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Long: PLBY, PSA, FWONK, ROK, AMH, VLVLY, CUBE, TOST, BROS, DUFRY, PCAR, SPOT, BIRD, WYNN, WOOF Short: RRGB, SFIX, COLD |
Below are updates on our eighteen current high-conviction long and short ideas. We have added Petco Health and Wellness Company (WOOF) to the long side of 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. |
Another key point of PLBY’s centerfold initiative is the ability for the platform to help promote other aspects of PLBY’s business. The potential in the crossover between business ventures is simply massive.
Examples of the cross promotions PLBY could do are highlighting/selling sexual wellness products as well as beauty products, partnering with creators on exclusive lines, and much more. The growth runway for PLBY continues to be one of the best we can find, and we think this company is headed over $10bn in EV vs the current ~$1.5bn.
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. |
Earlier this week property management software company Yardi reported that self-storage rents were trending up +10.2% in November, a slight 100-200bp deceleration versus the prior month, which is consistent with typical seasonal patterns.
Rents in Florida and across the Sunbelt region continue to trend up in the mid-teens or higher y/y. The colder fall and winter months are typically the slowest leasing season, so a slight deceleration now is very normal. If rents were to decelerate in April/May, that would be more of a concern. We remain Long CUBE and PSA and believe that FY22 NOI and earnings expectations remain too low.
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. |
Click HERE to listen to Communications analyst Andrew Freedman discusses Formula One Group (FWONK) on The Call @ Hedgeye.
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. |
Click HERE to listen to Industrials analyst Jay Van Sciver discusses wage inflation and the recent moves in Rockwell Automation, Inc. on The Call @ Hedgeye.
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. |
This past week data released by CoreLogic showed that single-family rents grew in September at the fastest rate in 16 years, up +10.2% y/y. The CoreLogic Single-Family Rent Index (SFRI) measures rent changes among single-family rental homes using a repeat-rent analysis to measure a “same store” concept.
Among the 20 metro areas covered, Miami led the way up +25.7%, followed by Phoenix up +19.8%. Chicago had the lowest increase, still up +2.8%. Although reported on a lag, the data is useful as SFR data is notoriously sparce and unreliable given the large reporting gaps and dominance by “mom-and-pop” landlords.
It is nonetheless indicative of the ongoing acceleration serving as a tailwind for Best Idea Long AMH, given its Sunbelt presence and rents to renewing tenants up in the mid-single-digit range portfolio-wide in 3Q21. The data supports a clear acceleration heading into 4Q21 as renewal spreads “catch up” to rents to new tenants.
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. |
The pandemic only accelerated the adoption of technology in restaurants. Restaurants that weren’t able to adapt quickly went out of business.
Now, with a new variant that is likely to be faster spreading than Delta, restaurants will have to adopt technology even further to meet the demands of a contact-less landscape. As a new wave of covid spreads, there will likely be similar trends in which individuals rely heavily on takeout and delivery.
These both require a modern system to take orders and efficiently fulfill them, which is where Toast is a perfect.
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 decades of new store openings ahead of it. Not all concepts can be expanded beyond a state or a region to the rest of the country. The performance of stores in new markets is critical in determining whether a concept can grow beyond its base.
Dutch Bros stores in several new states have higher than average unit volumes, despite low customer awareness. In Texas the company only has five stores opened so far, but those stores have the highest AUVs of any of the seven states that have had stores for numerous years.
Volumes grow over time with more market presence and local advertising. The performance of the new stores provides us with visibility into the future expansion of Dutch Bros and the future looks bright for the store base to be multiples larger.
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. |
We had a phone meeting with Dufry management this past week and continue to be bullish on this name.
The biggest topic of conversation was the obvious of potential lockdowns in Europe as well as new COVID variants as this name trades down with any sort of COVID news that hits the wire. Management conceded the road is bumpy and the news flow is annoying but assured us that even despite the news flow the business continues to get incrementally better with each passing day.
The most highly correlated metric to Dufry’s revenue is global passenger traffic, and that number continues to improve week over week. Despite the headlines and Covid news narrative, the numbers show what’s happening in the underlying business, and that truth is a continuation of global travel recovery.
PCAR & VLVLY
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Long Thesis Overview: 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. 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. |
With the combination of subsidized electrification and pricing-driven EPS growth, we expect PCAR, Volvo, and perhaps Daimler Truck to revalue into a new range.
Daimler Truck is likely to be valued post-spin between €30 billion & €50 billion (*assuming profitability targets are hit*), suggesting the remaining Daimler AG would be ‘cheap-ish’ for a legacy auto OEM. The combined group’s EV should be closer to €100 bil vs. the current ~ €80 bil, with adjustments for emissions-related liabilities.
SPOT
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Long Thesis Overview: We are moving Spotify (SPOT) a few notches higher on the active long side ahead. 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. |
According to the press release this week, "Today’s trending shows and movies aren’t just inspiring fandoms, they’re also fueling internet-wide obsessions.
So much so that within two weeks of Squid Game’s debut on Netflix, Spotify listeners had created more than 22,500 unique themed playlists to keep the experience going. It’s clear that after the credits roll, viewers are left wanting even more—and they come to Spotify to hear it.
So starting this week, the two streaming companies are coming together to launch an all-new Netflix Hub on Spotify where fans can get the full audio-streaming experience from the entertainment they love.
On the hub, Free and Premium listeners in the U.S., Canada, Australia, New Zealand, the U.K., Ireland, and India can access official soundtracks, playlists, and podcasts, along with exclusive Spotify content. By simply searching “Netflix” on Spotify, you can find and sing along to the music behind some of your favorite Netflix shows—all in one place."
BIRD
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Long Thesis Overview: From where we sit – 30% annual top line is a slam dunk for this brand – especially given that it has only 11% brand awareness, with huge upside for new customer acquisition. Though it’s currently losing money on roughly $250mm in sales – 100% of which is DTC (i.e. extremely attractive) – the EBIT margin structure is likely to clock in at a 15%-18% level over a TAIL duration on nearly 3x the revenue base. That puts about $0.75 per share in earnings in play. |
The stock has been extremely volatile since it priced above the range on its IPO. The stock is now down ~35% from where we thought it should trade based on the underlying growth and earnings trajectory of the company and we think when the company reports earnings on Tuesday Nov 30th that it will be a solid print.
In order to get a real sense as to what BIRD is worth, we need to roll the clock forward a few years and see where the revenue base, margin structure and capital intensity are likely to shake out. From where we sit – 30% annual top line is a slam dunk for this brand – especially given that it has only 11% brand awareness, with huge upside for new customer acquisition.
This name should trade 40x-50x that number easily; it’s going to get an ESG premium as one of the most legit companies when it comes to being ecofriendly. That suggests a $30-$38 stock price over 2-3 years.
WYNN
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Long Thesis Overview: If history has taught us anything, it’s that BIC makes a great lighter and in the casino world, BICs catch fire during recoveries and generally outperform the competition. Per our math, WYNN is indeed outperforming in the USA. Macau is the wildcard, and with all the fits and starts it’s impossible to discern a trend. However, we’re optimistic that WYNN will outperform there as well when the market stabilizes and recovers. |
We’re elevated Best In Class (BIC) WYNN to the GLL Best Idea Long List, as BIC is always better and Wynn’s properties certainly fit that bill in all of their markets. But we’ve found that best in class works best during recoveries.
These properties fill up first and recover faster. Hmm Circus Circus or Wynn Encore? Sure, the delta for the lesser properties is higher when a market is near peak as they gather the overflow, but casino hotels worldwide are in recovery mode right now. And that favors WYNN and the proof was in the Q3 pudding.
For the first time since Covid, we see evidence of a positive earnings revision cycle which combined with a historically low valuation, suggests the stock has significant upside potential.
Using fairly conservative SOTP assumptions, WYNN offers ~30%+ upside over the next 6-12 months per our math. As such, the stock deserves a place on the Hedgeye Best Idea Long List.
woof
Hedgeye CEO Keith McCullough added Petco Health and Wellness Company (WOOF) to the long side of Investing Ideas this week. Below is a brief note.
On the one hand, we're hearing about some hedge funds liquidating (firing) people and their positions...
On the other hand, I'm hearing (from McGough) to buy the damn dip in this stock.
Here's part of what Retail analyst Brian McGough wrote to his Retail Pro subscribers:
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Takeaway: The story is 100% on track. Street is underestimating TREND and TAIL EPS, cash flow, and de-levering. We build to $35 (+50%) in 12-18 mos. We think that WOOF should be bought on today’s selloff. Despite coming in 10% ahead of consensus, there was a ‘freak-out’ factor associated with the Gross Margin line, and a transitory pressure due to mix and freight pressure. The operative word there is transitory. The company is seeing an impact from strong sales in consumables due to the pet life cycle going from Year 1 (heavy supplies, little food) to Year 2 (low supplies, lots of food). Also keep in mind that as it scales its vet clinics the services personnel costs are booked in COGS as opposed to store labor, which is booked in SG&A. |
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). |
Are you buying casual dining names like Red Robin? We are short the sector. Despite the easy sales comparisons, the commodity cost headwinds, difficulty in finding labor, and lingering challenges from the pandemic have our estimates below expectations for many casual diners.
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. |
Another new feature that SFIX is continuing to scale up is its “Live Styling” feature. This service is a one-on-one video session where customers and stylists can chat about what clothes should end up in the box.
There are many problems with this service such as increased labor costs from staffing this program as now the company will require stylists to work at least 20 hours per week instead of having stylists that do their work as a side gig like Uber drivers.
The company is clearly moving away from its touted algorithmic and big data processes to move to be like a typical retailer with programs like this and “Direct Buy”. SFIX has very clearly run out of TAM and is trying anything to find new customers.
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 received the updated USDA report on cold storage commodity levels, which are very important for Best Idea Short COLD. Stock levels increased sequentially from September into October as expected, however the stock levels ticked down to 93% of prior year levels versus 94% last month.
Stock levels should be building on an absolute basis quarter-over-quarter ahead of the key holiday period, however we believe the metric to watch is % of prior year levels which (1) shows the degree of difficulty in the cold chain versus 2020, (2) is trending lower versus back towards the long-term average of 99%, and (3) has direct implications for COLD’s top line. We remain bearish from a fundamental perspective until COLD likely “kitchen sinks” its 2022 outlook in February.
