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Long: AMN, POAHY, PLBY, PSA, FWONK, ROK, PCAR, V, MTCH, AMH Short: PLUG, BGFV |
Below are updates on our twelve current high-conviction long and short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
AMN
AMN Healthcare (AMN) hit a new 52-week high this past week and remains a Best Idea Long on the Health Care Position Monitor. The delta wave across the south/southeast has officially become a problem for health systems in areas where vaccination rates are relatively low. The spike in cases in kids is a concern as well that’s putting some strain on pediatric units.
We continue to believe that the risk for AMN is a potential lack of supply for both itself and AMN’s clients, but the supply/demand imbalance remains bullish for the staffing company for the time being.
10 states nearing—or exceeding—hospital capacity during COVID's summer resurgence (Fierce Healthcare) highlights the issue(s) in Alabama, Florida, California, Georgia, et al. quite nicely. Just one example: in Idaho, “The officials also pointed to widespread staffing vacancies across the state, highlighting one hospital that currently has two-and-a-half times the number of open positions as usual.” 2.5x the number of open positions vs. the usual is a sign of the times, and we’ve shifted our narrative a bit recently to acknowledge the disruption this delta-driven, hopefully final, COVID-19 wave is causing.
Pent-up demand is likely to boost patient volume for several more quarters and perhaps longer, but we’ve got a pause following 2Q21’s strength. We’re monitoring new cases, ED visits, and hospitalizations closely and expect our core “snapback+” thesis to resume in a month or so, which is just in time to influence the commentary that will come on 3Q21 earnings calls.
On a reasonable 2x-2.5x revenue basis, the stock can head toward $150 from ~$106, in our opinion, and 2H21 will likely be strong with acute facilities under some pressure and non-acute facilities remaining open.
POAHY
One of the key issues keeping Porsche Automobil Holding SE (POAHY) shares at a discount to the market value of its share of Volkswagen is a legal suit brought by investors in German courts. Although the legal uncertainty is still unclear, in part due to covid delays, the lead opposing attorney passed away in April sapping some enthusiasm from the plaintiff’s case.
The delay and negative direction could drive a settlement or similar exit in the nearer term, or at least it creates a favorable asymmetry in our framework.
The schedule changes amid chaotic pandemic pressures softened the potential legal catalyst; it is hard button it down beyond noting that a ‘worst case’ discount is subject to narrowing on ‘Porsche SE favorable’ outcomes. We continue to like the auto OEMs in 2H, particularly in Europe.
PLBY
Last week we hosted the Playboy (PLBY) management brain trust, CEO Ben Kohn, CBO Rachel Webber, and CFO Lance Barton, for a fireside chat to discuss the business. Like any high-return story, this model is ALL about execution, and that means its about the people executing the strategy.
We touched on some obligatory questions around the quarter and near-term catalysts, but we really got a better understanding of the steps this company needs to take to dramatically transform the profit center of this portfolio of brands, and make its long-term guide of $100mm in EBITDA and the consensus $491mm long-term revenue estimate look like rounding errors.
Ultimately, we heard how the team will turn this 68-year old startup into a $10bn company.
PSA
Coming out of 2Q21 results it is clear that Best Idea Long Public Storage (PSA) and other self-storage management teams have incorporated several hundred bps of occupancy loss into FY21 guidance, which would be an incredible move over 12 months but now assumed to happen in roughly ~5 months time.
Our checks indicate maintained occupancy and further rental rate acceleration into August. The math tells us that there is potential upside to PSA’s FY21 SSRev guidance of +7% to +8.5% and, by extension, the SSNOI and Core FFO ranges.
Our view remains that improved operational execution, external capital deployment, an optimized capital structure and better shareholder engagement drives the stock into at least the mid-$300/share range.
FWONK
Per Formula 1 (FWONK), "Following ongoing discussions with the promoter and authorities in Japan, the decision has been taken by the Japanese Government to cancel the race this season due to ongoing complexities of the pandemic in the country." This is not the first time a race has been canceled due to COVID; earlier this year, the Canadian G.P. was canceled, and the race was made up with a doubleheader in Austria. The Singapore G.P. was canceled due to COVID, and a replacement is yet to be announced. Both the Japanese and Singapore G.P.'s come at the back half of the race calendar, with Japan scheduled for October 8th-10th and the race taking the place of Singapore to be November 19th-21st.
Liberty Media has made its commitment to a 23 race season very clear, and we believe them. They have made several scheduling changes over the last two years to maintain their schedule and will likely do the same for this one. Given the logistics, we could see a doubleheader at the U.S. G.P. as it follows the Japanese occurring on the 22-25th of October and would be a great test case for the two U.S. G.P.'s on the calendar for next year. For the to-be-determined race in November, we could see F1 repeating last year and add Baharain back using their outer circuit layout. This would make sense as the two following races are in Saudi Arabia and Abu Dhabi.
ROK
While a certain ‘not-an-auto company’ held an A.I. day rolling out a dancing ‘robot’, Rockwell Automation (ROK) remains the robotics. You can be long the company that supplies the machines to make the machine to Tesla, Rivian, and other manufacturers.
After decades of manufacturing in low labor cost regions, geopolitical challenges, logistics disruptions, and technological advances promise to bring more manufacturing back to developed markets. As that happens, ROK and its automation peers should see a rising tide of more advanced factory investment.
PCAR
Despite an earnings report that was received less well by markets than it might have been, we continue to believe that PACCAR (PCAR) will benefit from stronger industry pricing amid a new competitive dynamic.
Daimler Truck and Navistar have historically not pushed industry margins and are now positioned differently, with Navistar acquired by TRATON and a portion of Daimler Truck trading separately. North American order books are filled out for 2021 and into early 2022, as truck companies add capacity amid high truck rates and freight demand.
The Daimler truck spin-off + the Traton/Navistar tie-up has shifted the focus of the management teams from a volume business to growing margins to industry standards which will come through price increases – a change that is vastly underappreciated in our view.
V
With inflation remaining in focus, we continue to favor the payments sector for the globally diversified and real-time inflation-hedged nature of revenues, particularly the open-loop card networks like Visa (V) which have sold-off in the past few weeks on concerns over the delta variant.
Visa excellent track records under economic regimes characterized by decelerating growth and accelerating inflation.
MTCH
Per the Wall Street Journal, a bipartisan bill entered into the Senate that would seek to increase the competition within AppStores by "boosting competition and consumer protections by placing new restrictions on how the stores operate and what rules they can impose on app developers."
This legislation comes after Apple and Google have been to anti-trust hearings in April regarding their practices in their App Stores, notably around the 30% "App Store Tax" they place on in-app transactions.
The legislation would "bar the companies from certain conduct that would tend to force developers to use their app stores or payment systems. It also would obligate the companies to protect app developers' rights to tell consumers about lower prices and offer competitive pricing. It would effectively allow apps to be loaded onto Apple users' devices outside of the company's official app store."
This legislation could very well lead to lower Appstore take rates or "taxes" on in-app purchases, which would greatly benefit companies like Match Group (MTCH) who really on in-app purchases for large portions of their revenue. If the app-store fees are reduced to any capacity, these companies would see margins increase on in-app purchases services (subscriptions and ala carte purchases) as their costs associated with those products would be decreased.
AMH
Our Best Idea Long among residential REITs has underperformed the XLRE by just under 400bps over the last 30 days, providing an interesting entry / accumulation point on the long side. The underperformance was driven by several Old Wall downgrades “on valuation” – we’ll take the other side of that trade all day.
We continue to see upward Core FFO estimate revisions on the order of ~12-15% for FY23 as a positive catalyst, driven by: (1) better than expected same store portfolio performance driven by accelerating rents, (2) ~$65 million of annual NOI contribution from developments and (3) preferred stock redemptions.
Said another way: if consensus estimates are wrong, then the valuation call must be wrong as well. American Homes 4 Rent (AMH) has best balance sheet in the sector and will be generating FCF to support dividend increases.
PLUG
The enthusiasm for shares of Plug Power's (PLUG), after a couple decades of consistent losses and equity issuance, is just stunning. No one on the earnings call even asked for the efficiency of their fuel cells and electrolyzers.
For PLUG, neither the big stuff nor the small stuff makes much sense. To the extent that a hydrogen economy emerges in coming years, PLUG is unlikely to be a relevant part of it. It would make vastly more reasonable for Air Products to buy electrolyzers from Ceres Technologies – a more efficient offering than the PLUG PEM electrolyzers on last check – and dominate the industry with the other industrial gas companies.
At a more detailed level, the restatement, investment income, service revenue, or warrants-for-revenue make little economic sense to us. What PLUG has is $5 billion, a stock it is willing to use as currency to ‘fund’ revenues, and a promotional management team.
We remain reasonably comfortable with our bearish view on PLUG. It is a strangely executed ‘stock-as-product’ scheme, as we see it, with little operating company value.
BGFV
On the Big 5 Sporting Goods (BGFV) 10-Q the company wrote “One vendor, Nike, represented greater than 5% of total purchases, at 8.5%, in fiscal 2020 and accounted for 7.2% of the Company’s total sales in fiscal 2020.
In the first quarter of fiscal 2021, the Company was informed of an expansion of Nike’s direct-to-consumer initiatives that will impact certain multi-branded retailers, including the Company, and which will lead to a significant reduction in the Company’s future supply chain relative to this vendor.”
When Nike makes up 7% of total sales in a record year, good luck trying to grow on top of that without that company’s help. But when you account for the fact that Nike represents ~20% of total softgoods sales, it becomes unsurmountable.
