|
Long: PLBY, PGRE Short: EXAS, CURV, BGFV, WRBY, DOCN, DTC, INVH, WEBR, HZO, MPW, GIL, AMN |
Below are updates on our fourteen current high-conviction long and short ideas. We have removed WeWork (WE) from the short side and have added AMN Healthcare (AMN) 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. |
We had the CFO of PLBY on for a call for Retail Pro and institutional subscribers this week doing Q&A on the business. It was a good call, the CFO is sharp and everything remains on track with the business.
We spent some time discussing CENTERFOLD in particular, especially with the announced hire of a head of Creator and Influencer marketing coming over from Amazon’s Twitch. She’ll facilitate the engagement and growth of the creator base and scale the CENTERFOLD brand awareness.
We think the growth story here is intact and that this stock will be many multiples of its current price over 2-3 years.
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 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. PGRE should not be a public company, and we think it is likely that it will not be any longer looking out beyond the May 2023 annual meeting.
On last check Monarch is still a “page one shareholder” and additional hedge funds with an activist slant have built or added to positions.
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. |
EXAS is at the ASCO Conference this week where they released a press release titled “Exact Sciences Showcases Breadth of Early Detection and Treatment Guidance Portfolio with Multiple Data Presentations at ASCO 2022” Here is the link if you want to take a look.
We think EXAS has suffered as a Quad-Factor short in Quad 4 where unprofitable long term TAM stories simply get crushed. In the shorter term competition is coming for Cologuard in the form of blood based cancer screening, including EXAS’s own pipeline. And in the current environment, the negative impact of a recession is stalking growth on one side, while a return to in person care and a recovery in colonoscopy, is moving in from the other.
Quads, Factors, and Fundamentals line up poorly. Next week we will have our May update for colon cancer screening and Cologuard claims so stay tuned.
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. |
On Gap Inc’s (disastrous) conference call this week, the company commented on how wrong it got sizing this Spring at Old Navy – keeping in mind that it made all styles up to size 28 in the biggest initiative to lure in the plus-sized customer in the company’s history.
It sounds like Old Navy is backtracking on that initiative, which is a slight positive on the margin for Torrid. Is it enough for us to move our numbers ahead of consensus? No. We’re still below. But an important development for us to call out on the margin.
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. |
After the WRBY downgrades late last week, the stock didn’t part take much in the consumer rally seen late this week. Big multiple growth stories are in trouble. The market might not give these money losing businesses any kind of premium for a long time going forward, that’s what happened in the first tech bubble.
In the interim, WRBY still faces demand pressure, and it is likely to miss profitability expectations, meaning its still sizeable multiple remains at risk. We still think WRBY is heading lower.
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. |
DKS and HIBB both reported earnings this week. The DKS quarter was solid. The first quarter itself was solid. Comps well ahead, gross margins beat, SG&A rate inline with expectations. Inventories up 40%yy, though sales are tracking ahead of inventory when compared to 2019. But management tempered earnings guidance for the year, suggesting a more cautious outlook to the quarters ahead.
Meanwhile HIBB missed earnings, but held guidance hoping to be able to deliver. The read for BGFV is not good, HIBB’s hope is all in the strength of Nike for the remainder of the year, and DKS’s guide down is likely around concern for hardgoods demand reversion.
BGFV no longer has Nike, and there for is relying on the hardgoods side, and lesser softlines brands to try to make up the difference. It won’t happen. BGFV earnings are likely to continue to fall.
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. |
Solo Brands ripped on Friday -- +20% at one point and ending the day +8%. The cause was that the CFO was on the tape buying stock – 70k shares to be exact. Not exactly a ringing endorsement as we’re only talking a $350k buy.
It’s also not clear whether he was required to buy, as many executives are required to own a certain value of shares of their stock, and with DTC -68% for the year to date, and -77% from the post-IPO peak, the aggregate value of his holdings was a fraction of what he owned at the time of the IPO.
We still think there’s another negative earnings revision ahead for DTC, though numbers have been inching closer to our model.
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. |
We’re getting into barbecue season, and the trends aren’t great. We heard from the grill brand reports that sell through was slowing, that was back in 1Q. Looking at the online interest for grills in the chart below, interest has continued to deteriorate vs the big 2020 rally.
When consumers bought grills at abnormal rates, it shifted the replacement curve leaving an airpocket in forward demand which is what we are now starting to hit. WEBR will see falling sales and margin trends in the coming quarters leaving the stock much lower.
INVH
|
Short Thesis Overview:
|
Best Idea Short Invitation Homes (INVH) recently 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. The next catalyst is INVH’s commentary at key NAREIT conference the first week of June, and we have heard two things: (1) the company is holding pre-conference sell-side meetings to “weed out” questions it does not want to deal with, (2) there is increasing media and regulatory chatter.
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). |
In the latest Person Consumption Expenditure report this week, we saw that pleasure boat expenditures grew by 14% vs last year. Sounds like an impressive number, until you factor in the fact that the trend in recent months has been for ~30% growth.
Marine Max’s model is almost entirely driven by sales of high end boats and yachts, and the negative wealth effect we’re seeing due to the value and wealth destruction by Quad 4 in equity markets can’t exactly be inspiring people to go out and drop $3mm on a new 72’ Azimut. This company is egregiously over-earning today.
This company earned $1-2per share pre-pandemic, and now the Street has the company earning $8+ per share in perpetuity. Yes the stock looks cheap at 5x earnings. But the reality is that the real earnings number is closer to $3 over a TAIL duration, which cuts this stock by about 60-70%.
MPW
|
Short Thesis Overview: Medical Properties Trust (MPW): 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. |
Best Idea Short Medical Properties Trust (MPT) is probably our top short pick here.
Lets be honest: (1) the management team is sketchy and non-credible at best, (2) the company’s earnings quality is terrible and deteriorating further, (3) leverage is high and increasing up and to the right, (4) the hospital operator mix suggests significant adverse selection, (5) MPW’s exposure to hospital operations (as opposed to just the real estate) is significant and a huge red flag, and (6) there is at least one (Steward) and maybe two (Prospect) “nukes” sitting at the heart of the portfolio.
The stock is worth $10-11/share at best in our opinion, and is at risk of cash flow deterioration, multiple compression and a dividend cut. Short it.
GIL
Short Thesis Overview:
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). |
Gildan is not immune to the net inflation spread inflection that we expect to see across the apparel industry. Costs are rising while retail channel pricing should slow and go negative.
The focus for Gildan might be on the rising raw materials costs of cotton and polyester, up about ~50%. Higher costs from a year ago are just now flowing through the P&L, so more of that to come.
GIL has some operational and pricing levers to offset some materials volatility, though this is the biggest spike in a decade. Perhaps the other cost pressure concern to be aware of is what elevated oil could be doing to production costs globally in apparel manufacturing regions.
GIL's manufacturing "city" in Honduras can handle this risk better than most with processes to reduce energy consumption and a supplemental power plant on site, but it is not immune to the directional cost pressure. With the energy/food price shocks, labor costs should see pressure, and you can tack on an elevated risk of political unrest that has occasionally disrupted GIL supply chains in the past. Cumulatively those cost pressures will put some material directional pressure on margins in the coming 3-4 quarters.
The cost pressures come at the same time we are likely to see softening demand as we expect to see unit demand pressure globally, with the core GIL US market facing a consumer slowdown and GDP growth slowing pressuring corporate/promotional channel. If prices go up to offset costs, the unit pressure would be magnified.
All in we see sales and margin pressure greater than what is in consensus expectations. That means EPS in 2022 closer to $2.40 vs consensus at $2.90. This stock could easily migrate down into the mid-20s given the margin risk in the coming quarters.
AMN
Hedgeye CEO Keith McCullough added AMN Healthcare (AMN) to the short side of Investing Ideas this week. Below is a brief note.
Another Counter #Quad4 @Hedgeye TREND day it has been with plenty of crowded hedge fund shorts getting squeezed/covered on green (GME is +24%!)...
Coaching Notes:
A) days like today remind you why I sent you 22 straight profitable COVER signals between May 10-22
B) Now we're in a great position to re-load on the short side, but we're in no rush
C) We don't have to rush because we aren't getting killed in 2022
We own #patience as a Core Asset Allocation. We don't need to be in the stinky business of picking other people's "bottoms" either.
On shorting this name in particular:
A) I like shorting our former Longs (AMN)
B) AMN is bouncing to lower-highs within a Bearish @Hedgeye TREND Signal
C) Tom Tobin reiterated the SELL on green on The Call @Hedgeye this week
See Tobin's Healthcare Pro research product for details on the name
