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Long: PLBY, PSA, FWONK, ROK, AMH, VLVLY, CUBE, TOST, BROS, DUFRY, PCAR, BIRD, WYNN, WOOF, AVB, COIN, RIVN Short: RRGB, SFIX, COLD |
Below are updates on our twenty current high-conviction long and short ideas. We have removed Spotify Technology (SPOT) from the long side. We have added AvalonBay Communities (AVB), Coinbase (COIN), & Rivian (RIVN) 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. |
This week Playboy announced that it has partnered with platinum selling hip-hop artist Cardi B as the company’s new Creative Director In Residence. This is massive for Playboy as Cardi B has hundreds of millions of followers across social media.
She has 15mm TikTok followers, 20mm Twitter Followers, 100mm+ Instagram Followers, 32mm monthly listeners on Spotify (64th in the world), and 36mm Facebook likes. Pair that influence with PLBY’s already strong social media presence of 15mm Facebook Likes, 10mm Instagram Followers, 2mm Twitter Followers, and 250k TikTok followers.
Our sense is that her deal with Playboy is chock full of incentives on sales targets and possibly stock, which would be very positive for both the stock and the company moving forward.
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. |
PSA announced last week that it had closed on its previously-announced $1.5 billion acquisition of All Storage which owns and operates 52 assets in the Dallas-Fort Worth MSA.
The acquisition was 100% funded with unsecured debt which, given the ~2% cost of debt, is an exceptional use of capital for a deal that could ultimately stabilize above a ~5-6% yield. The portfolio is only ~75% stabilized and is immediately accretive to earnings in FY22 as well as forward NAV growth, with only a marginal increase in leverage to ~4.5x net debt + pfd./EBITDA. We continue to like the way that PSA is flexing its low-levered balance sheet to increase scale and execute on accretive external growth.
The math tells us that FY22 is setting up to produce another double-digit SSNOI growth year, although there is a high probability that the RoC inflects downward after 2Q22. Nothing new to report on CUBE, other than that it remains our favorite long idea in self-storage.
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. |
Mercedes’ Lewis Hamilton has closed the gap to title rival Max Verstappen following a dominant victory in the inaugural Qatar Grand Prix at the Losail International Circuit, with Verstappen recovering from a grid drop that saw him start P7 to finish second, as Alpine's Fernando Alonso took the final podium position.
After a clinical start from pole position, Hamilton was able to control the pace at the front of the field with in indomitable lights-to-flag win, his second in a row after Brazil. But while Hamilton was impressive, so too was Verstappen, who was dropped from P2 to seventh on the grid for failing to respect double waved yellow flags in qualifying.
Verstappen shrugged off the disappointment, though, jumping to P4 at the start before quickly making his way up to second, before following Hamilton home to limit the damage to his title lead, which now stands at eight points as Verstappen claimed the fastest lap bonus point.
Meanwhile, there was joy down at Alpine as Alonso returned to the podium for the first time since the 2014 Hungarian Grand Prix, the Spaniard having executed an aggressive drive to survive late-race pressure from Red Bull’s Sergio Perez to take third.
Perez’s fourth place was a decent recovery considering he’d started P11, while he finished ahead of the Alpine of Esteban Ocon, with Lance Stroll taking P6 for Aston Martin.
The Ferrari pair of Carlos Sainz and Charles Leclerc were P7 and P8. Lando Norris took P9 after a late stop for the McLaren driver, as Sebastian Vettel took the final points-paying position for P10 – with Pierre Gasly failing to make a two-stop strategy work, dropping from P2 on the grid to P11, allowing Alpine to move clear of AlphaTauri in P5 in the standings.
Meanwhile, it was a day to forget for Mercedes’ Valtteri Bottas, who took his own grid drop, dropping from P3 to P6, before falling to 11th at the start and then suffering mid-race tyre issues – as did Williams’ George Russell and Nicholas Latifi – before Mercedes retired him.
So, with just two races to go now, it’s Hamilton within touching distance of Verstappen in the drivers’ fight. Roll on Saudi Arabia.
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. |
Last week we put out a note on Long AMH HERE, where we talked about the lead-lag effect between and among home price appreciation (HPA), leasing spreads and realized rents in AMH’s results.
HPA leads leasing spreads by 3-4 quarters, which in turn lead actually results and earnings by another 2-3 quarters. The trend in HPA for AMH’s markets show an acceleration in the RoC on leasing spreads and earnings likely through FY22, and there is zero chance this is accurately being reflected in consensus numbers. Just buy the stock and let it rip.
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. |
As covid cases ramp up into the winter months, restaurants will have to deal with slowdowns and possibly even lockdowns. Restaurant goers will wane in the winter months as individuals do not want to deal with dining outside in cold temperatures or risk getting infected indoors.
Takeout and delivery will increase in popularity. These headwinds for the industry will only accelerate adoption of technology. The first covid wave showed how restaurants needed to quickly adapt to the changing environment these restaurants face.
During the first wave many larger chains pivoted to a digital environment. However, in future waves, it will be the smaller restaurant chains that will need to adapt to compete with these larger chains.
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 continues its expansion into the South, opening a new location in Houston, Texas. This location marks the fourth location in the Spring-area in Houston.
The AUV for the average Dutch Bros location is about $1.7 Million, which is tremendous for how small each location is. However, for new openings in 2020 and 2021, the AUV for these locations is an astounding $2.1 Million. Dutch Bros has been selectively expanding into new regions.
These new locations have shown to be even more successful than their west coast base. Both franchised and company-owned locations are growing at a rapid pace.
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. |
With the news of the omicron variant coupled with the lockdown potential in Europe this name continues to get bashed. Is there anything fundamentally different about this business because of the variant—the answer is no.
Dufry continues to be the global leader in the Duty-Free industry no matter what COVID news flow comes through. Of course, the revenue recovery of this business is tied to passenger recovery, which may take a hit over a shorter time period, but all the updated forecasts have passenger recovery coming back to 2019 levels by 2023, even if the road to get there is bumpy.
Despite the near-term volatility this name still has multi-bagger written all over it as the passenger recovery does normalize, the company emerges on a leaner and more variable cost structure to achieve record EBIT margins on higher revenue, and continues to develop its operation in Hainan.
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.
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. |
BIRD put up results for the quarter in line with its preannounced range, but the market was looking for it to crush expectations right out of the gate and take up the guide. That didn’t happen. The top highlight of the quarter is that US revenue accelerated to +42%.
The key is that this is happened at the same time the company launched no fewer than 5 new platforms – showing that innovation drives the top line here. Second is the SG&A level.
The brand has only 11% unaided awareness, and it has to innovate on one end, and then spend up to build awareness of the brand and product at the other end. As a newly public company management is doing what it should to drive accelerated growth.
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. |
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.
By our calculation, Wynn has grown its GGR share by almost 200bps in 2021 YTD vs 2019, and that’s with a lower-than-average table hold percentage. Hedgeye EBITDA estimates are now higher than the Street for 2022 and 2023, for the company and across every Wynn market. WYNN’s BIC assets will prove to be share gainers and it remains a Best Idea at Hedgeye.
WOOF
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Long Thesis Overview: 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. |
The first reaction to seeing WOOF come back public earlier this year was “here we go again” as this name has gone public twice already in 1994 and again in 2002. However, after more research we found this name to be incredibly intriguing. First it plays in a great category.
The pet category was attractive pre-covid, with 1% growth in the pet population each year, and 4% increase in per capita spending. That got turbocharged with covid, as pet adoptions surged to 4% while people sheltered-in-place. This creates an 8-10 year secular tailwind for the number of pets that need to be fed, groomed, and vaccinated. Second, WOOF also is playing in the Vet business which is a $27bn TAM.
WOOF has close to 200 full vet hospitals in its 1500 total stores with the plan to get to 900 in the future. The addition of a vet center at a store has resulted in ~600bp lift to sales in year 1 of the first 100 clinics.
This vet build out in the face of outsized industry growth over the next 3-5 years is critical to the TAIL call here having any teeth. Tying it all together, WOOF is creating an unrivaled ecosystem experience in the secularly strong Pet category.
avb
Hedgeye CEO Keith McCullough added Avalonbay Communities (AVB) to the long side of Investing Ideas this week. Below is a brief note.
Rather than live in fear of other people's lack of process, let's keep playing our game... looking for #Quad1 pivots like the one REITs analyst Rob Simone gave us on The Call @Hedgeye this morning:
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Buy the damn dip in Avalonbay Communities (AVB) was the call. The Signal didn't come until we saw the emotionally draining red into the close. |
coin
Hedgeye CEO Keith McCullough added Coinbase (COIN) to the long side of Investing Ideas this week. Below is a brief note.
Been waiting, patiently, for consensus to get frustrated with "Crypto not going up"...
And, of course, and immediate-term TRADE #oversold signal within Coinbase's (COIN) Bullish @Hedgeye TREND.
From Financials analyst Josh Steiner's Financials Pro research product:
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Takeaway: The time is right to add Coinbase on the long side. Back in June, we hosted a Coinbase bull-bear debate in which we profiled the risk-reward setup for the broader digital asset space as well as Coinbase, the largest U.S. cryptocurrency exchange. The detailed bull case for Coinbase can be reviewed in that presentation. With the continued, widespread growth of the crypto asset class, and what had been a cooler third quarter, we are adding Coinbase (COIN) as a new Best Idea Long based on the strong October trends and the longer-term, secular growth tailwinds across the crypto-verse. |
RIVN
Hedgeye CEO Keith McCullough added Rivian (RIVN) to the long side of Investing Ideas this week. Below is a brief note.
After buying some Tech (QQQ), McGough (Consumer Discretionary)... what Sector Style am I fishing for here in #Quad1?
A: Industrials (especially the sexy ones).
This is as sexy as Industrials analyst Jay Van Sciver might get: Long Rivian Automotive (RIVN):
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Rivian is set to be one of the largest IPOs of the last decade toward the end of November, targeting a hefty $80 billion valuation. The well-funded electric vehicle start-up offers vehicles in the higher value segments of the auto market with innovative ‘adventure vehicles’, the R1T pick-up truck and the R1S SUV. On the commercial vehicle side, Rivian is a prospective supplier to Amazon with its EDV platform…positioning the company as another front for the Bezos v. Musk twelve-digit billionaire battle. |
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). |
We remain SHORT most labor-intensive, casual dine-in restaurants stocks like Red Robin which sold off on concerns over the new COVID-19 variant that has been reported out of South Africa. The stocks have been under pressure for some time but the incremental selling pressure is well in front of any indication that dining restrictions in the U.S. will be widespread. That said the Delta variants definitely hurt 3Q21 performance.
There are varying press reports the variant carries an unusually large number of mutations associated with increased antibody resistance and is "clearly very different" from previous incarnations. South African scientists have already detected 30 mutations to the spike protein, which play a big role in how the virus enters the body. The biggest concern is whether the virus could lead to more serious illness or decrease the effectiveness of vaccines and treatments, but internally we don't belive that to be the case.
It's likely that the early breakdown from analysts is that the sudden share price drops of restaurant stocks could be overdone without any clear indication that the variant will ultimately impact U.S. traffic, but that is not the overriding investment thesis for this group.
The labor issues have created new sales-related problems this quarter and into next year. Some restaurants that are struggling with labor shortages and the return of customers to on-site dining are choosing to scale back the times delivery and to-go orders. Many casual dining companies are cutting capacity in that they can't staff both the in-store delivery on both in-store and digital sales.
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. |
SFIX continues to creep ever closer to its IPO price of $15.
Since shorting this name the company has introduced and significantly pushed its 300-500bps dilutive direct buy initiative, it has introduced its “live styling” feature which requires heavier investment on the SG&A line to pay more stylists to be able to interact with customers, the Founder and CEO transitioned out into an Exec Chair role (which does not happen in a position of strength), and the COO sent a letter to the companies employees saying it must do better amidst massive stylist turnover.
The company reports next Tuesday, and we expect this name to continue to show weakness.
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. |
Nothing new to report on Best Idea Short COLD. We received the updated USDA report on cold storage commodity levels last week, which showed that 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.
Commodity stocks 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. We remain bearish from a fundamental perspective until COLD likely “kitchen sinks” its 2022 outlook in February.
Its very hard to find shorts right now in REITs, and COLD is an obvious candidate over the next 3-6 months, at the very least as a funding short.
