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Long: AMN, PLBY, PSA, FWONK, ROK, PCAR, AMH, RH, FISV, VLVLY, BYD, PENN Short: PLUG, PK, RRGB, CF, SJM |
Below are updates on our seventeen current high-conviction long and short ideas. We have added CF Industries (CF) and The Smucker Company (SJM) to the short side of Investing Ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
AMN
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Long Thesis Overview: We expect prolonged wage inflation across the US Medical Economy as a result of widespread provider burnout and medical consumption pent-up demand remains significant for many types of care. We expect these trends to continue to benefit hospital staffing company AMN Healthcare (AMN). |
HR and Staffing Directors across Health Care are dealing with what looks increasingly like mortal combat on a daily basis. As we review the most recent labor data and update our newly improved AMN tracker (jobs and wages), we remain bullish on AMN, which continues to be ideally positioned so long as supply and price do not become problematic for them too (i.e., that they can’t meet demand or must pay up for talent themselves).
While it looks like there's been some resolution with regard to strikes recently, there's no shortage of headlines about significant signing bonuses for nurses (all the way up to $40k!) and demand for temp/contingent staffing all across the US. Delta + the reopen has created an even more challenging environment to navigate for Health Care providers than we envisioned - that said, Delta Variant looks like the last [big] COVID wave to us and likely an inflection point to take an already tight labor market to a whole new level of crazy.
Given the backdrop of prolonged wage inflation across the US Medical Economy resulting from widespread provider burnout and the most recent surge of COVID-19 hospitalizations due to Delta Variant, AMN remains a Best Idea Long on the Health Care Position Monitor.
PLBY
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Long Thesis Overview: We think that the upside here is simply massive. 10-bagger over TAIL duration. Ideas like this come along once every few years. I know that it’s too thinly traded now for a lot of institutions to get involved, but that dynamic should change dramatically over the next 1-3 years while the P&L, Cash Flow, Balance Sheet and float characteristics catapult themselves worlds head of the consensus. |
Playboy (PLBY) continues to drive strong resonance with Gen Z, and our survey shows young people are the most impressionable when it comes to the formulating an opinion on the Playboy brand.
The streetwear collaborations with PacSun and Missguided show strong sales while the non-licensed (full revenue recognition) PLBY collaborations continue to sell out on the PLBY site. This brand does not have the same connotation with younger people as it does with the older crowd, and brand chief Rachel Webber is doing an excellent job guiding the bunny to be appealing to Gen Z and continuing to win new customers.
PSA
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Long Thesis Overview: We can keep this short - all that really matters for Best Idea Long PSA is that the company inaugurated FY21 FFO guidance with full ranges for all the key drivers (SSRev, SSExp, SSNOI, Development, Acquisitions, etc). Not only does this bring PSA up to par with the other four peers in the space, but it signals management's ongoing commitment to address long-time shareholder gripes regarding engagement with the street, governance, capital deployment, balance sheet efficiency, etc. All of these items are core to the long thesis for accelerating earnings growth and a positive re-rating of the stock. |
The recent pullback in shorter-duration REITs over the last five days offers an interesting opportunity to participate in the “next leg up” in this turnaround story also benefitting from secular tailwinds and inflationary pressures. We see upside to the mid-$300/share range.
FWONK
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Long Thesis Overview: In 2020, F1 reached a new Concorde agreement for the 2021-2025 seasons that will meaningfully improve the economics of a race. Liberty has also focused on entering more attractive, long-term race deals like the Vietnam and Miami Grand Prix agreements. We believe there is more grease on the wheels. Liberty can maximize its efforts to increase interest in the sport, continue to go after underpenetrated markets, and use its SVOD service to capitalize on its content more efficiently. The most significant area of improvement for F1 is their sponsorship and partner agreements. We believe there is ample opportunity in sponsorship with only 17 races out of the record-breaking 23 race calendar having a title sponsor and F1 lacking many low-hanging partnerships such as fuel and hospitality providers. |
Legendary F1 Team manager ( Ferrari, Benetton, and Drawn Racing) Ross Brawn is also the Managing Director of Motor Sports for corporate Formula One. The Monday after every race, he writes a weekly column for F1's website, where he usually gives his puts and takes from the weekend's race.
In this week's edition, he offered up an interesting data point "It's also important that we look at F1 Sprint in the context of the whole event, which incidentally delivered the strongest ever weekend streaming numbers we've ever seen on our OTT platform F1TV." This anecdote comes after F1 management has started to talk about F1 T.V. more frequently in their quarterly calls.
When F1 originally came public F1 T.V. was a major part of the bull thesis; at the time, WWE's streaming service was seeing very good numbers, but after the rollout of F1, T.V. bulls quickly dropped it as a part of their thesis.
With F1TV continuing to be brought up by F1's management, we wouldn't be surprised if bulls start to factor it in again into their thesis. Management has never published user or subscriber metrics for F1 T.V., but we have used Sensor Tower to help us get an estimate of subscribers (as seen below).
ROK
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Long Thesis Overview: We expect this to be an unusually good cycle for ROK as developed market automation investment benefits from less ‘offshoring’ of production amid higher emerging market labor costs and other considerations. The capabilities for automation technologies, from machine vision to software to 5G and the like, broaden the market opportunity substantially. Despite being one of the best businesses in our coverage, shares of ROK don’t yet sport the premium valuation we’d expect them to receive as organic growth accelerates through 2H21. |
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
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Long Thesis Overview: With labor tight, inventories low, traffic heavy, and truck orders soaring, it is surprising that shares of PCAR have lagged the industrials sector by over thirty percentage points in the last year. We’ll take the other side here, adding PCAR back as a Best Ideas long at a relative level that’s about as ‘cheap’ as it gets. We expect that shares to outperform in the next year by more than 50%, with construction & infrastructure spending, aftermarket growth, and (yes) electrification all prospective catalysts. |
About three-quarters of total freight is moved by truck in the US; just 4 companies dominate truck manufacturing (and it’s really just 2). PCAR might well have been expected to move with the CATs and OSKs in the last year, longs on our Best Ideas list which we’d consider swapping for ROK and PCAR.
We’ve added PCAR as a long twice before, once in August 2012 and again in mid-2018; and the cycle dynamics have changed dramatically over the past decade. We see the strong construction/infrastructure investment, and tight labor/inventory set-up as meaningful positives for PCAR.
AMH
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Long Thesis Overview: On balance, we see the data as very supportive of the long-term SFR long thesis in general, but in particular AMH with its captive "bank" of lot inventory and unique development program set against an extremely tight supply environment. As the space matures and grows more competitive given the outsized yield opportunities, operators with pre-sourced inventory to control, build and deliver have a massive advantage |
Best Idea Long AMH will be presenting next week on 9/22 at one of three really key annual conferences in the REIT sector. The company will most likely release an updated investor deck along with its presentation, including average occupancy and releasing spreads through August.
We expect blended leasing spreads to accelerate potentially into the double digit range in 3Q, which would be supportive of the glidepath to longer-term FY23 Core FFO earnings power of ~1.70/share which is well-above consensus. We see at least ~25% upside in shares in the near- to intermediate-term.
RH
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Long Thesis Overview: as the company is going to have to show success in opening up new countries to prove the top line consistency and momentum, and that will take 2-3 years. But we’re been here for the ride since $28 – and this ride is far from over. There’s no better ‘buy the dips’ name I can find in retail than RH. This team’s strategy is going to make long-term shareholders a lot of money. |
RH’s international expansion to RH England is scheduled for a 1H kick-off, with management guiding a year 1 range of anywhere between $50mm and $250mm. However, how we’re doing the math, this is likely to be a $1.5-$2bn business for RH (management guiding closer to $1bn), not to mention the coming launch of RH Paris, which has an almost identical population count as the UK (each has between 65-70mm people).
Compare that to the state of California, which has 39mm people and is an $800mm business for RH. Then tack on Italy (60mm), Germany (83mm), and the rest of Europe. Currently the US market is white hot, but that won’t lest forever, and when it cools international will be there to keep this company growing top line at ~20% for the foreseeable future.
FISV
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Long Thesis Overview: With the domestic reopening progressing at full clip, resilient Quad III and Quad IV setups, and shares trading at a historical discount to the broader market, Fiserv is a rare, high caliber value play in a red hot payments space. Accordingly, shares of Fiserv remain a Best Idea Long based on an array of positive catalysts through 2021. |
Longer-term, Fiserv (FISV) is the leader in card issuing and merchant-payment services, with the benefits of scale and strong bank relationships. The company continues to show strong bookings growth in its card issuing and bank-IT segments, as small banks and financial institutions pursue digital transformations.
Although it trails in high-demand, industry-vertical-specific software, the company has seen strong growth in e-commerce (+21% y/y, with >$1B of revenue coming from E-commerce) and from its Clover PoS system for merchants, which has recently surpassed Square’s seller business volume.
Yes, competition is strong and technology is beginning to equalize the state of play, but the pie is growing and is large enough to sustain the industry's new and emerging players, and Fiserv, with its strong free cash flow, is more than capable, as it has been doing, to adapt and evolve in a timely fashion.
VLVLY
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Long Thesis Overview: Shares of Volvo Group (VLVLY) have lagged other machinery-oriented names despite favorable industry and company specific factors. Trucking conditions in Volvo’s key markets remain extremely tight, while labor conditions may ease in coming months. Construction equipment demand in developed markets should remain reasonably robust, a view supported by fleet demographics, COVID recovery stimulus, elevated commodity prices, and aging infrastructure. We see greater than 50% relative upside for shares of Volvo as robust demand intersects with stronger 2022 pricing. |
Volvo has promising HD truck electrification programs, with little recognition in the valuations for ZEV capabilities. NKLA alone sported nearly half Volvo’s market value with no production on just the hopes associated with lower emissions powertrains.
Concerns around supply chain disruptions should, in all likelihood, be viewed as positives that limit supply, support pricing, and motivate customers into 2022. Volvo is trading at a noticeable discount to peers.
A tolerable sum-of-the-parts implies ~50% upside relative to the sector for shares of Volvo group (~kr300), a reasonable risk/reward in the context of challenging hunting in larger cap industrials .
BYD
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Long Thesis Overview: BYD looks like one of the most undervalued stocks in our universe, when measured vs its true potential. We get it, stock is up vs pre-Covid, but the numbers have justified most of the move higher. And yet, they continue to go even higher. There’s also a case to be made that BYD is deserving of structurally higher multiples given the inherent organic growth in its markets (especially LV Locals), and higher flow through, but also for the fact that the negative secular theses have pretty much been dispelled. Do we need to make the case for higher multiples right now? No, with the stock off its highs and numbers way too low, we have plenty of valuation support in our SOTP analysis. |
As mentioned in our regional gaming discussion earlier this week, much of the regional market results for August are coming in above expectations (reduced by Delta) but there’s still the uncertainty surrounding LA and MS given Delta but mostly hurricane Ida. Based on some of our checks with property closure timing, we do think the combined “South” segment could be flattish in August vs 2019 levels, despite losing 3-4 full days of casino activity.
LA will be more impacted in September by Ida (casinos reopened in a staggered fashion) while MS lost fewer days in September. Looking closer at LA, by the hour there is still significant progress being made to restore power and get regular business activity up and running. Per 3rd party data source, PowerOutage.us, shows that ~78K households are still without power in Louisiana out ~2.2MM tracked – this is down substantially from the peak of ~1.2MM two weeks ago and 300K last week.
Given the strength of the South’s casino markets since reopening, we think the snap back could be strong and relatively fast, though we would expect these markets to lag the Midwest for another month or two.
PENN
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Long Thesis Overview: (per Hedgeye GLL analyst Todd Jordan) "I would own Penn National (PENN). It’s had a great management team historically, which is critical for a buy & hold play. The Barstool move was very astute on their part. I have a pretty good idea what Barstool would be worth as a standalone company, and we know what Penn’s option to buy it at is; there’s a huge divergence, they can buy Barstool for far cheaper than it’s truly worth. The initial chunk they bought was at a very low price too.” |
HedgeyeTV hosted a great event earlier this week featuring six veteran Hedgeye analysts that were brought on to pitch one of their high-conviction stock ideas (long or short). Hedgeye CEO Keith McCullough moderated the live discussion and livened it up with a few macro/stylistic factor related questions.
The GLL pitch went first and featured PENN as a top pick in this quick hitting segment that spans just 10 mins long -- 5 mins of laying out the PENN call + another 5 mins of Q&A and back and forth with Keith. Here is the replay link HERE of the full webcast for you to enjoy.
PLUG
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Short Thesis Overview: Plug Power PLUG seems to be in the business of issuing shares of stock, even giving warrants to facilitate product sales at valuations that ended up being absurdly low. The behavior around the most recent equity offering looks dubious. Forklift fuel cells are a difficult business, likely entering a post COVID downswing. Reputational damage could become a broader issue, and we see ~80% relative downside. |
The enthusiasm for shares of PLUG, after a couple decades of consistent losses and equity issuance, is just stunning. No one on calls even asks for the efficiency of their fuel cells and electrolyzers – feel free to push your friendly neighborhood sell side Q&A participant to ask.
Imagine not being able to resell hydrogen profitably, the being unable to buy at a reasonable price from Air Products, incurring cost to switch to Linde, all when the bull case for your stock is to become a producer and distributor of hydrogen. PLUG’s installed base and most of the customers it is supplying relate to materials handling equipment – forklifts, a business that is losing out to Lithium Ion powered equipment. That doesn’t come up much on these earnings calls.
PK
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Short Thesis Overview: We’d characterize Park Hotels & Resorts (PK) trends as soft and while the company conveniently blamed the Delta variant of Covid-19, that only tells part of the story. Looking ahead, PK warned of softer results now expected in September and October versus when they last provided and outlook in early August. While Delta is no doubt impacting the US travel sector, the seasonal slowdown in leisure travel is revealing the weakness in corporate transient that would’ve been evident with or without Covid issues. We’ve been adamant on this point and haven’t felt the management teams have adequately discussed the issue with investors. |
"Now's not a good time to visit Hawaii." – Hawaii Governor, David Ige, 8/23/21. We figured this quote and the regulations and restrictions that have come forth thereafter would have an impact on Hawaii RevPAR, and thus far our concerns have been confirmed by weekly data. Oahu has been served with stricter guidelines than the rest of the islands, and the set up broadly continues to weaken. As noted by the blue line in the chart, Hawaii was rightfully part of the bull case for some hotel REITs given its leisure focus and access for Americans that are looking to leave the continental US but not cross borders. We’d expect these Covid restrictions to inevitably ease, but the HI government has been a lot slower moving than other governments through Covid so we think much of the expected 2H upside from Hawaii will not come to fruition.
A number of REITs hold significant exposure to the state, including PK (~24% of EBITDA), HST (~10% of EBITDA), and SHO (~10% of EBITDA). We remain most negative on Best Idea Short, PK, and given its weak exposure (significant business customer exposure, urban + Airport exposure), excess financial leverage, and now decelerating performance in of its best performing markets to date.
RRGB
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Short Thesis Overview: Restaurants that we could operate at total capacity saw comparable restaurant revenue increase 7.0% from the pre-pandemic comparable quarter. In addition, margins at these restaurants reached 19.5%, a 180 bps increase. However, overall comparable restaurant sales are still down 2.4% compared to 2019. Nothing exciting to see with Red Robin Gourmet Burgers (RRGB). |
Restaurant sales lost some ground during August amid a spike in COVID cases and its negative effect on consumer confidence. In August, same-store sales growth was 6.1% during the month, a 2.1 percentage point drop compared to July. Traffic growth was -5.4% during August, a 1.6% decline from July.
Sales growth was the lowest recorded since 5.8% posted in May, and traffic results were the worst for the industry in the last three months. The industry is relying on larger-than-usual growth in average guest checks to propel sales into positive territory. The average check grew by 4.5% year over year in August. On a 2-year basis, the average check grew by 13% during the month. However, the average check grew by only 3.2% in all of 2019.
Sales growth was 11.8% for limited-service restaurants in August, an improvement of 0.8% points compared to July. Meanwhile, full-service restaurants experienced a sharp downturn with sales growth at 2.4% in August, a drop of 3.8 percentage points compared to July. We are short casual dining companies as a theme.
Red Robin is poorly positioned in the sector with food quality that is little differentiated from its fast casual competitors that are lower priced and have quicker service.
cf
Hedgeye CEO Keith McCullough added CF Industries (CF) to the short side of Investing Ideas this week. Below is a brief note.
During market corrections we obviously don't get as many SELL ideas moving towards the top-end of my Risk Ranges...
That's where patience and process matter. CF Industries (CF) is the kind of short Industrials analyst Jay Van Sciver is looking for (rising costs with little to no pricing power).
Here's a good summary on those fundamentals from his Industrials Pro research product:
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CF | Price, Volume, Capacity CF Industries reported higher realized prices across its nitrogen products, which was well anticipated, but production was lower than anticipated. CF cut 2021 production to the lower end of previous forecasts. There are several longer-term issues with CF. Greener solutions could displace CO2 emitting Haber-Bosch processes. Capacity is set to continue increasing in coming years leading to price-limiting production growth. 2022 estimates moved higher after the release but Urea, UAN, and Ammonia prices will have the key impact on actual results. Urea prices peaked out in June, although remain higher in 3Q than 2Q. Time and capacity are likely on the side of the bear case. |
SJM
Hedgeye CEO Keith McCullough added The Smucker Company (SJM) to the short side of Investing Ideas this week. Below is a brief note.
I have no idea why people would be buying "defensive" names whose P&L's are the opposite of defensive right now - they are getting squeezed!
In addition to a name like CF, think Consumer Staples companies who have A) no pricing power and B) rising costs due to inflation)...
The Smucker Company (SJM) looks like this in our Consumables Pro research content:
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Takeaway: Management lowered EPS guidance a quarter after raising it due to higher than expected inflationary headwinds. J.M. Smucker reported FQ1 EPS of $1.90, down 20% YOY, but a penny above consensus expectations. Sales decreased 6%, but in constant currencies excluding divestitures, sales increased 1%. |
