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Long: PLBY, FWONK, AMH, PCAR, SBEA, AVB Short: RRGB, EXAS, CURV, BGFV, DDS |
Below are updates on our eleven current high-conviction long and short ideas. We have removed Public Storage (PSA), Rockwell Automation (PSA), & CubeSmart (CUBE) from the long side. We have added Torrid Holdings (CURV), Big 5 Sporting Goods (BGFV), & Dillard's (DDS) to the short 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 announced some new key hires in its leadership concurrent with its ICR presentation last week. One key hire is Ashley Kechter as President of Global Consumer Goods. Kechter comes from Gap Inc but spent 7 years under Gary Friedman at RH prior to Gap. PLBY also announced a new CEO of Honey Birdette, promoting the recently hired COO, as well as a new Chief Communications Officer.
All of these new hires will play an important role in the business growth strategy and help PLBY deliver on the long-term investment story. These new employees are also another signal around the brand image and business changes. The hires are three women joining a majority women workforce.
They have other options for their career paths, but instead see the best opportunity here at PLBY in monetizing one of the world’s most recognizable brands that is transforming its identity and relevance with the new generations of consumers by getting back to its roots of counterculture, freedom of speech, and freedom of expression.
We think PLBY has a massive growth runway ahead of it and will see a big fundamental ramp in 2022. This company will be worth $10bn+ in 3-5 years.
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. |
Liberty Media Formula One (FWONK) has had a great run since we made it a Best Idea Long in May 2021 in the mid-$40s. Many elements of our thesis have played out nicely as it relates to domestic viewership trends, which were up ~55% YoY in the U.S. in 2021. While the multiple has expanded from low 20s to high 20s over this period, there are multiple catalysts left that make us favor FWONK on the long side to start 2022.
- New sporting and technical regulations kick in starting this year, which should improve competition.
- The Inaugural Miami GP scheduled for May 6 – May 8th
- Renewal of upcoming U.S. media rights (Current F1 rights with ESPN are undervalued), which could see possible bidders from Amazon, Apple and Netflix. ← Most important catalyst
Meanwhile, we expect a material step up in financial performance in 2022 compared to 2019 (pre-COVID baseline). Note that Factset consensus estimates for 2022 partially reflect this improvement, with revenue ~18% higher than 2019 and adjusted OIBDA ~34% higher.
The 2022 Formula1 season kicks off in Bahrain on March 18-20. And while 2021 was an incredibly exciting year for the sport, we wouldn’t discount 2022 being another exciting year. We will continue to track viewership trends closely.
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. |
The next catalyst for Best Idea Long AMH is 4Q21 results in mid-February with no date announced yet. This past week the company announced a 23 million share offering, with 10 million shares sold current and an additional 13 million shares to be settled through year-end 2022.
We expected this and had assumed 20 million shares issued in our model, as AMH needs to raise external capital to fund its accretive development program. The simple math is as follows: trading at a ~4.4% unlevered cap rate (~23x multiple) and using that capital to acquire ~6.5% or higher yielding assets is value-accretive on those assets before leverage, so a sound capital allocation decision by AMH. If you have the ability, you do that trade all day. We would also note that AMH has been a solid Quad 4 bet.
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. |
December Class 8 orders bounced back 139% month-over-month from November’s multi-year low as customers continue to demand new trucks. This should support an already enormous OEM backlog.
At this point it would take a ~1 year to at full capacity to work off just the North American backlog. We have pointed out that Industrials like PCAR can generate decent book-to-bills while simultaneously living off a giant backlog will outperform the high growth, low profit companies as investors pivot away from more risky exposures.
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! |
The next catalyst for Best Idea Long AVB will be 4Q21 earnings results to be released on 2/2, where the company will also provide its initial FY22 outlook.
We look for a modest beat on the quarter, but more importantly an above-consensus guide with the Street at Core FFO of $9.38, including SSNOI growth likely to shake out in the low-to-mid-teens range. It is possible that all of SSRev, SSNOI and Core FFO earnings growth accelerate into the final quarter of the year, and likely that both AVB and EQR post the highest SSNOI growth numbers in the companies’ histories.
One of the biggest advantages for the Coastal Gateway apartment REITs is the relative lack of supply, which is much easier to develop across the Sunbelt where rental rate RoC is already rolling over. AVB’s large representation in the XLRE index is important in Quad 4.
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. |
The top ten coffee chains had traffic growth compared to 2019 beginning in May, while traffic to restaurants were down except in the months of July and October. Despite consuming more coffee at home during the pandemic consumers still made trips to coffee houses. Office workers now working from home are making trips to their local coffee store. Since Starbucks started to change the coffee category decades ago coffee is seen as much more than a beverage. The coffee house is the experiential destination for a brand. According to Placer.ai cross-shopping patterns in California between Dutch Bros and Starbucks have shown the growth of Dutch Bros locations has not impacted Starbucks visits or customer loyalty.
Black Rifle Coffee Company (BRCC) is set to take share in the coffee house category with its store growth plans, but it does not have to source it from the competition. BRCC benefited from the pandemic driven growth in at-home coffee consumption with its direct to consumer business. The company is accelerating its outpost (store) growth in 2022. Growing its outposts is the second driver in BRCC’s three-pronged growth strategy.
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). |
Red Robin’s SSS are set to rapidly decelerate in the coming quarters against the recovery comparisons of 2021. A longer term question is whether the company’s new dual brand strategy will work. Red Robin expects the rollout of Donato’s Pizza in all of its company owned restaurants by the end of next year. Dual brands have a poor track record of success in the restaurant industry. It is worrisome that adding pizza to the burger restaurant is management’s best idea to reverse flagging restaurant productivity.
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! |
At ~$75, Exact Sciences (EXAS) shares remain under pressure and on the Health Care team’s Best Ideas Short list. This could have been a big week too, as the Cologuard 2.0 data (1/18) and Mayo Clinic Special Call (1/19) could have derailed the short thesis. However, that didn’t happen. This past week, we wrote:
- Exact Sciences Presents Data Showing Improved Accuracy of Second-generation Cologuard® Test and Progress Toward an Even Better Colorectal Cancer Screening Solution for Patients (PR). The company released headline data here, and we'll have to see how GIs, PCPs, and competitors react and counter-detail, respectively: Cologuard 2: "...overall sensitivity of 95.2% for colorectal cancer (CRC) at specificity of 92.4% for negative samples confirmed by colonoscopy. Subgroup analyses showed 83.3% sensitivity for high-grade dysplasia, the most dangerous precancerous lesions, and 57.2% for all advanced precancerous lesions.”
- And we weren’t alone in noticing at least one issue with the data. An analyst commented on the new data being worse than the original, smaller study: “…but we did see a reduction in advanced adenoma data from the ACG 2019 data of 65% to now 57%. And I appreciate this has more prospective data in the set this time around. So, I just wanted to get a sense of why that could be the case."
Also, we still can't get our arms around Exact hiring the whole Pfizer primary care sales team after talking about wellness visit trends and office access issues being headwinds. How will they fare when this Omicron wave recedes? We also wonder if Guardant’s, Geneoscopy’s, and others’ clinical trials in this space are having an impact on Cologuard volume. At the same time, there’s innovation on the colonoscopy side, which remains the Gold Standard for CRC screening.
CURV
Hedgeye CEO Keith McCullough added Torrid Holdings (CURV) to the short side of Investing Ideas this week. Below is a brief note.
#Quad4 is when short-selling gets to be more profitable and fun...
With Total US Retail Sales #slowing in December vs. November we want to stay with Retail analyst Brian McGough's shorts that were already working.
"Valuation" for a slowing retail stock is not a catalyst in #Quad4.
Here's what our Retail Pro research product had to say on the name:
bgfv
Hedgeye CEO Keith McCullough added Big 5 Sporting Goods (BGFV) to the short side of Investing Ideas this week. Below is a brief note.
Another low quality US Retailer that Retail analyst Brian McGough does not like remains Big 5 Sporting Goods (BGFV)... and he highlighted DKS bearishly in his Retail Pro research product today as well.
All was fun and games with these low-quality retailers when the US economy was in #Quad2 last year. In #Quad4 they can go down, a lot!
DDS
Hedgeye CEO Keith McCullough added Dillard's (DDS) to the short side of Investing Ideas this week. Below is a brief note.
All of these crap retail Factor Exposures ripped the Macro Unaware (on the short side) at this time last year...
(That’s when we were long of the low-quality, high short-interest, squeeze plays)
Now, like good Bayesian Boys who are Signal & Quad dependent, we are doing the opposite of what was #Quad2, shorting these secular losers in #Quad4.
Here's Retail analyst Brian McGough's latest update on Dillards (DDS) from his world class Retail Pro research subscription (I am long of McGough in all Quads):
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Dillard’s (DDS) | Upping to Best Idea Short List. Two weeks after going short DDS, we’re adding to our Best Idea list. We were long DDS earlier this year, and got off too early, but think it’s time to go the other way. Bulls will make the argument that the company is slowly taking itself private. But then why did it just pay out ~50% of its cash balance in the form of a special dividend instead of buying back its stock? |
