Investing Ideas Newsletter

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

Below are updates on our sixteen current high-conviction long and short ideas. We have added CoreCivic (CXW) to the long 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.

One of the misunderstood aspects of the PLBY thesis is the complete change in brand direction and transformation of the leadership.  It has recruited top talent and is building a team appropriate for the new brand direction. 

A key aspect is that over half the employee base is female, meaning the company is very much changing from the old male targeted message to a more balanced one and with a consumer products business more targeted to the young female consumer.  The key leaders are highlighted in the slide below.

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. Our understanding from conversations with industry players is that Monarch is “playing for keeps” and fully intends to pursue Monarch.

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. Given the massive capex drag in office (can be 25%+ of NOI), we think the $14/share range is the “upper limit” of a rational private buyer’s ability and willingness to pay, given the downward impact it has on “economic” yield versus nominal yield. On last check Monarch is still a “page one shareholder” and additional hedge funds with an activist slant have built or added to positions.  

CXW

Hedgeye CEO Keith McCullough added CoreCivic (CXW) to the long side of Investing Ideas this week. Below is a brief note.

So, if we're buying-some bonds here (because Bond Yields are signaling immediate-term TRADE #overbought), what else are you thinking about doing in your portfolios?

A) Buying-some Gold and some Gold Mining exposure? Yep.

B) Buying-some REITS? Sure.

I just did a little due dilly on REIT Rob Simone's Long List (asked Floki’s Fractal for a Long Signal) and see that CoreCivic (CXW) is signaling buy at the low-end of its Risk Range.

Especially in Crypto fraud, you gotta be bullish on more people going to jail, no?  

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 an investor conference this week. They spoke about patients reaching the time to retest could be a $500M business, although relative to current screening of ~1,400M and a similar amount within the 3 year or greater window for retesting, its surprising to hear them speak in optimistic terms rather than disappointment.  

Part of the issue holding back sales has been access to physicians for in person sales calls. They’re saying their both doing great while also struggling with access.  We see Cologuard claims and the claims for colon cancer screening broadly improving off the Omicron lows in 1Q22.  Competition is coming and the big event will be Guardant’s data release in the second half of 2022.

This week they recommitted to their timeline for a data read out.  If Guardant’s data is anything like their preliminary data for specificity and sensitivity, a recovery for EXAS in 2022 with rescreening building momentum won’t matter.

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.

CURV Reported Earnings this week.  The company beat on 1Q results, but had to guide down 2Q profits while guiding inline for the full year.  That sets a higher bar on the back half of the year where margins are likely to come under severe pressure as promotions return to the category. 

TGT again this week warned about the need to reduce inventories in multiple categories by discounting. CURV will see share and margin risk in that environment and will struggle to hit the expectations just laid out.

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.

Since we went short WRBY in Dec, the stock is down 70% in a 16% down market. The amazing thing is that unlike other ‘beaten up’ names, there’s still ZERO valuation support here. The company has no earnings, so p/e is infinite. It’s got cash flow, but trades at a staggering 33x EBITDA.

As with most companies that have no earnings, people like to look at EV/Sales, and call WRBY ‘cheap’ at 2.2x sales just because it peaked at 10x sales after a mispriced direct listing. In Macro Quad 4, relying on EV/Sales as a valuation metric is downright reckless – especially when profitability hopes are being pushed out. In theory, and practice, there’s no reason why this name can’t trade at 1x sales.

To be clear, we’d be interested in owning WRBY at a price, but that price is well into the single digits vs the current $15 price.  

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.

BGFV made new lows this week.  There has been a whole lot of nothing in terms of news around the model lately.  The core consumer is seeing pressure, its categories are reverting, and Nike is no longer available to be a traffic driver to the store.  This model remains under pressure.

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.

DTC was down on the week. Following last weeks rally on insider buys, this week saw no flow through on buying.  The market doesn’t want to touch small cap names coming of peak earnings levels. 

ASO reported this week, the company did not talk about Chubbies sales even though it was a new brand launch highlighted for this spring.  Maybe that is a red flag, or maybe it’s nothing.   This name likely remains under pressure seeing no bid while we still sit in Macro Quad4.  

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 announced a executive departure this week  with the chief accounting officer leaving the company early next year.  Not an overly bearish signal, but generally execs don’t plan to leave when things are getting better. 

We have seen a slow return of grill demand this spring, but it still looking below 2021 levels.  Target’s warning around inventories can’t be bullish for sell throughs in seasonal and durables categories like grills.  We think this levered name continues to see earnings pressure and equity rerating lower.

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.

Best Idea Short 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 time the judge will decide some time in the Fall most likely on whether to dismiss or proceed. 

We DO NOT believe the case will be dismissed, and any move to discovery would likely be very damaging for INVH. We continue to believe that media and regulatory scrutiny is increasing in a highly negative way, with attention likely to increase throughout the summer and fall heading into the midterm elections.

Bigger picture, growth rates probably have already or is in the process of peaking 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. We prefer multifamily to SFR as a more sustainable model until valuations rationalize.  

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).

According to Placer, one of the sources we use to track visits to different retailers, traffic at West Marine has been in a steady decline since March, and remains well below last year as we enter the peak summer boating season. Not what you want to see as it relates to interest in boating, and a negative datapoint on the margin for MarineMax.  

Source: Placer.ai

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, and there were two FASCINATING developments last week. As we have said from the beginning we believe that several operators, most notably Steward Health and perhaps Prospect, are likely distressed 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 last week that are important signposts and very indicative of the stress: (1) Steward raised the equivalent of ~4-5 months of rent in cash by selling a business that had previously been regarded as a critical 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, as there is still ~$16/share of downside from here.    

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).

On the last print for it put up a nice headline beat out of GIL, but the setup here is clearly bearish. Regardless of the CEO’s comments on the call saying the channel is clean, our read is that the wholesale (screenprint) channel bought inventory ahead of likely price increases in 2H.

We’ve seen this story before, and it doesn’t end well. The company is running EXTREMELY lean on SG&A, which is not sustainable. So margins look too high, set to decelerate, in the face of a slowdown in end-purchases in the channel that accounts for 80% of GIL’s cash flow. 

When seeing high volatility in materials prices with risk to demand shocks and high inventory levels in the channel is not the time when you want to own GIL.

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

Another week of data for our AMN tracker and pricing continues to leak all of the premium built up over Delta and Omicron.  While management has guided to sequential declines from the peak, we think there is further downside for 2H22 and 2023. 

We’ve been posting the AMN charts in our Morning Brief along will all of the other key updates across our Position Monitor names. The presentation is up to 61 slides across multiple topics including trends in labor, medical utilization, and app downloads across our core names.

For AMN, the constellation of data we’re charting continue to back up our thesis.  We have several more updates for the Tracker and BLS labor data to go before AMN reports 2Q22 and key for our thesis, guides Q322. We’re planning to have a very good idea what they’ll be saying for both.

CROX

Short Thesis Overview: 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.

CROX is admittedly an extremely cheap stock – trading at less than 5x earnings. But when valuation is the first thing a bull hits us with, it usually means that there’s something wrong – or at a minimum, a reason why it’s so ‘cheap’.

For us, the problem we have with CROX is that the company is arguably overearning. The management team has done a great job here in making this brand white hot, but we think that the company is letting too much of that revenue strength flow through to the bottom line, as opposed to investing to ensure continuous brand heat. Last year, the company put up a 60% gross margin, compared to 48% pre-pandemic. Impressive.

But the EBIT margin has gone from 6% to an eye-popping 30%. We think that real earnings should be closer to be 20% -- with the incremental capital put towards R&D and more importantly, marketing.

Footwear cycles last a notoriously long time, so this brand might remain hot on its own for years. But from a financial perspective, we think it’s a risky way to run the model. We’ll trust the signal short-side here.