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Long: AMN, POAHY, PLBY, PSA, FWONK, ROK, PCAR, V, AMH Short: PLUG, BGFV, PK |
Below are updates on our twelve current high-conviction long and short ideas. We have removed Match Group (MTCH) from the long side this week and have added Park Hotels & Resorts (PK) to the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
AMN
Given the backdrop in healthcare including prolonged wage inflation across the US Medical Economy as a result of widespread provider burnout and yet another iteration of COVID-19 in the most recent surge resulting from the delta variant, it is not perplexing why AMN Healthcare (AMN) has hit another new 52-week high this past week. While our trackers are indicating that cases have rolled over, or at least stalled, in the south/southeast, we do not believe that we are “out of the woods” in terms of COVID cases especially given the looming flu season beginning in October. Recall that often “flu-like symptoms” were an early indication of COVID, and this year will be no different in an abundance of caution.
To provide some color on our AMN Provider and Wage Inflation Tracker, we have seen some softening in wages alongside an unclear trend in hiring, but based on an article we reviewed last week, Burnout, delta variant boost demand for traveling nurses again (8/18, Healthcare Dive), we believe that trend will establish itself with additional weeks of data. The article would support what we have been saying for a while now in that, “The reopen could be as hectic as the initial shutdown was.” It is important to understand that across US hospitals “nearly every single unit is in need of staff”. Once you add the risk of unvaccinated people being terminated because of hospital vaccine mandates, that is going to only add to the dire situation and lengthen the crisis. For these reasons, AMN Healthcare remains a Best Idea Long on the Health Care Position Monitor.
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
Spotted on LinkedIn this week was a job posting from Playboy (PLBY) looking for a UX/UI designer to create a content-driven platform like OnlyFans. OnlyFans has been a rapidly growing platform and recently made headlines for scrutinizing and temporarily banning sex related content. If there is a name that has relevance in the sexual expression content space it is Playboy.
Freedom of sexual expression is something Playboy has stood for throughout its 68-year history, which would make its entrance into this segment widely accepted. This company has the ability to enter so many different market segments and meaningfully drive revenue from every venture in the long term.
PSA
We checked in with Public Storage (PSA) other self-storage management teams this past week. There are no indications yet of any meaningful declines in occupancy towards normal levels, and rental rate growth continues to be the main driver of revenue and earnings. With street rates on new leases accelerating massively, there is now a “catch up” period where existing customer rate increases (ECRI) will likely accelerate significantly to converge to street rates. ECRI represents a larger share of revenue growth versus leases to new customers given the average length of stay.
There is also a chance that occupancy rates, while remaining seasonal, have reset to a higher level over a longer duration.
FWONK
Formula 1 (FWONK) returns from summer break next week, marking the halfway point of the 2021 season. Therefore, we wanted to review the U.S. viewership trends and preview the races coming up in the next month. Viewership in the U.S. has been strong, with the average G.P. attracting 928k viewers, a 62% increase YoY. Even more impressive is the cumulative viewership of the 11 races this season (10.2M) has already exceeded last year's 17 race season (9.75M).
The next month is extremely busy for F1, with four races occurring from August 29th to September 26th - nearly a race every weekend. We return next week to the Belgium G.P. at Spa - Francorchamps. On September 5th, we head to the Netherlands for the Dutch G.P. at Zandvoort, which hasn't held a G.P. since 1985 and will be a spectacle to behold with an all Dutch attendance to cheer on Max Verstappen. Meanwhile, September 10th sees F1 returning to Italy for the Italian Grand Prix at Monza, also known as "The Temple of Speed," as it is the track with the highest average speed and will see the second edition of Sprint Qualifying. Finally, we have the Russian G.P. on the 26th of September at the Sochi Autodrom.
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.
AMH
On Thursday, 8/26 the U.S. Supreme Court struck down the Biden administration’s eviction moratorium to the detriment of tenants, but opened a window for institutional residential landlords including the REITs to “churn” their portfolios.
Recall that American Homes 4 Rent (AMH) (1) has been collecting high-90% of its cash rent billed to tenants, (2) has been running at well-above average occupancy levels near 98%, but (3) also booking above-average bad debt for the non-paying portion of their tenant base unable to be evicted. This has resulted in a ~150bp drag to revenue growth. All else the same, the overturning of the moratorium accelerates the normalization of bad debt (our base case was for 2022) and creates a now ~150bp tailwind to revenue growth earlier than we expected.
This comes on top of already record asking rental rate growth. We continue to see the need for significant upward estimate revisions.
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
Big 5 Sporting Goods (BGFV): Beginning in 2-quarters, this company faces huge sales and gross margin compares, and while we have seen the stock move down since our original short call, the market currently thinks that the company will comp the comp. The best earnings year for this company in the 5-years pre-pandemic was $0.77, and that INCLUDED Nike.
What happens when the company has to backfill shelf space with Reebok, New Balance and private label? Comps simply can’t hold up. HIBB reported a negative comp this week and despite a big EPS quarter it sold off big Friday. Nike has been driving HIBB’s business, there is no Nike to drive BGFV’s. If we give this name the standard ‘junk-tail’ 10x p/e multiple and apply to $1.00 in EPS, we get to a $10 stock.
PK
Hedgeye CEO Keith McCullough added Park Hotels & Resorts (PK) to the short side of Investing Ideas this week. Below is a brief note.
Not all REITS are longs in #Quad3. In back-tested-fact, as a subsector of REITS, hotels (and hotel REITS) are bloody awful in #Quad3...
Think about why? Slowing revenues into sticky/rising costs...
Gaming, Lodging, & Leisure analyst Todd Jordan reiterated what's been a great #Quad3 short: Park Hotels (PK). On The Call @Hedgeye this morning he reminded us that PK has 20% exposure to Hawaii.
Sellem on green, after they bounce.
