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Long: AMN, PLBY, PSA, FWONK, ROK, AMH, RH, VLVLY, BYD, PENN, CUBE, TOST, BROS, DUFRY Short: PLUG, RRGB, SJM, SFIX, SFM, KR |
Below are updates on our twenty current high-conviction long and short ideas. We have removed Quest Diagnostics (DGX) & Omnicom (OMC) from Investing Ideas. We have added Dufry (DUFRY) to the long 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 steady drumbeat of Health Care staffing strain headlines persisted this past week. We remain bullish on AMN, which should continue to benefit from above average wage rates and pricing for its staffing services.
Ironically, the issues have yet to impact AMN itself in a negative way, so we’re sticking with the script and Long position on the Health Care Position Monitor. A few charts from our recent coverage of labor data releases highlight the situation nicely, and we think the Street is ignoring what’s happening (why ’22 estimates for AMN are not rising and the stock sits in our MicroQuad 4 bucket). At some point, reality should set in, and numbers will rise, but we’re not yet there.
A quick look at Job Board data, Job Openings, and Wages paints a clear picture of the what’s happening in the trenches:
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 Dolce & Gabbana announced that the company sold nine NFTs for a grand total of $6.1mm with the most expensive NFT selling for $1.25mm. We take this bit of news as very bullish for PLBY and its work in the NFT space.
Playboy has an extremely vast library of content consisting of both previously released and unreleased photos and other items that can be brought into the digital sphere. Just look at the collaboration the company did with artist Slime Sunday back in May where the total collection sold for about ~1mm which was a huge success.
The Dolce and Gabbana drop shows that there is continued demand for NFTs at a high price point, and that does not even include what the revenue cut on secondary transactions will be as some NFTs appreciate. NFTs are just one of the many ways to win with PLBY as this company continues its path to a $10bn EV.
PSA & CUBE
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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. 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. |
REITs have been taking it on the chin a bit over the last 2-3 weeks, but we remain long of the shorter-duration lease, more cyclical and higher beta subsectors such as self-storage.
Best Idea Long PSA, along with peers CUBE and non-REIT UHAL (which are also longs), “re-price” leases monthly, i.e. due to their month-month-lease structure are theoretically better able to “pass on” on inflation more quickly to customers.
Typically existing customers receive an +8-10% rent increase notice (ECRI) during their second year of occupancy in a unit. Over the past 5-6 years pre-COVID, underlying market asking rents were not accelerating fast enough to keep pace with ECRI due to new supply, so when those existing customers vacated there was a “rent roll-down” to a new lower rental rate. This has the effect of putting a ceiling on revenue growth.
Things are different now, however, as accelerating market rental rate growth is positively impacting new lease rates, causing the blend of new + existing leases to be additive to revenue. We think consensus is perhaps ~5% too low on PSA’s FY22 Core FFO, and even further off on CUBE. Self-storage is one of the best performing REIT subsectors historically in Quad 2.
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. |
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
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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. |
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
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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 |
Apparently at recent competitor conferences AMH took a slightly more conservative tone on 2H21 growth rates versus INVH.
We believe it is HIGHLY probable that this reflects (1) a high degree of conservatism which is in the management team’s DNA, and (2) perhaps an effort to “talk down” expectations ahead of rip-roaring FY22 guidance to be provided early next year.
Recently published blended releasing spreads in the same-store portfolio do not indicate a slowdown in growth: +6.9%, +8%, +9.2% in 1Q/2Q/July & August, respectively. That looks like a RoC acceleration to us, and for a forward-looking metric. AMH remains one of the more interesting longs under our coverage over a TAIL duration. Buy the dip!
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. |
Simply put, if you fail to acknowledge that this company is legitimately evolving into a global home furnishings luxury brand (in effect, creating a classification that did not previously exist), then you're either living under a rock, or you don’t respect math.
Operating margin is tracking towards 25%, and furniture companies simply don’t put up these kind of margin levels. People think that the best model in retail is EDLP, or everyday Low Price. But it’s not. It’s EDHP – everyday High Price.
That’s RH. 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.
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, 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
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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. |
Similar to PENN, BYD is benefiting from strong growth in the regional markets as September numbers are setting up for a nice reacceleration. In addition to the regional gaming space overall, 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
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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.” |
PENN remains at the top of our Best Idea Long list as we reiterate the strength of their core B&M business. After a better than expected (given Delta) August GGR month that was chock-full of headwinds, initial September numbers are showing a nice dose of reacceleration back towards the post-reopening levels of growth.
Our MTD tracking, which leans more to the Midwest, had suggested that September was setting up to be a nice reacceleration vs August and so far, our initial checks on the first several states to report imply some positive trends. Key states like IL and MD reaccelerated nicely from August levels, with MD accelerating by over 700bps.
We remain bullish on the regional casino stocks as PENN remains a Best Idea Long.
TOST
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Long Thesis Overview: Toast (TOST) 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. |
There are several POS systems that restaurants can choose, but there are only a few which offer a full range of user-friendly and modern systems. Square and Toast fit these criteria as they are the only two which offer integrated payroll, a key component of the restaurant ecosystem.
The only system truly built specifically for restaurants is Toast. In 2019, Toast acquired StratEx for $250 Million. StratEx is a HR/Payroll software company which offered many synergies with Toast’s POS platform.
Payroll is not an easy business to build as payroll software cannot make mistakes. This strategic acquisition now positions Toast as the only POS software with integrated payroll built for restaurants. We see this as a significant upsell opportunity for Toast.
Most restaurants sign up for basic Toast software which does not include payroll. But as these restaurants can see the value that payroll brings to the table, Toast is able to upsell them and generate additional recurring revenue. Though Toast does not explicitly advertise payroll pricing, companies which offer only payroll for restaurants typically charge between $30-60 per month plus $5 per employee on the payroll.
This recurring revenue stream is especially attractive because as a restaurant scales monthly payments to Toast scale as proportionally. Upselling is one of the key methods Toast can use to increase their revenue stream and payroll is one of the most attractive features it has to offer.
BROS
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Long Thesis Overview: 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. |
Dutch Bros (BROS) is the most interesting restaurant concept to come public this year. The coffee and beverage chain is only in the West at this point, but it can grow by 10x in the coming decades. The company is differentiated by its company culture as it is by its focus solely on beverages.
Despite a relatively low awareness the company has seen higher system average in some of the more recent states it has entered as seen in the chart below. That bodes well for higher system sales averages as it enters new markets in the future. It is also an encouraging sign for its eastward expansion.
DUFRY
Hedgeye CEO Keith McCullough added Dufry (DUFRY) to the long side of Investing Ideas this week. Below is a brief note.
So, from a Full Investing Cycle #process perspective, to review what we're doing today (up your execution game):
A) Clean up the mess
B) Ride winners
C) Incrementally add more #Quad2 exposures
One obvious way to do that is buy back Duty Free (DUFRY) which got smoked alongside Small Cap Factor exposures and the Delta Variant during #Quad3 in Q3.... and is a Long again with Small Caps and the re-opening into #Quad2.
Retail analyst Brian McGough recently hosted the DUFRY management team and has been bullish on The Call @Hedgeye on the name alongside Sean Jenkins’ (our Lodging/Leisure analyst) #Quad2 research callouts all week.
Timing matters.
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. |
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 for Ceres Technologies – a more efficient offering than the PLUG PEM electrolyzers – 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 bear view on PLUG. It is a strangely executed ‘stock-as-product’ scheme, as we see it, with little operating company value.
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). |
Raising Cane's Chicken Fingers announced that it is sending corporate staff to work in restaurants as the chain struggles to fill job openings. Starting this week, about half of the office employees will work as fry cooks and cashiers.
The chain has 530 locations and is trying to hire 10,000 new restaurant workers in the next 50 days. Since July the number of people employed in the food services and drinking places has increased by less than 5,000 despite the expiration of extended unemployment benefits for the pandemic.
Many in the industry were hoping the expiration of benefits would result in a marked increase in job seekers. The industry’s unemployment rate is 7.5%. The difficulty in hiring is widespread causing restaurants to accommodate fewer guests and pay higher wages. As a casual diner Red Robin requires more labor than quick service or fast casual concepts.
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 (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%. |
According to NPD, consumers brewed about 73% of their coffee servings at home before the pandemic and sourced 27% from the foodservice channel. During the pandemic that shifted towards 81% of coffee was sourced from home and 19% from food service.
According to IRI, coffee sales in the supermarket channel increased 3.6% in the year ended May 16 to $5.9B. Consumers also shifted toward higher-quality coffee while brewing at home.
Sales of single-serve brewing systems, including pod coffee makers, increased 11% in the year ended May 2020 and accelerated to 26% growth in the year ended May 2021.
Sales of non-electric coffee presses, including French presses, increased 7% in the year ended May 2020 and accelerated to 12% in the year ended May 2021. Sales of non-electric pour-over coffee increased 17% in the year ended May 2020 and accelerated to 23% in May 2021.
In recent weeks, price increases of 10 to 20% have started to flow through the coffee bean category. J.M. Smucker has been a notable beneficiary of more consumers brewing coffee at home which peaked months ago.
SFIX
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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. |
If there was ever a time for SFIX to put up great numbers, this was the quarter to do it. Nearly every apparel company is smoking top line and gross margins, as we’re seeing the best selling environment for apparel in a generation.
SFIX certainly didn’t disappoint, putting up $0.19 vs the Street at ($0.12) and our estimate of ($0.08). But that’s where the good news ends. Nearly everything we heard validates our concerns about this business model, the company strategy, and the long-term earnings power of the company.
First off, the quarter included a $0.17 per share benefit from reduced marketing expenses, which were pushed into 1Q. Adjusting for that the company barely broke even. Second, inventories for the quarter were up 70% on 29% sales growth. Guidance for the first quarter is for 14-17% revenue growth, and for the year it’s 15%+. Aside from a lower growth profile relative to what we’ve seen historically and vs 2020, that’s VERY gross margin bearish in the face of such high inventories.
SFIX is becoming an online version of a department store. 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.
SFM & kr
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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. |
Grocery demand reaccelerated in August with the Delta variant as seen in the chart below. Overall demand for Consumer Packaged Goods in the grocery store channel has hovered around 0-2% since the first week of August. At the same time inflation has accelerated from 3-4% in July to 6% in the most recent week.
Without the price increases demand would be down compared to 2020. Higher rates of inflation will force consumers to change aspects of their pandemic shopping behavior from not being as price sensitive, one-stop shopping, and less promotionally driven.
With the return of most children to school and a slow return back to the office grocery demand will decline.
The Delta variant has made the shift to at home consumption seem more permanent than investors thought a couple of months ago, but it likely just pushed out the eventual recovery. Grocers will see sales declines as COVID-19 concerns lessen.
