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Long: AMN, PLBY, PSA, FWONK, ROK, AMH, RH, VLVLY, BYD, PENN, CUBE, TOST, BROS, DUFRY Short: RRGB, SJM, SFIX, SFM, KR, COLD |
Below are updates on our twenty current high-conviction long and short ideas. We have removed Plug Power (PLUG) from Investing Ideas. We have added AmeriCold (COLD) 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). |
AMN Healthcare (AMN) shares seemed to stabilize this past week in the mid-$90s after a sell-off the week prior. Rates for RNs have backed off a bit but remain at elevated levels compared to almost any prior period, ever.
The stock remains stuck in MicroQuad 4, which is what happens when the consensus estimate outlook is cloudy (rate of change/slope turns negative). In this case, it’s amazing that sell side analysts are holding 2022 estimates ~10% below where they expect revenue for FY2021 to ultimately land (~$3.28B). We’re sticking with AMN given the consistent drumbeat of staffing and labor strain news that’s ultimately positive for the company.
As the most recent wave of COVID-19 caused by the Delta Variant fades, we believe AMN will continue to be successful in providing staffing across the country where needed for multiple reasons. As we wrote this past week in Wednesday’s Morning Brief:
If you think the tailwinds for AMN may be transitory, check out How 2 CNOs are tempering staff resentment toward travel workers (Becker's). "Aya Healthcare, a healthcare staffing company, told Becker's the company is experiencing an increase in demand from all over the country, with more than 58,000 open jobs, driven by various factors including the pandemic, an increase in permanent vacancies across hospitals nationwide, burnout and overall higher census."
Wages may fluctuate slightly, and postings/requisitions may fluctuate, but one job posting doesn't mean the staffing agency or marketplace only needs to fill one position (i.e., it's not a 1:1 relationship - one posting could mean there are 3+ spots to fill), and management wants to give FTEs time off, etc. Also, "Vivian Health, a marketplace for healthcare hiring, reported the same trend. In September, Vivian Health saw all-time highs for demand for travel nurses — 68 percent higher demand than September 2020. The marketplace also saw all-time high average pay for travel nurse contracts, at $3,110 per week (a 39.4 percent increase compared to September 2020)."
Last for today, the company often experiences a boost during the flu season – vaccinators are often needed – and the #reopen appears to have resumed. We will continue monitoring our proprietary Job Postings Trackers and scanning for risks, and we’ll update subscribers on any future changes in positioning.
We remain Long AMN Healthcare on the Hedgeye Healthcare 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. |
PLBY unveiled a new NFT launch called “Rabbitars” which are NFT Cartoon Rabbits. However, the Rabbitar NFTs are much more than a simple unique collectible or artwork.
Rather, Playboy is creating its own world in the metaverse, and it appears the Rabbitars will be keys to access exclusive content and experiences within the Playboy ecosystem/community. The Rabbitars go on sale early next week. This is a big step vs what the company has done so far in blockchain content.
We continue to think NFTs and modern blockchain/digital content are going to be a significant consumer market in the future. PLBY has made it clear it wants to be a leader in this budding space. We see this as a $10bn+ EV company over a 5-year time period – with NFTs as just one of the components to the ecosystem the company is building around the brand.
Source: PlayboyRabbitars.com
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. |
Best Idea Long PSA will be reporting 3Q21 results after the market closes on Monday, November 1st, in what we believe may be the most important quarter of FY21 since the company reported its first ever guidance in April.
We say this because investors will begin to look for signs of any RoC deceleration in SSNOI growth, which is coming eventually and would by definition translate into a deceleration in earnings growth.
Average realized rental rates will likely accelerate further to the mid-8%-to-9% range in 3Q/4Q, but the question is whether occupancy normalizes and declines here offset some of the rate growth benefits leading to an overall slow down. The math tells us that the story has legs through year-end and that 1Q22 will be the time to revisit, but will of course re-evaluate with the quarterly results.
We are essentially in-line with Consensus on our $3.24/share Core FFO estimate, and think the bias is to the upside with the stock likely a further winner 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. |
U.S. viewership for the Turkish G.P. came in at 716k (up 63% YoY), the average viewership for the season now stands at 883k, up 54% YoY. We expect the next two races, U.S. (October 24th) and Mexico G.P. (November 7th), to be highly watched as they are typically the most viewed races behind Monaco.
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. |
Tight, inflationary labor conditions continue to highlight the need for automation investment. As capacity utilization improves, organic growth should remain robust - a metric that typically correlates with ROK’s valuation.
Manufacturing is likely to become more skill intensive as automation & robotics facilitate higher wage, and formerly low cost regions (e.g. China) become less attractive. Most recently, restaurants are experimenting with robots* in the face of labor shortages.
Food and Beverage makes up ~20% of sales for Rockwell. Rockwell reports 4Q21 earnings on November 2nd.
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. |
It seems like the entire REIT world has been sleeping on Best Idea Long AMH recently, which remains our favorite TAIL duration long among the REITs we actively cover.
To be fair it is not the best stock in Quad 2 historically, but as we sit here in October we are about ~6 months away from FY23 being the story, and our model and math shows that earnings estimates are still at least ~15% too low.
The long-term earnings power for this company is materially higher than the ~$1.35/share run-rate currently, likely approaching ~$2.00/share within 3 years and even then we would consider it to be the early innings of a perhaps decade-long secular growth story.
For now the key is risk-managing the position, but we think of AMH as a core long. The current 1% dividend yield is understated and likely to almost double over the next two years as cash flow accelerates.
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. |
It’s almost an insult to compare this company to the US-focused group of US retailers that it’s commonly caught up in. Unlike traditional furniture retailers RH has real pricing power, as evidenced by higher prices offsetting higher freight costs throughout the past few quarters.
On top of the pricing power, the global growth angle here in luxury furniture and home furnishings, restaurants, hotels (Guest House), and tangential businesses like luxury yacht and aircraft experiences simply cannot be replicated.
We’re looking at TAIL earnings power of $50, 70% return on invested capital, a truly massive global competitive moat, no real peers, and on top of that a bullet proof balance sheet. it’s undeniable to us the trajectory of where this company, this model, and ultimately the stock are all headed.
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 reported 3Q21 earnings on Thursday with the company beating on headline numbers. Orders should improve during 4Q as 2022 build slots are filled out.
The higher margin service and parts business grew, aided by high utilization rates and aging fleets. Volvo should benefit from the spin of Daimler Truck, expected in December, a structural improvement that should support pricing.
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. |
In addition to the traditional “regional markets”, we remain bullish on the Las Vegas locals’ market. This week we got an update from one of our favorite forward-looking macro factors of the Las Vegas Local economy, and the data continues to trend in the right direction.
In this installment of our macro checkup, we’re looking at a strong population growth proxy – out of state driver’s license surrenders. Home prices and equity build (touched on more frequently) are some of the stronger leading indicators for consumer confidence and consumption power for LV Locals gamblers, and another input that matters significantly to future GGR growth is population growth.
Population data series generally come out on a significant lag, but driver’s license surrenders offer an early glimpse at where trends could be headed for population growth side. We continue to like BYD as a Best Idea Long as the backdrop is very favorable.
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 almost all regional gaming markets have bounced back in September despite our concerns on how the South segment might look.
Even with the Hurricane Ida impact in mind, both MS and LA posted solid SS casino revenue growth which was up ~8% on a combined basis (vs 2019), accelerating materially from August’s growth rate of down 1%. Once again, the regional markets are proving resilient, and the South has been a leader on that front.
October is next on deck and our intra-month insights point to solid trends, and the month will benefit from extra weekend days vs 2019. Could growth accelerate from a strong September? We think that’s a good possibility and remain bullish on PENN and the regional casino stocks.
CUBE
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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. |
Essentially the same commentary holds true for Best Idea Long CUBE as with PSA, however we model (1) a faster overall SSNOI/Core FFO growth rate over the next twelve months for CUBE, (2) a slightly longer runway before any potential deceleration kicks in (1-2 quarters), and (3) more upside to Street numbers.
CUBE also has the added benefit of being able to flex its low-levered balance sheet against a smaller portfolio size, potentially “juicing” the overall Core FFO earnings growth rate in a highly accretive manner.
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. |
Restaurants are struggling to find workers. Prospective employees would much rather work at a Target, Amazon, or Walmart and make $15 an hour rather than work in the grueling environment restaurant’s offer.
With such a crisis, the restaurant industry is faced with a tough decision: pay employees higher wages and make very low margins or use technology. Most restaurants are choosing the latter. POS systems do not only provide payment processing and accounting.
Though there are a few systems which provide a full array of products, Toast does provide the full “restaurant ecosystem” of products. From aggregating mobile/delivery orders, to providing marketing tools to restaurants, to offering payroll/team management, Toast offers the full suite of products which any restaurant may need.
Toast allows restaurants to shrink their workforce and become more efficient, especially in a historic labor shortage.
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 has shot up 86% since their IPO Sep. 15th. The company has a unique franchising model which helps it find dedicated franchisees who embody the company culture. Dutch Bros no longer offers the option to franchise to the public.
All franchisees must have worked for the company for three years including one year as a manager. To allow these employees to easily open the franchise, the employee only needs $150,000 to open a location. In addition to this, the company has very few outright closures of these franchises.
The company will buyout a franchise at a 4x EBITDA multiple before they close it. From 2014-2017, 28 locations were reacquired and only one location was closed. This franchise model has allowed the company to have great success in terms of opening successful restaurants.
DUFRY
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Long Thesis Overview: Despite management teasing a 2023 recovery, we think the Street (and the current price) is still too conservative in not expecting a full recovery for another 5-years – particularly the European investment community. We think we’ll see a full recovery by 2023, on an EBIT margin double pre-pandemic rates. There’s your first paycheck. Then you get your second paycheck on the Hainan JV with Alibaba, which we think is running ahead of schedule (management is keeping people grounded here with expectations). That gets you paid by another CHf165mm, (1.50 per share) once the JV kicks into high gear in 2023. With the meaningfully higher margin profile comes the cash…and we think that the company will take out 15-20% of its share count over a TAIL duration – that is, unless it continues to consolidate the 88% of the industry it does not control. |
Dufry’s stock has seen pressure over headline fears of Covid cases rising in Europe and talk of Delta+ in the UK. The headlines though are really just that, headline news trying to get eyeballs. If we look at underlying restrictions and actual leisure travel demand trends, things are all moving in the right direction for Dufry.
With Covid’s impact receding in many parts of the world as vaccination rates push higher, lawmakers seem to be providing a more conducive environment for travel. The announcement of looser travel restrictions between the EU, UK, and the US have been positive developments for leisure travel sentiment and we’re seeing demand data reflect the easing of travel restrictions.
On our side of the pond TSA throughput continues to climb, flight capacity continues to increase, and scheduled flights tick up as well which is bullish for Hudson. Hudson is 20% of Dufry revenue, which is small, but provides a glimpse into what the future could look like for the other 80% of the business since we know Europe and the UK lag America’s recovery by several months.
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). |
This week’s earnings warning from Brinker (EAT) was a wake-up call for investors in Casual dining names. The re-opening was always going to be a challenge for many Casual Dining companies. Managing labor costs when SSS goes from -50-60% to +50-60% is nearly impossible to do without a misstep, and this is what we had from Brinker. It will not be the last company to talk about many of these challenges, nor the last to miss numbers. Red Robin is faced with all the same pressures that Brinker spoke about.
What is new this week? The company’s comments about its supply chain! Did they have a supply chain problem before? As of October 5th, when they released the FY2021 annual report to shareholders, they specifically said, "We have not experienced significant supply chain disruptions during the COVID-19 pandemic."
Now the company is saying, "We are responding to these COVID headwinds with an increased focus on hiring and retention efforts and working with our partners to gain further stabilization of the supply chain environment. The comments suggest that the supply chain needs stabilization. It would be nice to know what parts of the supply chain need stabilizing!
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%. |
J.M. Smucker was a key beneficiary from the pandemic and the shift to at-home meal consumption. The Delta variant interrupted what had been a gradual resumption of away from home meal consumption as seen in the chart below.
With COVID-19 hospitalizations continuing to decline we expect the resumption of the growing share of away from home meal consumption will continue. J.M. Smucker is also dealing with a number of higher costs as a result of supply chain issues just as sales are slowing.
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. |
When SFIX went public in November 2017 it was largely viewed as a broken IPO that priced at $15, well below the initial 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 IPO came with extremely high growth expectations, and in chasing them the company ran out of TAM way too quickly.
The rapid-fire launch schedule of new initiatives since the company came public has brought it too far beyond its core TAM, and way out on the risk curve into a territory that is simply destroying the (once attractive) financial characteristics of the business.
SFM
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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. |
We held our grocery sector black book update this week. Our investment thesis summary for Sprouts Farmers Market is as follows:
KR
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Short Thesis Overview: 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. |
We held our grocery sector black book update this week. Our investment thesis summary for Kroger is as follows:
COLD
Hedgeye CEO Keith McCullough added AmeriCold to the short side of Investing Ideas this week. Below is a brief note.
I've been waiting, patiently, for this rate (and inflation) sensitive REIT to bounce to lower-highs (and confirm my Bearish @Hedgeye TREND Signal) before I sent you a SELL signal...
In Rob Simone's new REIT Pro research product you'll get a breakdown of the Short Idea that includes:
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