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Long: AMN, PLBY, PSA, FWONK, ROK, PCAR, AMH, RH, VLVLY, BYD, PENN, DGX, CUBE Short: PLUG, PK, RRGB, CF, SJM, SFIX, OMC, SFM |
Below are updates on our twenty one current high-conviction long and short ideas. We have removed Fiserv (FISV) from the long side of Investing Ideas. We have added Quest Diagnostics (DGX) and CubeSmart (CUBE) to the long side and we have added Stitch Fix (SFIX), Omnicom Group (OMC), and Sprouts Farmers Market (SFM) to the short side. 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). |
The Health Care staffing crisis seems to be escalating across the US, with fatigue/burnout being compounded by vaccination requirements, and retirement/industry exits accelerating. This week, we’re tying in a slide from the Macro Team’s 4Q Themes deck because a picture speaks a thousand words:
And here is a look at the Health Care JOLTS data from a Health Care Morning Brief earlier this month. Again, the trend and takeaway(s) are obvious:
More recently, CVS Health announced its plan to Hire 25,000 Across the U.S. During One-Day Virtual Career Event (PR), which seems like a Herculean lift... "Pharmacists, pharmacy technicians, nurses, and retail store associates in high demand to support flu season, COVID-19 vaccinations and testing." Note, CVS raised the min wage to $15/hr. back in August, and "Most of the available positions are for full-time, part-time, and temporary licensed pharmacists, trained pharmacy technicians and nurses at CVS Pharmacy store locations and will be filled as soon as possible."
We remain bullish on AMN while we continue to work on our updated and improved AMN tracker (jobs and wages). For now, AMN remains ideally positioned to benefit from a perfect storm so long as supply and price do not become problematic for them too (i.e., that they can’t meet demand or must pay extraordinary rates for talent themselves).
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. |
This week PLBY announced its new creator led platform, Centerfold, “dedicated to creative freedom, artistic expression and sex positivity”. This new PLBY creator platform can be huge. Per Axios, referencing an OnlyFans pitch deck from March, the company did $2.2bn in GMV in 2020, trending to $5.9bn in 2021, that translates to $375mm in revenue in 2020 or $1.2bn in estimated revenue in 2021.
It would seem very easy for CENTERFOLD to get some share here given it already has some relevant interested creators; combined with the brand recognition perhaps Playboy’s opportunity is even greater than OnlyFans. The other perhaps less appreciated opportunity here is what this platform does for the Sexual Wellness offering.
If we assume CENTERFOLD is successful, the company can simply send its entire sexual wellness product portfolio to top relevant creators. It provides free (give them a referral fee if desired) direct marketing of product to engaged target consumers.
Think “Get this Honey Birdette outfit, or Pleasure For All gummy, or Lovers toy, or Playboy Makeup in the link below”. Monetization has been the problem with the PLBY P&L vs the brand relevance. This initiative could be a rapid remedy to that problem. The more we contemplate the CENTERFOLD opportunity, the more we wonder if our $10bn EV target is too low.
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. |
Data on the ground suggests that “street rates,” or market asking rates for new leases, are trending up +10% across the U.S. This comes following PSA’s first quarter of positive rent roll-up in several years, and portends further revenue and NOI acceleration.
We continue to see a mid-$300/share stock as the most probable trajectory, and stress that few REIT sectors are better equipped than self-storage to handle accelerating inflation and a rising interest rate environment.
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. |
In a recent interview with German news magazine Der Spiegal, Reed Hastings reiterated his view that Netflix does not need live sports or news to attract more subscribers. However, in referring to Formula 1, he said "A few years ago, the rights to Formula1 were sold. At that time, we were not among the bidders; today, we would think about it."
The commentary is interesting. As we know, Formula1 and Netflix have a history with the very popular "Drive to Survive" series and a documentary on famed F1 driver Michael Schumacher, which was released on 9/15. We have seen the value of sports rights deals increase globally as media companies acquire streaming rights (in addition to broadcast) to grow subscriptions, especially overseas.
We highlighted the potential for an F1 streaming rights deal as a potential positive catalyst and upside driver in our May 2021 black book. We know ESPN's U.S. broadcast deal expires in 2022, and European rights are coming up for renewal through 2025. We also know F1 has been in discussions with Amazon in the past.
We can't help but get excited by the idea of F1 signing a rights deal with a major streamer, not only for the direct financial implications but what it could mean for the brand long-term.
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. |
Cyclicals often ‘feel’ or ‘look’ expensive at the start of an upcycle. Oil & gas, automotive, mining, and building materials market demand has begun to recover but capital investment in production capacity impacts ROK on a lag. Valuation multiples also lag.
ROK enjoys one of the strongest structural positions in the Industrials sector, with a robust, segmented market position and high customer switching costs notable factors. ROK’s organic revenue growth recovery will lag the already V-shaped rebound in industrial orders, as capacity utilization remains depressed even as backlogs swell and inventories tighten.
As investors see the turn in factory investment with still low estimates and easing compares into 2022, we expect ROK shares to outperform by 60% to 80%.
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 traded down -1.20% on Friday after highly-correlated peer INVH announced a secondary equity offering to fund acquisition activity. The offering is actually a positive and noise to AMH, and the recent weakness is an opportunity to build or add to a long position.
The rate-of-change on earnings growth is accelerating, and the Street is still ~10% too low on FY23 earnings expectations which is what really matters for a TAIL duration long.
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. |
A big difference between companies like RH and others is that the furniture business is fundamentally different than businesses like TGT and DLTR that rely on having shelves stocked with timely merchandise at the exact time the consumer needs it.
When you buy a new bedroom set, it’s not ‘cash and carry’ meaning that you don’t haul the product out of the store on that day and tie it on top of your SUV. You expect delivery anywhere from 3-6 weeks down the road.
During the pandemic and continued through the supply chain disruption, as we’ve seen excess demand, we saw lead times extend to 9-12 weeks across the industry. The takeaway is that if people need to wait six months to get their furniture they will because they want the product and the wait is similar for other furniture retailers.
The supply chain issues will not become lost revenue for RH but rather perhaps delayed revenue recognition as people wait for their goods.
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. |
Inflationary pressures across transportation have raised returns for service providers. This has resulted in a robust capital investment cycle for heavy truck suppliers that should last well into 2022. Challenges in finding adequate labor typically leads to equipment upgrades, as drivers prefer newer equipment accommodating less skilled operators.
Current truck offerings are much more efficient to operate, a driver of replacement in the absence of stricter tailpipe emission regulations in recent years. Infrastructure and stimulus spending in both North America and Europe are likely to add fuel to the ongoing replacement cycle in construction equipment.
This positions Volvo well within our existing PCAR thesis and prior CAT/OSK thesis.
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. |
BYD’s performance continues to prove why this name remains an earnings growth story with more runway from here.
Consensus is underestimating the earnings power of the “new” BYD in this post Covid world. Similar to PENN, BYD is benefiting from strong growth in the regional markets, but they're also benefiting from their outsized exposure to the Las Vegas Locals market - the top gaming market in the country.
Their 5% stake to the Sports Betting (SB) and iGaming (iG) market leader, FanDuel, also sets them up nicely as the SB & iG continues to expand rapidly into new markets.
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.” |
We remain bullish on PENN and the regional gaming space overall as the August numbers showed yet again why there is a secular shift to this story.
Despite delta and Hurricane Ida, regional markets in the south posted results in line with 2019 levels in August, another testament to the resiliency of the regional gaming consumer, a consumer that PENN is.
Consensus has been waiting for that slowdown, but we continue to see sustainability as we get further away from the reopening. In addition to the B&M business, at the current stock price, their massive opportunity in SB and iG is not reflected in valuation, nor the fast-growing media business of Barstool.
DGX
Hedgeye CEO Keith McCullough added Quest Diagnostics (DGX) to the long side of Investing Ideas this week. Below is a brief note.
Getting damn dips to buy in this one have been few and far in between since the company reiterated our bull case earlier in September...
See Healthcare analyst Tom Tobin's Healthcare Pro research product for updated reasoning on why we still like covid testing via Quest Diagnostics (DGX) on the long side.
Here's an excerpt from their research:
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COVID-19 Testing (+ for DGX, and maybe BDX, ABT, QDEL too): BD Partners with Washington State in Back-to-School Testing Effort - BD Offers Digitally Read SARS-CoV-2 Rapid Antigen Test and Optional Turn-key Solution in 'Learn to Return' Program (PR). There are a few rapid antigen test options, and "Schools that choose to use the BD Veritor™ Plus system also have a full-service option where Premier Medical Group (PMG), a third-party testing company, plans and executes the school's testing program so teachers and administrators can focus on teaching, not testing. In this option, PMG will prepare a turn-key solution that includes testing protocol, administration of the tests to students and completion of all required results-reporting to individuals and schools, as well as local, state and federal health officials. This will be the only rapid (same day results) testing option with staffing support for Washington schools." |
cube
Hedgeye CEO Keith McCullough added CubeSmart to the long side of Investing Ideas this week. Below is a brief note.
REITS aren't always for sale... but when they are... we're going to send you buy signals on the names that REITs analyst Rob Simone likes.
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Takeaway: Doubling down on self-storage; adding CUBE as new Best Idea Long Key Takeaways: We are doubling down on self-storage and adding CubeSmart (CUBE) as a new Best Idea Long alongside PSA. This is a "keep it simple and straightforward" type of call: (1) the subsector is highly correlated internally given the submarket overlap and works well in an inflationary environment, (2) CUBE backtests well in each of Quads 2-4, (3) upward earnings revisions are extremely likely and a positive catalyst, and (4) CUBE's balance sheet is a huge strategic and style factor advantage. |
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. |
The most recent GBTA survey that came out for September reiterates to continued slowdown surrounding the intent to resume business travel. We believe that the corporate travel landscape is severally impaired and that the recovery could be much longer than what consensus is estimating.
PK remains heavily exposed to the corporate transient customer, but since the reopening they have been reliant on the robust leisure demand. Over the next months, the contribution from leisure will cool as it usually does from September to April, and we remain skeptical on PK’s ability to replace open room nights with the corporate customer.
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). |
One of the biggest challenges for the restaurant industry, especially full service restaurants, is finding employees. The job openings in the food service industry is still at record highs despite months of hiring by restaurants. Recruiting and training employees will cause labor expenses to rise in the coming quarters.
High employee turnover rates also remain a concern for full-service restaurants. They are undoubtedly a driving factor behind the staffing difficulties reported by many restaurant companies. There are substantial differences in employee retention between different regions and states of the country.
Regional factors such as minimum wage and unemployment rates contribute to creating a different set of circumstances restaurants need to contend with at the local level.
States with the highest full-service employee turnover are experiencing rates over twice as large as states obtaining the best retention results making it difficult for a national chain like Red Robin to develop systemwide policies.
CF
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Short Thesis Overview: 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. |
CF produces a true commodity with an aging process that should be negatively impacted by increased regulation and new capacity additions. Urea prices are likely to decline from the current high levels in coming quarters. We expect shares of FMC to outperform by more than 50%, shares of DE stall out, and for CF to underperform by ~30% in the next few quarters as higher nitrogen fertilizer prices are ‘cured’ by attracted supply.
SJM
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Short Thesis Overview: 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%. |
Robusta, the cheaper coffee bean used in instant coffee, prices have doubled since last summer. Robusta coffee prices have been surging since a cold snap in Brazil's coffee-growing regions damaged crops in July and August. This was compounded by droughts in other areas damaging Arabica beans. Vietnam is the second-largest producer, but the shortage of shipping containers, higher freight costs, and port congestion has made it more difficult to source beans. J.M. Smucker, a large buyer of Robusta beans, owns coffee brands including Folgers and Dunkin'. On the last conference call, J.M. Smucker took up its expectations for inflation from mid-single digits to high-single digits.
SFIX
Hedgeye CEO Keith McCullough added Stitch Fix (SFIX) to the short side of Investing Ideas this week. Below is a brief note.
Patience, on the short side, is every bit as important as waiting for your signals/pitches on the long side...
Retail analyst Brian McGough did a masterclass on The Call @Hedgeye on Stitch Fix (SFIX) this morning. It's getting squeezed to towards the top-end of my Risk Range™ Signal this morning.
That's where we send you SELL Signals, especially with companies like SFIX that have massive inventory builds and a #deceleration in Pod 1 (Revenues) pending.
See McGough's Independent Research notes on the name in his Retail Pro subscription.
OMC
Hedgeye CEO Keith McCullough is adding Omnicom Group (OMC) to the short side of Investing Ideas. Below is a brief note.
Today is the day when an experienced long/short pro raises some cash and/or puts on some shorts...
So why don't you do that and add back one of Communications analyst Andrew Freedman's best longer-term shorts: Omnicom Group (OMC).
Here's a reminder on the short call for those of you who don't subscribe to Freebird's excellent Communications Pro research product:
FROM FREEDMAN:
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OMC reported earnings this morning. As a reminder, we added the advertising agency holding companies to the top of the short bench last week and discussed during our themes call. The agency model is secularly challenged; plagued by in-sourcing, fee compression, high labor intensity and fierce competition. We believe relaxed remote work policies post-COVID will accelerate in-sourcing trends on the brand side. Additionally, while it seemed like a prudent move to lay off/furlough staff and institute pay cuts during COVID. In the long-term, it is quite possible the agencies accelerated their own demise. With economic activity roaring back, many agencies are understaffed – and we believe margins will come under pressure over the next 6-12 months as they have to ramp back hiring to meet demand (right into a slowdown in advertising spend) and likely have to pay higher wages (inflation) to attract/keep talent. |
SFM
Hedgeye CEO Keith McCullough added Sprouts Farmers Market (SFM) to the short side of Investing Ideas this week. Below is a brief note.
One of our favorite Sector Styles, on the short side, in #Quad2 is Consumer Staples.
One of our latest SELL ideas from Consumer Staples analyst Daniel Biolsi is one of his former pandemic longs: Sprouts Farmers Market (SFM) and its tapping the top-end of its Risk Range today.
From Biolsi and Penney's Consumables Pro research product:
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Growing concerns about their plans, adding to the Short List (SFM) We are adding Sprouts Farmers Market (SFM) to our shortlist. Sprouts' two-year stacked comp was negative in Q2. Management now expects the full-year comp to decline 5-7% from -LSD% to -MSD%. Guidance implies an acceleration in comps that seems aggressive. |
