|
Long: AMN, PLBY, PSA, FWONK, ROK, AMH, RH, VLVLY, BYD, PENN, DGX, CUBE, TOST, BROS Short: PLUG, RRGB, SJM, SFIX, OMC, SFM, KR |
Below are updates on our twenty one current high-conviction long and short ideas. We have removed Park Hotels (PK), CF Industries (CF), & PACCAR (PCAR) from Investing Ideas. We have added Toast (TOST) and Dutch Bros (BROS) to the long side and we have added Kroger (KR) to the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
AMN
|
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 tie in the work exhibited in the Macro Team’s 4Q Themes deck, 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 which support our view that AMN fits a key component which many areas of the US Medical Economy are seeking. As promised, we will continue to work on our updated and improved AMN tracker (jobs and wages). For now, AMN remains a Best Idea Long on the Health Care Position Monitor.
PLBY
|
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. |
Using historical M&A activity in the apparel space, we tried to get to a number of what JUST the apparel business for PLBY could be worth. We know PLBY does $2.7bn in retail sales already, which of course is not fully recognized on the P&L at the moment due to its egregiously low licensing, but that fee is changing and the P&L recognition is coming.
However, that $2.7bn is a similar number as KTB when it separated from VFC to become an independent public company and that $2.7bn when looking at a Bull/Base/Bear case can get to a value of between $1.8-$3.5bn for PLBY apparel. Currently PLBY’s market cap is sub-$1bn, so the apparel business alone could triple that number, and then all the other initiatives and brand monetization the company is undertaking could get this stock to a $10bn EV over a TAIL duration.
PSA
|
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 next catalyst for PSA is 3Q21 earnings, where we expect modest upside of ~1-2% to estimates.
The real fireworks will come along with 4Q21 results next year when PSA will likely provide its FY22 outlook. We would not be surprised if the FY22 Core FFO outlook comes in above $14/share, after which we would think that the sell-side will have fully caught up with initially low expectations.
Another item to watch is whether PSA pulls the trigger on Manhattan Mini Storage in the coming weeks which is on the market, given that it has the balance sheet flexibility to do so.
FWONK
|
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. |
Per F1, F1's much anticipated second Race in the U.S., the Miami G.P. now has an official date attached to it (Sunday, May 8, 2022), and the "TBD" spot in November was announced on Thursday to be the Qatar G.P. with the "Losail International Circuit" signing a 10-year deal starting in 2023. Next year, there will be no race at the circuit as the country is hosting the FIFA World Cup.
Additionally, it appears that a draft of the 2022 season calendar has been leaked. The calendar draft implies a 23-race calendar with races like the Australian, Chinese, and Canadian G.P.s returning (these G.P.s haven't taken place the last two years due to COVID). The draft also has some optionality to it with the Jul. 17 slot having either the French G.P. or Imola returning, and the Oct. 2 slot having either the Singapore G.P. or Turkey as possibilities.
ROK
|
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. |
The shift of production to China has been a key headwind to factory automation spending in more developed markets. But now tensions with China, scarce labor, supply chain bottlenecks, cost input pressures, and rising wages favor have increased automation investment by manufacturers.
Record capital raises in this cycle have been unusually focused on several capital-intensive niches, like electric vehicles, often going to build ROK outfitted factories. In a few years, we suspect it will have been obvious that Rockwell – the company that builds the machines that make the machines – was well positioned to increase revenues and margins.
AMH
|
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. |
Couple of Old Wall initiations/downgrades over the last few weeks with mid-$40/share “price targets.” We all know what to do with those! Let’s put it this way – if you pay mid-$40/share (and substantially less today), you would basically be getting AMH’s development business for free.
We will take that side of the trade. Just putting some numbers around it, the development business probably has $1.2-$1.5 billion of value “as-is” on the balance sheet today (or ~$3/share), and over $2 billion (~$5/share) if future NOI contribution is discounted back to the present.
Hence the ~$50/share we have been talking about making the most sesne, all while the RoC on rental rate growth is accelerating.
RH
|
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. |
With runway for another 20-30 galleries in the US, and countless luxury markets to open up overseas, this name simply has the roadmap to dominate the global luxury home furnishings market – and it has no peers.
How we’re doing the math, by year 5 of the model we’re at between $7.5bn and $8bn in revenue at a 25% EBIT margin. That gets us to $50 per share in earnings. The question then is what this is worth.
We could easily argue that this is worth 40x-50x earnings given the company’s growth, margin, and ROIC characteristics which suggests a $2,000-$2,500 stock in five years vs sub-$700 today.
VLVLY
|
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, which makes commercial trucks, buses, and construction equipment, has several similar tailwinds as PCAR. However, we continue to expect robust demand for construction equipment in coming years amid aging fleet…at least outside of China.
Volvo has a greater exposure to Europe, a region with a favorable macro set-up into than most regions. Volvo likely offers attractive upside, with shares trading near the lowest valuation relative to public peers in recent years.
BYD
|
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. |
In addition to their exposure to the robust regionals market, this week, we got another positive data point for the Las Vegas local economy’s consumer confidence and purchasing power as home prices accelerated to their highest rates of growth since February 2013, and the Shiller price index is now 5% above all-time highs.
Historically, we have found that home prices and in particular, the wealth effect (positive equity), is the most important driver of LV Locals gaming revenues. We expect good things from the LV locals’ market in ’21 and ’22 with BYD benefiting from the market’s robust fundamentals and holding a ~30% exposure there. BYD remains a Best Idea Long.
PENN
|
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.” |
PENN remains at the top of our Best Idea Long list as we reiterate the strength of their core B&M business that has continued to stay resilient through the delta headwinds.
August regional gaming revenues officially closed, and for a month that was supposed to, at minimum, be down a little vs 2019 given the delta / Hurricane Ida headwinds, we find the performance to be encouraging, and the set up for the proceeding months to end 2021 is looking good.
Based on current stock prices, little value appears to be ascribed to the future of PENN / Barstool optionality and/or too little value in the core business.
We see PENN’s core fairly valued at ~$72 / share, the future potential of Penn Interactive worth another ~$59 / share, and PENN’s eventual 100% ownership of Barstool Media worth another ~$7 / share. ~$135+ stock yields 70%+ upside from current which could be realized over the next 12-18 months.
DGX
|
Long Thesis Overview: The key to our thesis to DGX’s guidance for the near elimination of COVID volume in the coming months in the midst of yet another wave of infections. But instead of lockdowns, we expect the continued emergence of in-person care. We also expect the continued migration back to less socially distanced environments such as offices, which will exacerbate COVID spread along with influenza off the near-zero levels of the 2020-2021 season. Should COVID testing remain elevated and the recovery in the base business remains intact, we believe company estimates could be revised significantly higher. |
Despite some pullback in the stock as a result of fleeting COVID caseloads in the US, DGX remains a Best Idea Long as we expect the base business recovery to continue alongside sustained demand for COVID testing.
After speaking with DGX last week, we developed some data points on demand in NYC, a key market for DGX, and otherwise made a number of small adjustments to our model, including tightening up our near-term estimates to better reflect new information.
We still see a substantial amount of pent-up demand and expect the receding Delta Variant will remove one of the last remaining obstacles to its release, although one of the consequences of Delta Variant will be sustained demand for COVID testing at least through the winter flu months of 2021-2022.
The current flu season is already running substantially ahead of the last 10 seasons, and on a test volume per day basis has the potential to super-charge COVID volume and volume overall. Since we added DGX consensus estimates have risen with management guidance and in-line with our outlook.
We no longer have a substantial gap between our 2022 estimates and consensus, although there are multiple revenue drivers remaining, including additional COVID testing agreements, flu season upside, a more robust NYC recovery, and in-person care and pent- up demand release.
CUBE
|
Long Thesis Overview: 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. |
We actually like Best Idea Long CUBE more here than peer PSA for two reasons: (1) on the quarter we expect Core FFO to come in a penny or two above the high-end of the $0.51 to $0.53 range which would be a larger order of magnitude beat, and (2) there is more of a delta between our model and consensus numbers on a tail duration (>5%).
In addition, CUBE serves as more of a Quad 2 in 4Q reopening play given its smaller size and larger exposure to the New York market.
TOST
Hedgeye CEO Keith McCullough added Toast (TOST) to the long side of Investing Ideas this week. Below is a brief note.
The only thing better than having the patience to NOT chase price on a big IPO day, is buying-the-damn-dip AFTER it corrects...
It's interesting, but not surprising, to see consensus panic about Growth Stocks when US Growth is set to #accelerate (Q4 vs. Q4) into a #Quad2.
Buying Software and/or Howard Penney's Toast (TOST) on sale works for me. Here's a good excerpt from Penney’s Consumables Pro research on the name:
|
Takeaway: We presented our pre-IPO Black Book on Toast yesterday. Toast (TOST) raised the price range for its IPO from $30-33 to $34-36 earlier in the week. The offering price was subsequently raised again to $40. Shares opened trading at $65 today. Shares opened above the price range we highlighted in our pre-IPO Black Book. Comparing to publicly traded peers we thought the shares could trade up significantly. Not only did Toast have a larger TAM in the restaurant sector, but it also is set up to have a more dominant competitive position. |
bros
Hedgeye CEO Keith McCullough added Dutch Bros (BROS) to the long side of Investing Ideas this week. Below is a brief note.
What's nice about episodic-and-non-TRENDING US stock market corrections is that you get to buy new things on sale...
Alongside TOST (which I'd be buying more of here alongside ONON), one of Consumables analyst Howard Penney's new IPO Longs is Dutch Bros. (BROS). It's on sale here today.
Here's a good intro to the company from our Consumable's Pro research product:
|
Takeaway: We hosted a BROS pre-IPO deck on 9/14 @ 2 PM ET. The Dutch Bros concept looks strong and is an interesting competitor to SBUX. BROS is an owner-operator and franchisor of drive-thru shops that focus on serving quality, hand-crafted beverages with substantial average unit volumes. Founded in 1992 by Dane and Travis Boersma, Dutch Bros began with an espresso machine and a pushcart in Grants Pass, Oregon. Once public, BROS will be one of the fastest-growing restaurant companies by new store growth at 20% annually. |
PLUG
|
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. |
As we see it, PLUG’s largest business is issuing shares of its own stock.
The sales pitch has shifted to a ‘hydrogen future’ because the current business – unprofitably selling fuel cells for forklifts/materials handling equipment that can operate indoors – is being disrupted by lithium-ion battery options. In its materials handling business, PLUG gave warrants to customers to incentivize sales, issuing over 100 million shares to its two largest customers for taking equipment. PLUG had a sizeable restatement just seven weeks after completing a $2 billion secondary offering…not a classy move.
RRGB
|
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). |
We presented our Restaurant Industry Themes Black Book this past week. We see inflationary pressures persisting for casual diners. The pervasive impact on the restaurant industry can not be ignored. Labor is a critical issue for the industry, and it requires extraordinary moves by companies to attract a quality labor supply.
As Hedgeye's Macro Team said last week, "the fastest growth in money printing globally has predictably produced not just the fastest pace of asset price inflation on record, but also the highest rates of global price inflation in decades." The Delta variant caused sales trends in August to cool, and it has continued to impact sales trends into September.
Soon difficult comparisons will begin in March 2022, as a result we are maintaining our cautious stance on casual dining into year-end.
SJM
|
Short Thesis Overview: Management lowered EPS guidance a quarter after raising it due to higher than expected inflationary headwinds. J.M. Smucker (SJM) 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%. |
J.M. Smucker surprised the market a month ago when it lowered EPS guidance for the year by about 5% from $8.70-9.10 to $8.25-8.65. Management cited pricing actions are expected to lag cost inflation. So Q2 is expected to have the most impact with EPS down 15% before price increases are implemented.
Management now expects COGS inflation to be up high single digits. It was only a quarter ago when management indicated that inflation could be handled and guided above consensus expectations. Now management has guided the year below where consensus was a quarter ago.
J.M. Smucker is on our short list as we are below management’s expectations on the ability to pass on price increases with its portfolio of weaker/promotional brands. J.M. Smucker disproportionately benefited from the shift to at-home meal consumption. The reversal of at-home meal consumption trends and inflationary pressures are driving our below consensus projections for the company.
SFIX
|
Short Thesis Overview: There are clear negative implications there for sales predictability, gross margins, inventory turns and capital intensity. We don't think management is planning for having to compete like we think it will be forced to. This company was something special in its early pre-IPO days. Now it’s become just what the tech investors don’t want to admit – a retailer. Retailers trade on earnings and cash flow. A $40 stock definitely doesn’t respect that reality. |
When Stitch Fix went public in November of 2017 it was largely viewed as a broken IPO. Priced at $15 – well below the range of $18-$20. What people did not realize at the time is that the model as it existed in 2016/17 was the best that SFIX had to offer. The company captured the sweet spot of its TAM at ~1.5mm customers, who were spending $550-$600 with SFIX per year. The core customer here is someone who needs style advice, and is comfortable paying for a shipment (or a ‘Fix’) of apparel sight unseen, but curated for them specifically by extensive algorithms combined with (live) stylists.
Keep what you like, send the rest back. If you send it all back you pay $20. Gross margins were 45-46%, and importantly its customer acquisition cost (CAC) was at trough levels of ~3% of revenue. The company turned its inventory at 18x, which is like lightning in a bottle for a retailer (apparel asset turns generally range between 3-4x), and it generated 60% return on capital and 80% ROE. The problem here is that with the IPO came extremely high growth expectations, and in chasing them the company ran out of TAM way too quickly. By 2015 it had 867k customers at an operating margin of 10.6%. That was solid.
The company should have frozen growth at that point. But it didn’t. In its peak earnings year of 2016, it launched Men’s, after which the company saw a 12% decline in spending per customer (while the company was in the IPO process). Men spend less than women on premium apparel, and they cost more to acquire. Then, less than a year later, it launched Kids. By this time operating margins had fallen to 3.5%.
Then, just two months after launching Kids, SFIX announced that it was launching into the UK in 2019 – the complexity of which cost SFIX another 200bps in margin. So over a 5-year time frame of spending more in CAC for a lower-yielding consumer, EBIT declined from $64mm to $23mm, despite adding $1bn in revenue and 1.5mm net new customers.
Perhaps the biggest admission that SFIX had run out of TAM was in December of 2019 when it introduced ‘Shop Your Looks’, otherwise known as ‘Direct Buy.’ This offering allows shoppers to go online and pick their own assortment instead of a computer algorithm and a stylist doing it for them. So let me get this straight, a company that was built on custom personalized curation of apparel and charging a premium to the consumer that needs the styling advice decides to abandon that model and put the product selection decision in the hands of the consumers.
How is this different from going to www.nordstrom.com? It’s not. Actually, Nordstrom has 10x the assortment that SFIX has – with the inventory and the discounting mechanism to compete aggressively for the business. Gross Margin will be the a major shock to the model. With Direct Buy the company opens itself up to severe competition, something that its ‘personalized curated’ AI model has been isolated from in the past. We think the company competes away 500-600bp of Gross Margin over a TAIL duration.
We think it’s headed back to its IPO price, and then lower.
OMC
|
Short Thesis Overview: The agency model for Omnicom (OMC) is secularly challenged; plagued by in-sourcing, fee compression, high labor intensity and fierce competition. 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. |
We expect agency’s will continue to struggle to attract/retain talent as the best and brightest get poached by their customers or move on to the platform side (e.g., Facebook, Google, etc) – both typically offering improved work/life balances.
We have been stalking these names on the short side since early spring, but haven’t added them to the position monitor because of accelerating economic growth and recovery in advertising spend. However, as we look to the back half of 2021 and into 2022, we expect advertising growth rates to decelerate meaningfully from here. From a positioning standpoint, we view these shorts as an attractive way to hedge out some of the cyclicality in our secular, digital longs (e.g., Facebook, Google, Twitter, Roku)
SFM
|
Short Thesis Overview: With growing concerns about their plans, 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. |
Sprouts Farmers Market’s, a chain of roughly 360 natural grocery stores, 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 appears aggressive.
The company has changed its strategy from using promotions in fresh produce to drive traffic to its stores to an Every Day Low Price (EDLP) strategy. Sprouts Farmers Market does not have its historical traffic drivers, circulars and promotions. Without the benefit of store traffic growth from the return to pre-pandemic shopping habits Sprouts Farmers Market will .
There is increased risk to the top line and gross margins by winning new grocery shoppers in an environment with elevated digital spending. The company is also changing its future store format to shrink the size by reducing the backroom. This requires additional distribution centers to implement, but the smaller store size is expected to reduce the capital investment and improve returns. The smaller investment and higher returns are expected to lead to an accelerated store opening plan.
However, lower sales would lead to lower returns, jeopardizing the double-digit store growth plan and the company’s multiple.
kr
Hedgeye CEO Keith McCullough added Kroger (KR) to the short side of Investing Ideas this week. Below is a brief note.
We know why bears buy "defensive" names like grocers and staples (they thing US Growth is slowing). Kroger is a good example of a recipient of the Delta Variant slowing the real Services economy in Q3.
But what happens as covid cases continue to slow and the real Services economy re-opens (for real this time) during #Quad2 in Q4?
Here's a good excerpt from Consumer Staples analyst Daniel Biolsi and Howard Penney's Consumables Pro research product on the name post what was a widely expected "good quarter":
|
Management raised EPS guidance from $2.95-3.10 to $3.25-3.35. Guidance for ID sales was raised from -4% to -2.5% to -1.5% to -1.0%, with the 2H expected to be flat to slightly positive. That implies a ~300bps deceleration in the 2H on a two-year stack basis. Management now assumes inflation to be 2-3% in the 2H. As they return to the office has been postponed, and indoor masking rules have been reinstalled in certain areas, food at home has benefited. A long investment in the grocers is also a bet on life not resuming to pre-pandemic behavior. |
