Investing Ideas Newsletter

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

Below are updates on our fifteen current high-conviction long and short ideas. We have added Crocs (CROX) 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.

HERE is the Replay of our Q&A with the PLBY CFO to dive into key business drivers for Best Idea Long PLBY. We touched on CENTERFOLD, the announced buyback authorization, investments in the team, licensing, new business drivers, and more.

Want access to these calls live? Subscribe to Retail Pro now. 

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.

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. It appears that PGRE will only be holding private 1-on-1 meetings at NAREIT and not presenting.  

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 was at the ASCO Conference last week where they debuted 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 be presenting 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.

We got a few more apparel earnings prints this week with VSCO, LULU, and PVH.  2 of the 3 (VSCO and LULU) had significant increases in inventories and far outgrowing sales trends, PVH US inventories were lean due to supply chain delays. 

VSCO is more of a competitor to Torrid than the others.  The data continues to trend towards elevated inventories across the industry.  CURV will be seeing margin pressure like everyone else as well as intensifying competitive pressure in its category carve out of plus sized apparel.  

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.

Barron’s out with a fluff piece that ‘the consumer is stronger than you think’ which is based on the analysis of an Old Wall analyst. Old Wall meets Old (dying) Media. Great. One of the names the article pitched was long WRBY, due to increased store rollout cadence as the company catches up from what was delayed during the pandemic.

We disagree. Store rollouts are the problem here, not the solution. The company stated at the IPO that it was doing ~$3,000 per foot. But the reality is that it is struggling to do better than $2,000 – even as we ‘re-open’ and consumers spend more on fashion, which should include glasses.

WRBY was a defendable disruptor to the eyewear space when it was an online-only model, but we think that a brick & mortar strategy will permanently impair profitability.

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 think that BGFV still faces another big downward revision this year. In January, the consensus estimate for the year was $3.23. Today it sits at $2.41. The interesting thing is that when you go to big5sportinggoods.com you still see Nike product on there.

That goes away this fall. Next year, we think that BGFV will struggle to put up $1per share in earnings, as it loses Nike as a vendor, the consumer mean-reverts in the sporting goods space, and as Dick’s Sporting Goods and Academy Sports invade BGFV’s territory.

Over a TAIL duration, we have earnings nearly evaporating to about $).25 per share. This company falls into the ‘has no reason to exist’ category. 

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.

Another insider buy at DTC this week, this time by the CEO. Generally insider buys are a positive, though we are surprised at the minimal flow through in price action following the transactions. 

There still appears to be no bid from the institutional crowd, nobody wants to touch this stock. That makes sense to us as it is over earning, the buy side likely wants to see numbers rebased before getting interested.  It all continues to suggest that this company shouldn’t have come public.

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.

A big insider sale at WEBR was filed this week.  Late last week the EVP and President Emeritus Hans-Jurgen Herr sold 50k shares.  This is notable and bearish for 2 reasons.  One, its an insider sale after a massive drop in the stock. 

Second, it’s an insider putting shares that weren’t really floating out into the market, which provides more float/liquidity for those potentially looking to short the stock.  We continue to think WEBR will see reversion in demand and subsequent margin pressure while being a highly levered stock.  That’s a bad recipe for equity value.

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) recently filed its motion to dismiss the qui tam whistleblower case in federal court, and the plaintiff / whistleblower has until the end of June to file its response, after which the judge will decide sometime in the Fall most likely on whether to dismiss or proceed. 

The company will be presenting at the NAREIT conference this coming week and holding 1-on-1 meetings with investors, and we have heard that it has been conducting pre-conference “screening meetings” to try to filter questions and address uncomfortable questions early.

This is highly unusual but, honestly, not expected given that the company will no doubt not want to spend the entire conference talking about this case. Life’s not fair! Stepping back we do not expect much to come of management’s commentary and meetings, but we continue to believe that (1) media and regulatory scrutiny is increasing and that (2) the case will not be dismissed but move relatively quickly into discovery mode.

That’s when things get very interesting. Bigger picture, growth has probably peaked and will continue to slow as (1) it becomes more challenging to pass along rent increases to the typical SFR renter and (2) capex requirements come up to more sustainable levels. 

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).

What could go wrong? Yes, that’s sarcastic. If you listened to the RH conference call this week you should be downright scared as it relates to high-end big-ticket purchases that are interest rate sensitive.

We’re bullish on RH for a number of reasons that we won’t go into here. But one of the best names to pair against that high-conviction long is HZO. The biggest pushback we get on this name is that ‘the stock is cheap’.

Seriously? Can we talk for a minute about what the earnings and cash flow numbers these bulls are using in the ‘it’s cheap’ argument? The consensus is modeling that the current earnings power of ~$8.00 per share stick – virtually in perpetuity.

Keep in mind that this company earned $1-$2 per share during the pandemic. We’ve got earnings mean-reverting in our model to $3-$4 – which still arguably does not assume a crash in underlying demand – just normalized margins on an otherwise stable top line. We’re likely to see a 4-5x multiple on that number, which is good for better than 50% downside from here. 

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.

Medical Properties Trust (MPT) is probably our top short pick here, and there were two FASCINATING developments this week. As we have said from the beginning we believe that several operators, most notably Steward Health and perhaps Prospect, are strained and likely unfavorable credits that will ultimately default or require additional MPW support.

MPW is already levered to the hilt and would likely need to raise equity capital at unfavorable prices and / or cut its dividend to be able to extend that support.

In the case of Steward Health, two things happened this past week: (1) Steward raised the equivalent of ~4-5 months of rent in cash by selling a business that had previously been regarded as a growth area to CareMax, and (2) the FTC sued to block the Steward sale of five hospitals to HCA, which both negatively impacts Steward’s liquidity but also eliminates a source of capital for MPW via the “put option” to HCA.

The first validates Steward’s obvious need for cash to help support its rent payment to MPW, the second negatively impacts its liquidity and MPW’s access to capital directly. Things are getting interesting, for MPW heading into the Summer / Fall. Short it.    

GIL

Short Thesis Overview: Look for names that just reported #slowing this month (YETI, GIL, etc.) Look for Bullish to Bearish TREND reversals with big 3yr look backs  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).

Volatile commodity prices have historically caused issues in GIL margins.  Short term run ups or falls are the most disruptive to Trend GIL profitability as it doesn’t want to have to make multiple big price jumps or cuts, so it tends to eat more margin change on volatility.  

Outside of the 2012 cotton shock, this is the most volatile raw materials market that GIL has seen.  In recent weeks cotton has been trending up ~70% YY (chart below).  Oil (where polyester comes from) has been up of course as well.  

This will be a tough pill to swallow as it takes about 12 months to flow through to the P&L. GIL is likely to have some earnings pressure around dealing with this combo of cost pressure and demand slowdown from a weakening consumer.

AMN

Short Thesis Overview: 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

AMN continues to be a Best Idea Short.  Labor pricing continues to ease along with falling Hospital COVID ICU occupancy.  Hospitals reporting critical staffing shortages has fallen from 20% to 10% even as we've seen BA2 trend higher in recent weeks. 

The same HHS data that contains critical staffing shortages data also shows that COVID inpatient occupancy in New York looks like its rolling over AND COVID ICU occupancy has remained flat since 4/18/2022, well past the point in prior waves where rising cases and hospitalizations had resulted in rising ICU occupancy.  Without rising ICU occupancy there won't be the public health actions that we are all so ready to be behind us. 

In addition to the Quad-Factor analysis, AMN has a long enough history that allow us to measure the stock's performance across all prior Macro Quads. 

Quad 4 is clearly the weak point.  Now if the counter to the short is "nursing shortage," that's been a feature of staffing for many of the prior Quads measured in the chart.  Looking ahead, the upcoming labor report for May could be a problem if "nursing shortage" is your fundamental anchor.  JOLTS data comes from provider surveys and as the crisis abates, it seems likely that the some of those postings come down. 

If JOLTS levels drop while Health Care hiring slows, which is a possible scenario, rates will be set to fall further, and "nursing shortage" won't be so important.

crox

Hedgeye CEO Keith McCullough has added Crocs (CROX) to the short side of Investing Ideas this week. Below is a brief note.

These intraday bounces are all part of risk managing The #Quad4 Bear...

The key is to keep moving. Remember, we're looking to add fresh inventory after covering other Bearish @Hedgeye TRENDs on red. 

Coaching Notes:

A) Is the ticker making lower-highs on #decelerating volume? ... and 

B) Is the ticker one that Retail analyst Brian McGough is bearish on fundamentally?

From the LOVE to the Crocs (no you don't buy more pairs with no stimmy checks), this year has been one to remember on the short side. 

Stay with these shorts AFTER they bounce.