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Long: PLBY, PSA, FWONK, ROK, AMH, VLVLY, BYD, CUBE, TOST, BROS, DUFRY, PCAR, SPOT, BIRD Short: RRGB, SJM, SFIX, KR, COLD |
Below are updates on our nineteen current high-conviction long and short ideas. We have removed Penn National Gaming (PENN) & Sprouts Farmers Market (SFM) from Investing Ideas. We have added PACCAR (PCAR), Spotify (SPOT), & Allbirds (BIRD) to the long side. 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 reports 3Q results on Monday after the close.
This is an important quarter for PLBY, not so much because of the quarter to be reported, but rather the forward outlook and commentary from the company with several key initiatives all accelerating the monetization of one of the most recognizable consumer brands in the world and starting to close the massive gap between brand power and relevance versus what is recognized on the P&L and in the company valuation.
Since last quarter, the company has launched a unique NFT/metaverse offering with Playboy Rabbitars and announced a creator led content platform called CENTERFOLD that will compete with OnlyFans. Both were not in the consensus view of where the Playboy brand is going, and they are in addition to several business initiatives in sexual wellness, style and apparel, beauty and grooming, and gaming and lifestyle.
Maybe the company has too many opportunities in front of it, juggling multiple initiatives presents some challenges, but just a couple need to be successful for the value creation here to be immense, and over the long term lots of the growth businesses can be home runs for PLBY.
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. |
We went back and recut the numbers across self-storage post-3Q21 results, and we are highly confident that the inevitable RoC deceleration in revenue and earnings for the space is a 2H22 story given the current pace of rental rate increases.
In both PSA’s and CUBE’s cases FY22 Core FFO estimates appear roughly ~8-10% too low, and our numbers incorporate 20-80bp of occupancy loss next year offset by rates up nearly +10%.
Both property taxes and especially payroll expenses will be above average next year, but we have modeled +5% growth for both line items yet (1) still see a good chance for rate-drive NOI margin expansion and (2) low-double-digit SSNOI growth which basically never happens, not even post-GFC.
We are long the sector through 1Q22/early-2Q22 at which point we will need to pay close attention to the signals. If you are going to be long individual REIT stocks here in Quad 2, self-storage NEEDS to be part of that allocation.
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. |
Mexican G.P.: F1 returned to Mexico this past weekend, which was in full swing to welcome back Red Bull's Sergio Perez to his home country. Red Bull and Mercedes battled it out over the practice, and qualifying sessions, with Mercedes grabbing a front-row lockout of Bottas and Hamilton; Red Bull's Max Verstappen claimed third position.
The start of the Mexican G.P. was highly eventful, with Verstappen flying by the two Mercedes into turn one to take the lead. Things went even more downhill from there for Mercedes as Bottas got spun by McLaren's Ricciardo, resulting in both racing at the back of the pack. The later stages of the race saw Sergio Perez charging from third to try and take second away from Hamilton, but he couldn't make a move to home crowds' disappointment.
The race ended with Verstappen taking the win, Hamilton in second, and Perez in third. We go into this weekend's Brazilian G.P. with Verstappen leading the Drivers’ Championship by 19 points and Mercedes leading the Constructors Championship by only one point. With four races left in the season, anything can still happen.
U.S. viewership for the U.S. G.P. came in at 968k, up 14% since the last race in 2019. The average viewership for the season now stands at 907k, up 58% YoY.
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. |
Just this past week there was an Old Wall Journal article discussing (1) the MASSIVE influx of capital into the SFR space recently and (2) the sustainability of returns given the added competition and scarcity of attractively-priced land.
We have been saying this for awhile on Best Idea Long AMH, but perhaps its greatest competitive advantage and the distinguishing factor versus the rest of the space is the ~$1.2 to $1.5 billion of warehoused land (~15,000 units) on its balance sheet to be delivered at an annual cadence of ~3,500-4,000 homes by year-end 2023.
This is on a base of just over 50,000 existing homes in the portfolio and with a ~30 day period to lease, so we are taking about a high-single-digit NOI and earnings growth contribution ON TOP of same store growth over a tail duration.
We are always cognizant of potential negative impacts from supply on pricing and returns, but that seems a long way off given the still nascent industry and lack of affordably-priced single family homes. From a signal perspective, both AMH and INVH appear to be consolidating and remain bullish TREND.
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. |
Still many states left to report October casino data, but thus far, regional gaming trends are looking up for the month and at an accelerating rate. The big wildcard states like MS and LA will likely drag down the current 13%+ growth number; however, operator commentary across the board was positive for industry trends into Q4 so LA and especially MS could surprise to the upside.
Outside of MD and KS, every other state has put up nicely accelerating revenue growth vs September, and as a reminder September came in a bit ahead of expectations. The below indicates same-store casino revenues, so excluding the positive impacts of Sports Betting, iGaming, and new properties on the total pie.
We recognize that focus could already be shifting to November and December trends, and we’ll have an initial read and update model forecasts out for those months, but if October comes in as strong as it has been so far, then investors should take note. Another month removed from stimulus thrust, pent up demand, extended UI benefits, etc. and we’re still seeing strong top line trends.
With that in mind, given the fading Covid impact across the US and perception around Covid, we think there’s still a nice tailwind for casino patronage to tick up, led by the older demographic. We remain bullish on the regional casino stocks, and BYD 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. |
At the large Restaurant conference in Las Vegas last week, Paul Brown of Inspire Brands said: "The restaurant industry is the last really large industry in the United States that has seen virtually no improvements in productivity." The long case for TOST is they are digitizing an industry in desperate need of help.
Importantly, the company delivered on a strong first quarter as a public company. Toast, Inc. reported 3Q21 Revenue of $486.4M vs. FS $433.6M and GPV $16.5B, +123% YoY; ARR at the end of September was $543.8M, +77% YoY reported 3Q21 adjusted EBITDA ($9.7M) vs. FS ($43.3M). 4Q21 Guidance is for (A)EBITDA ($50M)-($40M) vs FS ($55.9M) and Revenue $465-495M vs FactSet $447.5M. FY21 Guidance (A)EBITDA ($46M)-($36M) vs FS ($88.7M) and Revenue $1.655-1.685B vs FactSet $1.58B.
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 employees are all called Broistas. These broistas are usually groups of young and close-knit individuals. This unique culture of an energetic work environment is what leads to its largest customer base of the 16-25 subgroup. Individuals 16-25 make up more than 50% of the company sales.
The most popular drink on the company’s menu is the blue rebel energy drink which explains why the target demographic is teens. This brand will remain popular with that segment as long as the company’s culture and beverages match their preferences.
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. |
A point about Dufry that often gets brought up is the fact that historically airports/landlords have continually jacked up rents from 15% of sales to 30% of sales over the previous 10-15 years and will continue to extract all the value it can from operators like Dufry. While that may have been an option in the past it is not anymore.
The extreme passenger drop and rent abatements/MAG Relief helped landlords to see that they are in a symbiotic relationship with the operators meaning when one is hurting the other will be hurting as well. As a result of this realization, Dufry has stated 1.
That it has had rent renegotiations with a large number of landlords (bullish for rents) and 2. That 80% of its leases subject to MAGs have been renegotiated to include a variable component (bullish for rents).
When the leases have a more variable structure it won’t allow the airports to just jack up rents the way that has happened in the past, and on the flip side if business trends well the operators won’t extract more fixed rent dollars since the uptick in business trends will be reflected in the variable rent component.
pcar
Hedgeye CEO Keith McCullough added PACCAR (PCAR) to the long side of Investing Ideas this week. Below is a brief note.
The best part about a Go Anywhere strategy... is that we can go anywhere!
Selling-SOME of our fav greens and buying things on red is what we want to be doing as SPY inches closer to the top-end of my Risk Range...
PACCAR (PCAR) had a good quarter, breaking out on #accelerating volume. It's correcting today on #decelerating volume.
Here's a good summary excerpt from Industrials analyst Jay Van Sciver's Industrials Pro research product #subscribe:
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PCAR | Rebounding For Good Reasons The truck industry should undergo a major structural change this quarter with the spin-off of Daimler Truck. We expect Daimler to seek higher margins via pricing. Hints of that are seen in the delays for opening build slots for 2022. If we are reading that correctly, we think PCAR and Volvo are straightforward beneficiaries. |
SPOT
Hedgeye CEO Keith McCullough added Spotify (SPOT) to the long side of Investing Ideas this week. Below is a brief note.
#Process: first I cover shorts on red, then I start buying longs that are on sale...
Spotify (SPOT) is a good example of:
A) Bullish @Hedgeye TREND Signal that my analyst likes ... that
B) is correcting towards the low-end of its Risk Range on very light volume
Here's an excerpt from Communications analyst Andrew Freedman's Communications Pro research product on why he was getting incrementally bullish on OCT 26:
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Lastly, we are moving Spotify (SPOT) a few notches higher on the active long side ahead of earnings tomorrow morning. The mobile app download data continues to be strong, along with the Top 200 streams. One of our agency contacts also flagged a consumption shift back to music in 3Q21. |
BIRD
Hedgeye CEO Keith McCullough is added Allbirds (BIRD) to the long side of Investing Ideas this week. Below is a brief note.
With patience being core to your risk management #process, you aren't chasing "hot IPOs" with the CNBC crowd on IPO day...
You wait... and you watch...
And then one day, you get a buying opportunity in something like Allbirds (BIRD) towards the low-end of my Risk Range...
Here's a good intro excerpt on the name from Retail analyst Brian McGough's Retail Pro research product (subscribe to that):
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Bullish on BIRD: This deal is going to be hotter than hot – especially with the ESG crowd given the highly sustainable nature of the product value proposition. Our sense is that it prices above the range and rips on day 1. Allocations will be tight, but we think you definitely want to put in for this deal if given the shot. The question for us is what you do on the rip. Where to be a buyer and where to sell. While apparel companies are a dime a dozen, new footwear deals come around only once every few years. |
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 past week Red Robin reported 3Q21 adjusted EBITDA of $8.3M missing consensus of $11.5M with revenue below expectations although SSS of +34.3% beat consensus of +33.8%. Traffic increased 22.5% and average check increased 11.8%. Restaurant margins missed by 310bps with the cost of sales 20bps lower than expected.
Management expects FY21 commodity and wage inflation of +MSD% with SG&A of $120-$130M. Management reaffirmed capex plans of $45-$55M including continued investment in Donatos expansion to ~120 restaurants. Red Robin also amended its credit agreement, increasing the pricing under the credit facility and reducing the aggregate revolving commitment to $75M.
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%. |
In October, the U.S. PPI hit another all-time high with an 8.6% YOY increase and a 0.6% MOM increase. The goods component increased 14.1%, while services increased 5.8% YOY. The PPI for food manufacturing increased 12.8% YOY in October, decelerating from 14.5% in September, as seen in the chart below.
The average for the last twelve months accelerated to 7.2% YOY. Input costs continue to rise from the supplier base. Companies like J.M. Smucker have no choice but to raise prices, which will make achieving volume growth in 2022 extremely difficult while also lapping two years of pandemic driven shifts to food at home.
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. |
We remain extremely confident in the TAIL short call, that this company has completely run out of profitable TAM – and is going down the path of destroying its gross margin structure as it competes more heavily for the marginal and unprofitable customer.
As part of the change from running a stylist and AI curated model to “direct buy” that inevitably means the company will make some decisions regarding the number of stylists employed.
Well, the company made some cuts but (we think the stylist count has gone from 6,200 in the beginning of this year to closer to a number that starts with a 5) and in a memo to Stitch Fix Stylists the company’s COO Minesh Shah said “We can and must do better” with regards to how the company is treating and cutting its stylists. Not exactly encouraging words for anyone who is long the stock.
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. |
CPI for food at home increased 5.4% YOY in October, accelerating from 4.5% in September. Both the food and food and beverages category saw similar increases in CPI at 5.3% YOY and 5.1%, respectively. However, the meats, poultry, fish, and eggs category had the highest level of inflation at 11.9%, accelerating from 10.5% in September.
The U.S. conventional grocers have been the biggest beneficiaries of the pandemic in food retail. They have also been able to pass on inflationary pressures with less competitive pressures from strained inventory levels across the industry.
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 |
September quarter-end USDA commodity stock levels ticked up sequentially as a percentage of prior year levels to 93.9% versus 93% at the end of 2Q21, which makes a lot of sense given the typical seasonal build into the holiday period.
We would not read too much into the data yet as one quarter does not a trend make. The number tends to oscillate around the high-90s percentage range over longer durations, and the trend has been downward amidst the labor and supply chain issues which, by all accounts, are getting worse not better.
In terms of the stock, FY22 AFFO estimates have been slashed to $1.27/share at last read but we think (1) there is additional downside and (2) the new management team when announced is highly incentivized to set a very low bar for next year, likely below the Street.
The stock continues to signal bearish TRADE/TREND, and we recommend staying short until the numbers really get “kitchen-sinked.”
