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Long: PLBY, PSA, FWONK, ROK, AMH, VLVLY, BYD, PENN, CUBE, TOST, BROS, DUFRY Short: RRGB, SJM, SFIX, SFM, KR, COLD |
Below are updates on our eighteen current high-conviction long and short ideas. We have removed Restoration Hardware (RH) from Investing Ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
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 closed on its Dream (Dream.me) acquisition, which is a startup creator content platform that will accelerate the launch of PLBY’s Centerfold offering.
The company completed its sales of Rabbitar NFTs with transactions in the secondary market now selling for, as of this writing, about 80% more than the original offering price. Playboy also held an NFTNYC party that was exclusive to Rabbitar holders and featured celebrities such as Pamela Anderson and Trinidad James.
These two content initiatives indicate how PLBY is rapidly evolving its brand offering to take a stale model into the next generation in terms of how the company can monetize and grow its brand relevance with customer.
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. |
Both Long Bench PSA and Best Idea Long CUBE topped 3Q21 expectations, most recently CUBE on Thursday evening with Core FFO of $0.35/share a penny higher than our numbers.
PSA continues to execute on the things that we thought were major upside catalysts for the stock, in this case acquiring Dallas-focused All Storage for $1.75 billion, but 100% financed with new unsecured notes issued at a blended ~2.0% coupon. The “going-in” yield on non-stabilized occupancy of ~75% was just ~2.6% (or an equivalent 38.5x EBITDA acquisition multiple).
However, upon lease-up the NOI yield on cost expands to at least 6% for +340bp of yield expansion/value creation and a ~400bp spread to the cost of debt capital. The deployment of this $1.75 billion is massively accretive and exactly what PSA should be doing here. On CUBE, Old Wall numbers remain too low and our math supports FY22 Core FFO above ~$2.40/share with consensus at ~$2.22.
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 U.S. G.P. came in at 1.22m, up 42% since the last race in 2019 and the most-watched race of the season so far. The average viewership for the season now stands at 903k, up 57% YoY.
There are some factors to this impressive viewership number, the first of which is the pent-up demand for the race in the U.S. since there wasn't one last year, and it is the home race for both U.S. fans and Haas F1 team.
The other contributing factor is Red Bull's Sergio Perez; he has a strong following amid amongst the Hispanic community, with Perez often citing the U.S. G.P. to be his home G.P. before the Mexico G.P. was added back to the calendar for the 2015 season.
ROK
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Long Thesis Overview: We expect this to be an unusually good cycle for ROK as developed market automation investment benefits from less ‘offshoring’ of production amid higher emerging market labor costs and other considerations. The capabilities for automation technologies, from machine vision to software to 5G and the like, broaden the market opportunity substantially. Despite being one of the best businesses in our coverage, shares of ROK don’t yet sport the premium valuation we’d expect them to receive as organic growth accelerates through 2H21. |
While HTZZ may get a benefit from buying Tesla electric cars (or not), ROK is building EV factories around the world. In that sense, ROK might emerge as an index play on electric vehicle capacity additions. Oil & gas, life sciences, and batteries check further boxes.
We’ll see more in the 10-Q but we think ROK is an attractive industrial as capacity tightens, industries retool (e.g. EVs), and wages rise. ROK is projecting favorable trends into FY22.
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. |
Great 3Q21 results from Best Idea Long AMH with Core FFO of $0.35/share +$0.01/share versus our model. The stock had traded up into the print following INVH’s beat last week, so were not surprised to see a flat reaction post-earnings.
The thesis here is simple and twofold: (1) accelerating rental rate growth and normalizing bad debt translate into accelerating SSRev and SSNOI growth, and (2) the Street is STILL mismodeling the development platform and how it impacts earnings. The result is an improving RoC and Street numbers that are still 10-15% too low over a TAIL duration. One technical yet VERY important point: management is lowering their initial yield requirement to start a new development project or acquire a home, yet stabilized returns remain unchanged.
Thinking through that, it means that revenue and NOI growth trends are IMPROVING relative to prior underwriting. This is a VERY bullish sign, in our view.
VLVLY
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Long Thesis Overview: Shares of Volvo Group (VLVLY) have lagged other machinery-oriented names despite favorable industry and company specific factors. Trucking conditions in Volvo’s key markets remain extremely tight, while labor conditions may ease in coming months. Construction equipment demand in developed markets should remain reasonably robust, a view supported by fleet demographics, COVID recovery stimulus, elevated commodity prices, and aging infrastructure. We see greater than 50% relative upside for shares of Volvo as robust demand intersects with stronger 2022 pricing. |
Volvo has promising HD truck electrification programs, with little recognition in the valuations for ZEV capabilities. NKLA alone sported nearly half Volvo’s market value with no production on just the hopes associated with lower emissions powertrains.
Concerns around supply chain disruptions should, in all likelihood, be viewed as positives that limit supply, support pricing, and motivate customers into 2022. Volvo is trading at a noticeable discount to peers. A tolerable sum-of-the-parts implies ~50% upside relative to the sector for shares of Volvo group (~kr300), a reasonable risk/reward in the context of challenging hunting in larger cap industrials.
BYD
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Long Thesis Overview: BYD looks like one of the most undervalued stocks in our universe, when measured vs its true potential. We get it, stock is up vs pre-Covid, but the numbers have justified most of the move higher. And yet, they continue to go even higher. There’s also a case to be made that BYD is deserving of structurally higher multiples given the inherent organic growth in its markets (especially LV Locals), and higher flow through, but also for the fact that the negative secular theses have pretty much been dispelled. Do we need to make the case for higher multiples right now? No, with the stock off its highs and numbers way too low, we have plenty of valuation support in our SOTP analysis. |
BYD posted yet another strong quarter, despite the Ida and Delta headwinds, beating the Street on the top and bottom line.
Demand trends accelerated late in Q3 and into October, amenities are only being brought back if they grow EBITDA, cash flow is huge, target leverage is much lower than historical levels and the company is already there, and CapEx needs are pretty low.
We think the stock buyback authorization will be exhausted quite quickly and more is on the come. This is turning into a compounding story, among other favorable investment qualities, and we recommend investors buy along with the company at current levels. BYD remains a Best Idea Long at Hedgeye.
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’d characterize PENN’s Q3 as disappointing primarily because margins compressed sooner than we thought they would. But the offset was a powerful start to Q4 and market share gains in the OSB/iG segment.
When the stock indicated down slightly, we weren’t surprised. Then it quickly dropped double digits which seemed like an insane overreaction until we heard about the Portnoy piece in Business Insider nicely timed for PENN’s earnings day.
Dave Portnoy is a loose cannon, and we can’t predict how this will all shake out, but this is certainly a wild card. It might be a while before PENN gets any credit for SB/iG or the Barstool media business, but even allocating $0 in valuation credit to those future business lines, we see PENN worth at least $70 per share on a standalone, pre-Barstool pre-theScore.
The cash flow generation inherent in PENN’s regional portfolio should be robust for years to come and PENN remains a Best Idea Long at Hedgeye.
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 few businesses that are ran by the engineers who developed the product itself. Facebook, Amazon, and Tesla to name a few.
These companies have something unique. The management teams of these companies truly understand the full capacity of the product and can directly spearhead development and improvement of it. In the case of Toast, the President and co-founder Steve Fredette, graduated from MIT and had built several applications on iOS before founding Toast.
In addition to him, Aman Narang, COO, also graduated from MIT with a degree in Computer Science and was a product lead at a software company before co-founding Toast.
Having two engineers on the management team of Toast allows them to be involved in both the financial decisions of the company, and then tie these into the product development. This gives Toast a unique edge over several tech companies.
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 is getting in the holiday spirit by offering seasonal drinks at all their locations. They will offer Peppermint Bliss Cold Brew, Hazelnut Truffle Mocha and Glacier Peak Rebel.
The Glacier Peak Rebel is a spin off their best-selling energy drink, Blue Rebel, which is now topped with a sweet marshmallow like foam and sugar crystals.
Dutch Bros is most popular with the 16-25 demographic which drives 51% of their sales. The most popular drink on their menu is their Blue Rebel energy drink which makes up 24% of their revenue. These new holiday drinks will drive incremental traffic into their locations and make for an accelerating Q4.
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. |
Hudson recently opened its first full-service restaurant and bar, Plum Market, at Dallas Fort Worth Airport.
Maybe this opening is a scalable concept for Dufry, or maybe it is a “test-run” to understand the nuances of how to operate airport restaurants and kitchens before making a splash in the M&A market.
In either case, we like the move as food and beverage has been a point of emphasis for expansion with Dufry as its just another way that the company can get customers in its ecosystem and generate sales.
The move also plays into something Dufry CFO Yves Gerster suggested during his fireside chat with us a few months ago which is that with F&B Dufry could possibly obtain a master concessionaire contract for airports which come at better terms, rather than just a single concession and allow Dufry to organize its shops in the airport in the most advantageous way for sales.
We like both the macro direction of travel recovery and the micro moves that Dufry is making at the moment.
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). |
Several restaurant companies reported quarterly results this past week. Cheesecake Factory’s call hit on the themes that are impacting all casual diners. The company’s inflation comments were:
"Looking ahead to fiscal 2022, due to the disruptions in the supply chain impacting the restaurant industry and the broader economy, our purchasing team is still in the process of contracting, as you would expect in these circumstances. Note that while we currently have 3% pricing in The Cheesecake Factory menu and plan to remain at that level for the remainder of this year, as David mentioned, should the cost pressures prove not to be transitory, we will implement further pricing actions at our menu change during the first quarter of next year to protect margins. Specifically, if commodities were to remain at current spot pricing levels for the full year of 2022, it would require us to take an additional 1.5% to 2% of menu pricing for a total of 4.5% to 5% of menu pricing to support our margins. The labor market is also dynamic and inclusive of known minimum wage increases; we are currently anticipating Inflation could be around the 5% level we are experiencing at our restaurants this year so far."
Our current MACRO in-house view is that Inflation is not looking transitory! Raising prices at that level will be a challenge for Red Robin and other casual diners.
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%. |
Black Rifle Coffee, a new competitor in the bagged coffee space has been growing at a rapid clip.
This past week the company filed to go public via a SPAC merger. The transaction with SilverBox Engaged Merger Crop I values the company at $1.7B. Black Rifle will raise $100M through a PIPE alongside the merger.
Engaged Capital, a backer of SilverBox Engaged, will also invest $100M. Former Green Beret Evan Hafer founded Black Rifle. Black Rifle commits to hiring military veterans, and about half the employees have worked in the armed forces. The company expects to reach $230M in sales this year, representing 40% growth.
Most of the sales are online, but in the future it plans to accelerate growth through stores and wholesale. Coffee is JM Smucker’s most profitable business segment.
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. |
Last quarter, inventories for SFIX were up 70% Y/Y as the company ramps up its Direct Buy feature.
Yes, you read that right, 70% growth. That inventory build happened on only 29% sales growth. Guidance for the first quarter is for 14-17% revenue growth, and for the year it’s 15%+. 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 due to the amount of continual inventory build that the Direct Buy Program will require. Check out the SIGMA chart, the blue line shows where SFIX’s margins, inventory and revenue triangulated last quarter.
Shifting down into the Quadrant3 Red Zone is a very bearish signal.
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. |
Sprouts Farmers Market reported Q3 EPS of $.56, beating consensus expectations of $.39. SSS declined 5.4% compared to expectations of -3.9%. Gross margins contracted 130bps due to the comparisons and passing through cost inflation to customers.
Compared to Q3 2019, gross margins expanded 265bps from fewer promotions, shrink improvement, and mix. The company cited significant inflation in meat with resistance to the higher price points by customers. Produce inflation has been double digits, but the company has been able to pass it through. SG&A expenses decreased by $52M due to lower pandemic expenses, incentive compensation, and lower marketing and e-commerce costs. Compared to 2019, SG&A spend only up 4.7%.
Management guided Q4 EPS to $.26-.30 vs. consensus of $.34. SSS are expected to decline 3 to 5% compared to consensus expectations of -2.6%. Gross margins are expected to contract less than in Q3. Despite the weaker sales results, management is moving forward on the plan to re-accelerate store growth.
Management is planning for comps to be flat in 2022 as well as EBIT. Management believes the margins are where they need to be, so the focus will be on growing the top line. The plan is for gross margins to be flat in 2022.
Sprouts is pushing ahead with a new strategy and new store format to accelerate store growth, but growing traffic is still a top concern. In addition, the company over-earned during the pandemic – the margin gains will be competed away. As a result, Sprouts Farmers Market is on our shortlist.
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. |
This week Kroger announced an agreement with Bed, Bath, and Beyond to sell some of its merchandise in stores as well as online.
Kroger will feature some of Bed, Bath and Beyond’s home and baby products online and in a select group of stores starting in 2022. The announcement caused Bed, Bath, and Beyond’s share price to trade up 35% and drove up Kroger’s as well, but to a much smaller extent.
Previous collaborations in retail have a poor record of working because of the split of margins. In theory one retailer’s sourcing and brand equity could offer another retailer credibility in a non-core category.
However, in a world connected by online shopping it is not clear what Bed, Bath, and Beyond products inside a Kroger store would bring the consumer.
COLD
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Short Thesis Overview: Simply put, COLD is uniquely vulnerable given (1) its position in the “cold chain,” (2) the structure and mix of its revenue agreements, (3) the composition of its cost structure and high labor component, (4) the risk of integrating recent large acquisitions materializing at exactly the wrong time, and (5) consensus numbers that, in our view, were far too high both in FY21 but especially FY22 and beyond |
We are sticking with Best Idea Short COLD here, following what was one of the more eventful earnings reports in recent REIT history.
The company reported results a day early on Wednesday and simultaneously announced the firing of the now former CEO without cause, as well as three new Board appointments all with operations and merchandising backgrounds. 3Q21 results were in-line with already lowered expectations following the massive guidance cut on 9/21.
We take this as a signal that operations are trending way worse than even we feared when we first added to the Short Bench in late-August. The Board appointments plus permanent CEO search signal the company is likely to undertake the “heavy lift” to fix operations, versus put the company up for sale in the near-term.
This is how we see things playing out over the next ~3-6 months: (1) long CEO search during which USDA data move the stock until February, (2) the stock moving lower as commodity stock and labor issues worsen, and (3) FY22 guidance in mid-February which is “kitchen-sinked” to set a very low and easy bar for the new team.
That will be the time to re-evaluate, but COLD remains controversial and a short for now.
