenue: We anticipated the new Sprint Qualifying would attract advertisers and the potential for a title sponsor, along with increased fan engagement. We have yet to see if Sprint qualifying drives onsite fan engagement, as the first Sprint Qualifying isn't until British GP on the weekend of July 16th. However, we have seen it attract new advertisers and sponsors, as we discussed with Crypto.com.
2. Sponsorship and Advertising Rebounding Post-COVID: We initially flagged how impressive it was for F1 to attract title sponsors for 18 of the 23 races in this year's calendar due to COVID restrictions (Reminder Monaco doesn't get a title sponsor). Since our presentation, there have been two new title sponsors, increasing the number of races with sponsors to 20 and Sprint Qualifying now getting a title sponsor with Crypto.com. On 6/16, BWT, a water treatment supplier, became the title sponsor for both races in the Austrian GP doubleheader. As a part of the agreement, BWT received both the naming of the G.P. and trackside advertising.
3. U.S. Momentum Building w/Miami on the Circuit 2022: Our main way to track U.S. momentum for the sport has been the U.S. viewership data for each G.P., which has surprised meaningfully to the upside. So far, the average U.S. viewership of the current F1 season is up over 50% compared to last season, with multiple races reaching over 900k viewers (metrics typically reserved for the most premier races of the season, such as Monaco). Attached is our recap and viewership tracker for the French Grand Prix, which occurred on 6/20. We will continue to track the data closely and provide updates.

BFLY

Following our call with management, we were excited to present our Butterfly Network (BFLY) Black Book. Over the last few weeks, we have heard great reviews on the many different use cases for the device from a number of physicians in different specialties, the attractive pricing relative to quality of imaging, prevalence in training in nearly 100 US medical schools, and a recently doubled salesforce focused on growing the enterprise sales side of the business. Without consensus numbers to play against, the multiple will be untethered for the time being, but we believe there is a logical path to $26/share by executing on their improved business model following an inflection point for the company.

PLUG 

Here is the most troubling part about Plug Power (PLUG) for us (aspects of the restatement come close). 

1. Why doesn’t this company explain how its fuel cell technology offers the best product/market fit?
2. Where is the discussion about efficiency of units and improvement in efficiency?
3. Why would a fuel cell company need to acquire an electrolyzer maker?
4. Why does PLUG need $5 billion and what on earth indicates to public markets that this company will allocate that cash well? 

The accumulated deficit line is just a smidge under a cumulative $2 billion loss.  PLUG may escape with class action settlements for – and we’re guessing here - $500 million a couple of years out.  The projects with SK and Renault are far off; we suspect SK may regret the PLUG investment post restatement.  Not much is happening for PLUG in 2021.  The company has sold more stock than any other product…exit while prices last because supplies aren’t particularly limited, and the purpose seems distressingly clear.

CMG

The Chipotle (CMG) sentiment on the sell side is more positive than anytime in the past five years. The shares are trading at 40x this year’s EV/EBITDA estimates and 31x next year’s. There is a lot of good news and earnings growth priced into the shares at these levels. Are decelerating same store sales or inflationary pressures priced in? Will higher wages be enough to entice employees to join the company? Will higher prices be a headwind to traffic? We have more questions while the investment community appears to have less.

CCK

Below are three key thesis points behind our Crown Holdings (CCK) short thesis:

1. Canned Beverages Face Brutal 'COVID' Comps, Higher Transport Costs, Cannabis... Starting Now

With bars and restaurants closed or at reduced capacity in 2Q20 and, to a lesser extent, 2H20, consumers switched to buying beer and other packaged beverages for ‘at home’ consumption. The extreme growth in can demand in pandemic hit 2020 has set unreasonable volume expectations. Input costs are soaring, with shipping a notable headwind – it can be passed on, but products end up more costly. National legalization of cannabis is likely to result in alcohol consumption declines, particularly given demographic trends. This set-up coincide with a Quad 2 macro backdrop in which ‘staples-like’ names typically underperform.

2. Capacity Coming In No-Growth Industry, Driven By Dubious Eco-Friendly Narrative & Substrate Shift Theory

Aluminum cans are not remarkably eco-friendly, in part because of low recycling rates. Higher capture rates drove unacceptably high costs in other geographies. We suspect that consumers will notice that aluminum cans take a couple of hundred years to degrade and use significant primary aluminum with a large CO2 footprint. Many packaged beverage makers are working on alternatives to aluminum and plastic with a shorter degradation period. We doubt that cans retain the eco-friendly appeal, which is predominantly a popular belief in North America that fizzled in Europe a decade ago. Industry capacity is set to increase globally by over 30% in the next few years – a cyclical industry buying into its own growth story.

3. Growth Opportunities Less Value Creating Than Holders Might Expect, ~30% Relative Downside

Assuming a constant EV/can – which is currently inflated by this ESG/penetration narrative – volume gains would only add 23% to CCK’s EV. We view the can makers as materials conversion companies that are less structurally robust than many investors believe, supplying large packaged beverage companies with a commoditized product. Selling Euro Food Cans because Bev Cans are highly valued right now seems like the opposite of the right move. We expect perhaps 30% relative downside in shares of CCK and BLL as investors see poor volume evolution in 2021 amid enthusiastic capacity investments.