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Long: PLBY, PSA, FWONK, ROK, AMH, CUBE, PCAR, WYNN, SBEA, AVB Short: RRGB, COLD, EXAS |
Below are updates on our thirteen current high-conviction long and short 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 has launched its creator platform Centerfold. We’ll see how the early days go, but it already has a mix of heavily followed creators and notes a waiting list to add new creators. Given the success of Onlyfans and the move to take share from it by PLBY, this initiative alone could be worth multiples of the current PLBY market cap. It could be a rapid contributor to revenue and EBITDA.
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. |
Nothing new to report in the final week of the year on self-storage. CUBE remains a Best Idea Long and we continue to like PSA on the long side through 1H22, with the caveat being it is exceedingly rare for a REIT subsector to finish at the top of list in terms of total return for two consecutive years.
The next catalyst for both names is FY22 guidance delivered in February. It is notable that bellwether PSA backtests well in both Quads 1 & 4 with a ~76% batting average in Quad 4, and is also a top-5 component of the XLRE, so “hovering around the midpoint” of the Quads and/or an outright Quad 4 are not horrible scenarios. The real test will be the inevitable RoC deceleration on SSNOI and earnings, most likely in 2H22.
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. |
Getting Miami on the circuit was a major accomplishment and will help drive additional awareness in the U.S. ESPN has F1 broadcast rights through 2022. We wouldn’t be surprised to see F1 sign an expanded broadcast deal in the U.S. that includes streaming rights (ESPN+ or Amazon?), or hybrid that contemplates F1TV (e.g., authenticated by pay-TV subscription… similar to Sky in Germany).
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. |
We see shares of ROK as offering favorable exposure to a number of key trend from tightening capacity utilization and supply chain challenges to higher emerging market wages and increased developed market manufacturing. ROK is typically a Quad 1 beneficiary, which we see as a tailwind into 2022.
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. |
We remain very bullish on Best Idea Long AMH and struggle to find any REITs (other than INVH) with more potential to meaningfully increase earnings power in the near-term. AMH’s 4Q21 results are the next catalyst where the company will provide its FY22 outlook which should surprise to the upside.
Concerns on slowing against “tough” comps are overblown, and the company is likely to deliver ~$1.70 per share of annual Core FFO earnings power in short order versus ~$1.35/share currently. On the Macro Show this past Friday we highlighted perhaps “the most important macro chart in REITs right now.” HPA leads leasing spreads by 3-4 quarters, which in turn lead actual rent results and earnings by another 2-3 quarters. Leasing spreads lagged against HPA growth shows a very high correlation.
If the relationship holds and spreads accelerate into the low-single-digit or mid-teens range, it is conceivable that FY23 Street earnings estimates could be 20-25% too low. This is exceedingly hard to find in the REIT sector, stay long.
PCAR
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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. |
Daimler Truck separated from parent Daimler AG. We suspect that this independent company will change the industry focus toward high margins and prices. While North American Class 8 orders for November came in at only 9,500.
While this is the lowest intake since May 2020, long lead times and record backlogs limit the value of the build slots on offer. Full order books combined with easing supply chain bottlenecks should allow for higher revenue in early 2022, particularly as the macro environment brightens in 1Q22.
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. |
December and at least part of Q1’22 will not be as strong as they could have been for the LV Strip market, but that should prove temporary. The demand for the Las Vegas product month in and month out continues to impress us, and that’s relative to our already bullish outlook for the market.
Our bullish posture on WYNN and the LV Strip is more predicated on a positive ’22 & ’23 outlook, but the near-term data remains indicative of what lies ahead. November non-gaming trends slowed somewhat given the loss of weekend days (weekends are critical) but rate growth, absolute levels of visitation, and weekend occupancies remained robust.
Total visitation is still down double digits on a 3mma vs pre-Covid, but we see a path to full recovery in visitation in ’22 given the slate of events and convention calendar. The LV Strip’s hotel rate growth profile is on par with that of other top notch leisure destinations and given the demand influx we should see in ’22, the resorts are probably going to show additional growth against the ’21 performance.
AVB
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Long Thesis Overview: FY21 Guidance: 4Q21 Core FFO projected in the range of $2.19 to $2.29 on SSNOI +5.5% to +7.5%, so as expected SSNOI growth now definitely inflecting positive after JUST missing the crossover point in 3Q (-0.2%). This compares to Hedgeye at $2.20 and +9% for 4Q21, so we need to (1) take numbers up but also (2) re-work the mix between same store and non-same store contribution. Consensus was at $2.13 on 4Q21 coming into the print - thanks for coming out! |
On Friday’s last Macro Show of the year we noted that the Apartment subsector my may be a “tale of two cities” in 2022, with a potential divergence in performance between the Sunbelt names (MAA & CPT) underperforming and the Coastal Gateway names (AVB, EQR, ESS and UDR) outperforming.
At the very least there is an interesting funding short opportunity against a Coastal long, with AVB remaining our favorite name on the long side. We see the potential for RoC acceleration throughout the year with SSNOI growth finishing up in the mid-teens range, initial FY22 guidance coming in ahead of expectations, and upward earnings revisions likely throughout the year.
SBEA
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Long Thesis Overview: Black Rifle Coffee Company (BRCC) is a veteran-founded coffee company. The company was founded in 2014 by Evan Hafer, a Green Beret. BRCC is a mission-focused company committed to supporting veterans, active-duty military, and first responders. BRCC has targeted the $28B coffee category as its serviceable addressable market. Our military is the most respected institution in the country according to Gallup polls. Veterans are 7% of the population while the active-duty military is less than 0.5%. Half of the company’s employees are veterans. BRCC also gives preference to veteran-owned businesses as vendors and suppliers. The company's three-pronged growth strategy is driving 30%+ top-line growth. |
We see asymmetric risk/reward with the shares trading near $10. We assign a high probability to the de-SPAC of SBEA due to the financial commitments of investors. Between the PIPE/backstop and $100M committed by Engaged Capital, BRCC will have $225M on its balance sheet when the transaction is closed. The founders of Black Rifle Coffee Company, existing shareholders, SPAC sponsors, and new investors’ interests are aligned with earnouts and shares subject to cancellation based upon share price performance. At $10 per share, the market capitalization is $1.9B. SBEA shareholders will own up to 18% of the company as seen in the following chart. The projected 2023 EV/Sales of 4.0x is high relative to most mature consumer brands but below most high growth consumer brands that have gone public recently
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). |
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 Omicron 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.
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. |
This past week on 12/22 the USDA reported its most recent cold storage commodity level data, which showed that November ending levels stayed flat sequentially at 93% of prior year ending levels versus a longer-term average of ~99%. Stock levels remain in a downtrend due to supply chain disruptions and showed no meaningful build ahead of the key holiday period.
As a reminder, throughput levels directly impact Best Idea Short COLD’s top line results in the services business and there has been no change yet in the second derivative. We continue to look for a “kitchen-sinking” of FY22 guidance in February to set a very low and hopefully achievable bar and remain short at least until then. The next catalyst is December cold storage commodity data to be released towards the end of January.
EXAS
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Short Thesis Overview: All that said, consensus estimate trends continue to reflect near-term weakness for our universe and the potential for a late 1Q22 bottom, which looks like it's in sync with the Macro Team's call (whether it's MacroQuad 1 or 4). This week, NEO rotated out of MicroQuad 4 and into 1, which is still a short position but lower exposure (the outlook looks better from a NTM revenue perspective, but we've got to find out what's happened in 2H21 that drove that weak guide). Also, EXAS slipped back into MQ4 from MQ1, which we've been expecting. Last, we've got some work to do on the estimate trends for XHS, XHE, and ARKG, so keep an eye out for that! |
Overall, we expect the adoption and integration of NGS into the practice of diagnostics and medicine as a whole to continue to grow from here, but insurers must catch up with the science. As Dr. Albitar noted, "You can't have precision medicine without precision diagnostics - today, that's genomics, and the tech is ready."
That said, the bigger question is what happens as Omicron passes. We believe the return to in person care, and the return of colonoscopies, will put pressure on Cologuard, which is a good screening test, but not a curative one like colonoscopy. Also, Guardant recently announced they had completed enrollment in their blood-based colon cancer screening trial and will have results in the next few months. GH claims to have good sensitivity and specificity, and if that holds up in this trial, it presents another headwind for EXAS.
Even if EXAS has its own blood-based program, GH opens the door to multiple competitors all chipping away at EXAS share of non-invasive cancer screening. So far, EXAS' primary response in 2021 has been to take over the reps and the costs of the Pfizer co-promotion deal, which isn't really the stuff of a big TAM-like multiple. At 9X EV/Sales consensus still believes in the TAM, but if the topline disappoints and slows, there is plenty of downside.
