Investing Ideas Newsletter

Long: PLBY, PGRE Short: EXAS, CURV, BGFV, WRBY, DOCN, DTC, INVH, WEBR, WE, HZO, MPW, GIL

Below are updates on our fourteen current high-conviction long and short ideas. We have removed Black Rifle Coffee Company (BRCC) from the long side. We have added Medical Properties Trust (MPW) and Gildan Activewear (GIL) to the short side this week. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.

PLBY

Long Thesis Overview: One thing we see Playboy (PLBY) doing more now is its ability to tier product by price, channel (although PLBY leans into its own DTC channels), and consumer. The two products PLBY does this for are its lingerie and its ready-to-wear apparel. On the lingerie side, from highest price/consumer to lowest, the company has Honey Birdette with price points in the $100s, Playboy lingerie in the $50s, and Yandy in $20s. On the apparel side the company has, from highest price/consumer to lowest, its BigBunny brand in the $100s, Playboy Collaborations in the $70s, and Playboy Apparel in the $50s. This is a strategy that many of the best apparel brands, like Nike, execute to perfection. If Playboy can continue to execute on this strategic initiative, the apparel/lingerie offering will have years of profitable growth ahead.

PLBY announced $50mm share repurchase program after getting financing through a private placement of preferred stock carrying more of a debt structure with dividends and capped upside.  CEO comments on the press release communicated the opportunity for long term shareholder value, we would agree that PLBY is significantly undervalued, though we also want to the company to remained focused on its execution and growth investment. 

It’s not undervalued by 50%, its closer to 500%.  Repo won’t fix that, though a smaller share count would mean solid incremental upside on long term earnings we see.  Good to see the company interested in buying stock here, though business execution will be the biggest value driver. 

The company was at a conference this week stirring up investor interest, and we have the CFO doing a Q/A call next week where we will ask about the key growth initiatives for the company.

pgre

Long Thesis Overview: Following our addition of Paramount Group (PGRE) as a Best Idea Long on 1/3/22, the most frequent question we received was "assuming an activist could gain Board representation, who would the likely buyer be in a take-out?" We believe a straight take-private transaction could be the most likely outcome, whether by an activist firm with a direct real estate arm, a REPE shop or the Otto family themselves. However, given the math we also believe it is worth considering a scenario where peer Empire State Realty Trust (ESRT) with its dry powder and likely access to capital pulls the trigger and acquires PGRE in an all-cash or cash/stock transaction.

Long Bench name Paramount Group (PGRE) recently switched to bearish TREND last week after remaining a top signal strength long for several weeks. As a reminder PGRE recently rejected a $12/share buyout offer from Monarch Alternative Investment, and we think a revised offer as well as a potential proxy contest are in the cards for 2H22, although Quad 4 may delay the revised offer piece.

This was the second time in two years the company has rejected outright an unsolicited offer without running a full process to explore strategic alternatives/value, showing a blatant disregard for its fiduciary duty to shareholders. We believe a topping offer could be forthcoming and have said from the beginning that a takeout would likely be in the $12-14/share range, potentially involving the Otto family “rolling” their equity stake into a take-private transaction.

Given the massive capex drag in office (can be 25%+ of NOI), we think the $14/share range is the “upper limit” of a private buyer’s ability and willingness to pay, given the downward impact it has on “economic” yield versus nominal yield. 

EXAS

Short Thesis Overview: Exact Sciences (EXAS) shares remain on the Health Care team’s Best Ideas Short list following its  4Q21 / FY21 earnings release and call. As of mid-day Friday, 2/25/22, the stock is up ~2% on the week after dropping from the low $70s to the high $60s immediately following the earnings call. We think concern around 2022 Cologuard screening revenue guidance ($1,340MM to $1,347MM up from $1,062MM in 2021) is likely to leave the stock in a short bucket in our MicroQuads (MicroQuad 4 or 1), which is not a great place to be for a stock when we’re in Macro Quad 4.

Exact Sciences (EXAS) shares have tried to rally this week but are flat since Monday as of mid-day (5/20). The stock remains on the Health Care team’s Best Ideas Short list. As a reminder, Cologuard volume slightly beat our claims trend for 1Q22, but the company continues to lose a ton of money (~$180MM in 1Q22), and there were several questions about [Guardant’s] liquid biopsy (i.e., blood-based tests) vs. Cologuard during the Q&A. EXAS screens short based on several preferred Quad 4 factors (short interest, negative EBITDA, Micro Quad 1), and on 5/17, we noted GRAIL and Intermountain Healthcare Expanded a Partnership to Offer Galleri® Multi-Cancer Early Detection Blood Test to Eligible Patients in Utah (bw). The race is on and EXAS seems to in a "fast follower" position with Thrive Earlier Detection. We've heard commentary on GRAIL approaching DPCs (direct primary care doctors) "aggressively" recently: "Starting this month, Intermountain will offer the Galleri test to eligible health system patients at elevated risk for cancer, such as adults over 50 years old or with additional risk factors. In addition, the test will be available to eligible employees and their families who are enrolled in a company-sponsored health plan."

EXAS fine-tuned its guidance for 2022 around existing Consensus estimates, and we continue to see a recovery for in-person care through earnings reports and other high frequency data as we exited 1Q22, which in our view means colonoscopy will take back patient share it lost during COVID. Our view remains that Cologuard will cede share back to colonoscopy and market penetration is unlikely to ever get to or above 40%; however, we took note of EXAS’ Bank of America presentation this past week, as management described a way to potentially increase rescreening compliance from just under 50% to 70-80% by allowing a physician to place a standing order that’ll be good for up to one year.  

Risks remain: 1) the new, larger, expensive sales team can have an impact in a world where physician office visits don’t return to pre-COVID levels; 2) the market returns to normal (this risk is rising, but it’s no longer clear that EXAS will benefit); 3) management really does have a "clear line of sight" to profitability a couple of years out and the sell side starts to believe that and ratchets 2022 and ’23 revenue estimates higher from the $2B and level; 4) rescreening revenue surprises to the upside; and 5) GH’s ECLIPSE data fails to impress or is further delayed. EXAS is, we think, playing a long game with hereditary and pan-cancer screening (Thrive), but these opportunities are well outside of our purview, and we don’t feel any pressure to cover.

CURV

Short Thesis Overview: Consider that Sycamore bought Hot Topic in 2013 for $600mm and purchased it almost entirely for the crown jewel Hot Topic asset. Torrid was the icing on the cake. On July 1, Torrid went public as a stand-alone business in the hottest and most profitable apparel environment we’ve seen in decades and traded at a $2.5bn valuation. In the end, this is an overstored retailer that is benefitting from a once-in-a-generation burst in apparel spending at unsustainable gross margins, which came public because the private equity sponsor saw a unique window to sell an asset at inflated prices. Given that dynamic, there’s still stock that has to come to market and Sycamore still owns 75% of the shares outstanding, or about 82 million shares, which it will get rid of at any price and create continuous downward pressure on CURV.

We got continued data around building apparel inventories this week. TGT, a CURV competitor, noted slowing apparel demand and increased markdowns.  KSS, another CURV competitor, reported this week.  

The company missed EPS expectations by a wide margin at $0.11 vs the Street at $0.69. Sales were negative YY, gross margin down 70bps YY, but still 150bps ahead of 2019, so likely more to go on reversion side. 

KSS inventories were up 40% YY, and on vs 2019 (more relevant) its a -10% spread to sales,  inv up 1.5% with sales down 9%, clearly seeing inventory building on the margin.  CURV is facing growing competition and a competitive set that will be getting more aggressive on promotions with building inventories.  Margins for CURV are headed lower.

WRBY

Short Thesis Overview: Warby Parker is currently staring at a fork in the road as a business. Its current business model is selling glasses at a lower price than market leader Luxottica, but the CEO has talked about how the company is transitioning to become a “holisitic” vision care company. That means that consumers can buy glasses as well as get eye exams and prescriptions at Warby Parker stores. The issue is that type of transition requires capital intensity to allow stores to have the capabilities to offer exams as well as the requirement on SG&A to pay for doctors and other professionals to be in the stores to give exams. The initiative flies in the face of the company’s targets to leverage SG&A spending, and as the company goes down this path it will need to continue to spend to keep top line rolling which impacts margins.

WRBY reported earnings this week.  The company saw a slight miss on revenue with EBITDA well below expected at $0.8M vs consensus $8.8M.  Despite the 1Q weakness the company is hanging on to an ambitious guide for the full year on revenue and profitability. That guide is likely at risk in coming quarters. 

With industry demand trends under pressure, and online google interest for Warby declining, we think the company struggles to meet revenue and EBITDA targets for 2022.  The name caught some big sell side downgrades following the earnings release suggesting that even the bulls are doubting the company’s ability to deliver profitability. 

With negative EBITDA this name can keep going lower in Quad4.

DOCN

Short Thesis Overview: Our signups data for DOCN still looks depressed on total customer growth. We expect the company likely has another Q to go (2Q22) of excessively weak customer adds until a new normal arrives closer to a historical (non-covid) average.

Click HERE to watch Technology analyst Yosef Vaitsblit discuss the latest update on Digital Ocean (DOCN). Update is timestamped at 3:44. 

BGFV 

Short Thesis Overview: Earnings risk is huge in 2022 and beyond for BGFV.  Nike is gone and the sporting goods category has seen over consumption during the pandemic which should mean an impending drop off in demand.  Double whammy of earnings pressure on BGFV.

We continue to have a net negative view on sporting goods demand and margin reversion.  We think BGFV will be the biggest loser given competitive threats and the risk around losing Nike as a vendor. 

DTC

Short Thesis Overview: Solo Brands originally started in 2011 as just Solo Stove, but in 2021 acquired Chubbies (apparel), Oru (kayaks), and Isle (paddleboards) to create a portfolio of brands – that ultimately have Zero synergies at the company or consumer-level. The company went public the traditional route back in October at an initial price of $17/share, and has been broken ever since (currently trades at $16). The outdoor categories it serves benefitted materially from the pandemic, and all of them are likely to slow materially over 2022 and 2023 – yet the consensus has earnings growing 20% over the next two years.

We heard data points from several companies this week that continue to support our negative view on over consumer durables products.  WEBR’s print detailed above in this note was one of them, another key one was TGT which specifically highlighted too much inventory and weakening demand in bulky durables categories related to home where it had to start discounting. 

DTC’s core products are likely to see continued demand and margin pressure in the coming quarters.

WEBR

Short Thesis Overview: The read overall is negative for the big durables names as we think we are about to see unit consumption reversion to the mean, and given the over consumption the last couple years, we need to go well below historical average unit consumption to correct. Bad demand/margin setup.

WEBR reported a 2Q revenue and EBITDA miss of about 8% on each.  Management also significantly reduced the full year guide to EBITDA of $140mm-$180mm, about half the prior $300mm midpoint.  The question after seeing that is likely, "then why was the stock barely down on the day"?  Well the answer is pretty simple, the core private holders that took this public still own over 90% of the shares outstanding and ~60% of the floating A shares.  The stock is still in price discovery mode as the institutional crowd has struggled to find enough borrow to actually put on a short position, and sponsors are reluctant to sell after such a rapid fall in the stock. The guide down culprit is retail traffic and purchase trends in 2022.

The crux of out short call was the high likelihood of demand pressure into 2022 given normalization of unit consumption, especially in the context of significant discretionary income pressure Y/Y.  Revenue trends about 40% to 50% above 2019 levels were simply not sustainable. 

Now the company is taking up price by double digits to offset cost pressures around inflation in freight and materials, so gross margin should be getting progressively better in the coming quarters, but unit trends have been and likely will continue to be volatile. The question now is will guidance be right?  While the stock has been in price discovery mode, management is in guidance discovery mode, meaning this is a new public company, with a team learning how to guide, and having to do it in what will likely be some of the worst demand reversion trends it has ever seen.  Let’s just say we’d take the under on any management team’s ability to properly guide the downside risk in such an environment. 

Even if the management team is correct, with $2bn in market cap and $1.3bn in debt, it’s trading at ~20x EBITDA on falling numbers.  Leverage sits at about 7x Net Debt to EBITDA. It’s no wonder there is no borrow.  We’re coming out slightly below the bottom end of the EBITDA range at $136mm, with 2023 closer to $200mm.  At a low DD EBITDA multiple, this stock is worth around $1 to $3, maybe less. 

INVH

Short Thesis Overview:  We are adding Invitation Homes (INVH) to the Best Idea Short list, as we think the recently revealed whistleblower case in San Diego is a much bigger deal potentially than the market is currently discounting. This will be a controversial one for sure as INVH is a consensus long trade (and we recently had on the long bench), but we think (1) all the more reason to short it here given both the headline and real financial overhang mixed with a Quad 4 macro setup, and (2) clients need to be thinking about this issue critically.

Invitation Homes (INVH) filed its motion to dismiss the qui tam whistleblower case in federal court. We don’t necessarily want to wade into the legal specifics, but a few observations from a fundamental perspective. INVH wrote in its 10-K filing earlier this year that “it was not subject to material litigation risk,” and this was highlighted by a significant portion of the rest of sell-side as reason not to worry about potential legal liability.

Thanks for coming out. Then, the company petitioned to remove the case from state court and escalate to federal court. Then on 5/4 INVH hired a new SVP of Legal with more than 15 years of experience in dispute resolution, investigations, litigation, compliance and corporate transactions. Watch what they do, not what they say – clearly this is a company concerned about its legal liability.

In the motion to dismiss the company basically claimed (paraphrasing) “yea, maybe we committed fraud, but only the government can sue us, not private plaintiffs.” And it also tugged further on the thread of shifting responsibility for the non-permitting to prior owners, despite the fact that INVH represented in subsequent transactions that all homes were up to code and had all necessary permits, licenses, etc. What?

Finally, as we have said from the beginning, if we are right about this it likely means the entire SFR subsector is operating at artificially/unsustainably high “economic” margins and ROIs inclusive of maintenance capex. Staying short here and would most definitely steer clear on the long side. 

WE

Short Thesis Overview: We added WeWork (WE) to the Short Bench two weeks ago following a disastrous sequence of events surrounding a rumored equity raise on a Friday afternoon sending the stock down 20%+, which (1) given how it was handled and (2) the recent string of negative events, led us to conclude that management of a controversial SPAC had likely lost all credibility heading into a Quad 4 in 2Q.

We added WeWork (WE) to the Best Idea Short list this past year after a bullish New York Times article, which highlighted that WE’s facilities are seeing increases in utilization rates. Here is the problem – that has been so since we launched on the stock late last year.

Since then the company has lost a chairman, seen the combination of the CEO and chair roles, the management team as basically lost credibility, new location openings have trailed expectations, cash burn as exceeded our forecasts, and we are now in Quad 4. WE has basically all of the wrong style factors for Quad 4, so we used the narrative last week to go fully short.   

HZO

Short Thesis Overview: Here's another good example of how you professionally covered a short lower and now have a another shot to short it again with the latest weak-handed hedgie covering on green... See Retail analyst Brian McGough's Retail Pro research for details on why to short PEAK CYCLE numbers at MarineMax (HZO).

We saw still more market volatility this week with indices falling again.  The wealth effect is likely to start to see a trickle down effect to high ticket and luxury category demand like those that are core to the HZO business. 

Online interest for boats and yachts is trending well below the levels seen in 2020 and 2021.  It’s only a matter of time until we start to see demand problems for HZO.

mpw

Hedgeye CEO Keith McCullough added Medical Properties Trust (MPW) to the short side of Investing Ideas this week. Below is a brief note.

The best part about selling AFTER a bear market bounces is I get to send you SELL signals in names that A) aren't new to my Independent Research team's lists... but B) have bounced big to lower-highs with my Bearish @Hedgeye TREND signals.

Tag, Medical Properties Trust (MPW), you are it.

I do enjoy telling people to sell trusts that my research all-stars don't trust btw. Here's a good summary excerpt from Rob Simone's REIT Pro research product on the name:

Medical Properties Trust (MPW): Q1 earnings call yesterday; company spent 30% of the conference call going down the road of non-credible 3rd party reports rather than presenting credible data; the data and the math is what will matter in the end; CEO said company is in the strongest position they’ve ever been in from a financial standpoint; red flags everywhere on the call, embarrassment for the management team; we encourage people to listen to the conference call; MPW remains a short.

GIL

Hedgeye CEO Keith McCullough added Gildan Activewear (GIL) to the short side of Investing Ideas this week. Below is a brief note.

Here's another disaster stock that's just getting started in terms of it signaling Bearish @Hedgeye TREND...

Coaching Notes:

1. Look for names that just reported #slowing this month (YETI, GIL, etc.)
2. Look for Bullish to Bearish TREND reversals with big 3yr look backs 
3. Look both ways (and down at your feet) before you cross a bear's path

Retail analyst Brian McGough remains bearish on Gildan (GIL) after being bullish for most of the bull run. See his Retail Pro research product on why (including high Cotton prices).