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Long: PLBY, PGRE, CXW Short: EXAS, CURV, BGFV, WRBY, DOCN, DTC, INVH, WEBR, HZO, MPW, GIL, AMN, CROX, CAR |
Below are updates on our seventeen current high-conviction long and short ideas. We have added Avis (CAR) to the short side this week. 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: 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. |
A key aspect of the PLBY bull thesis is the change in brand positioning. The brand is far removed today from its recent history of being a men’s magazine. Messaging is getting back to the brand roots of equality, personal rights, and freedom of expression.
That positioning is drawing in a whole new consumer that the brand was missing. That new consumer is younger, and more female, which is the core consumer demographic to appeal to when a company is setting up for long term growth. We continue to think PLBY is one of the more compelling revenue growth stories in consumer today.
PGRE
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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. |
PGRE's Board rejected the offer on 3.21, and we never heard a public response from Monarch leaving an open question as to whether Monarch would hang around to pursue a fight, unlike Bow Street which very logically backed away with a sizeable gain after its offer was rejected in 2H20.
This was the second time in two years PGRE rejected an unsolicited takeover proposal without concurrently announcing a full process to gauge value and explore other alternatives. We continue to be of the view that PGRE has been run terribly from a capital allocation perspective, exists primarily to benefit an entrenched CEO and controlling family shareholders, and should not be operating in a public context.
The only logical conclusion to this story is a take-private, with the only questions being "who" and "when?"
CXW
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Long Thesis Overview: Formerly known as Corrections Corp, to the Long Bench on an identifiable near-term catalyst in the form of the Biden Administration potentially letting Title 42 expire. CXW is no longer a REIT, having converted back to a C-Corp 2 years ago, but has unique (and controversial) assets very relevant to the current situation at the southern border being amplified by the Ukrainian refugee crisis. |
Focus is on losing less money in #Quad 4 and outperforming on a relative basis; all conservatively levered, favorable RoC, lower-beta, longer duration, etc.
On CXW, you have to love prisons along with other "sin stocks" in a recession, with the company appropriately delivered and poised to benefit from an eventual expiration of Title 42.
EXAS
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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. |
Remarkable to look back at where EXAS peaked on the back of chasing pan cancer testing with their acquisition of Thrive, and the incremental and temporary addition of COVID testing.
Over the last 5 years the stock has gone from $33 to $120, back down to 35 when COVID hit then back up to a peak of $150, and here we are at $37. The Pfizer reps seem to be getting some traction in the latest claims update, but the economic data will be in the driver’s seat, both in pushing EXAS unfavorable factors lower, as well as concern for the routine doctor visits that generate a Cologuard prescription.
CURV
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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 its 1Q call CURV noted its intention to unload excess inventories through discounting. This week we also got sales updates from internationally base online retailers in Asos and Boo Hoo taking about an increase in returns. Rising return rates in fashion apparel does not bode well for the company with already inflated inventories and slowing sales.
More returns = inventory levels greater than expected which equals further discounting to reduce the inventories. With the combination of increased returns and additional discounts, CURV will face a significant amount of margin risk. Despite growing inventories, rising cost inflation, and slowing consumer spending, CURV is sticking to its original full year 2022 guidance, which it will struggle to hit.
CURV will be at the Jefferies Consumer Conference next Monday, the 19th. We don’t expect to learn much new, but there is a chance the company has to preannounce if results are trending well below management’s prior expectation.
WRBY
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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 Parker’s CFO sold stock a week back which was filed in a form 4 this week. Not a good sign when an exec is selling after a big decline.
It's most likely just related to liquidity in compensation, but still doesn’t bode well for the near term outlook of the stock, at least in the eyes of the CFO. This remains an overvalued, unprofitable retail concept.
DOCN
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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) on 6/13/22. Update is timestamped at 1:20.
BGFV
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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’ve detailed the Nike risk for BGFV a lot with the vendor no longer using BGFV as a wholesale partner. What we haven’t discussed is the idiosyncratic risk around inflation related to the fact that half the company’s stores are located in California.
California has the highest gas prices by far in the US at $6.42 on average for regular unleaded. The middle tier consumer in core BGFV markets is feeling the inflationary pressure hard. The category it self is hanging in there from a growth perspective in recent retail data, but its likely to see reversion and BGFV is likely to be a big share loser in advance of and during the slowdown.
DTC
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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. |
In retail sales data for May released this week, Sporting goods stores actually put up a decent number, hanging in right around last month’s growth when compared to 2019 levels. That perhaps a good thing for DTC, in that sales for its category distribution channels look ok, but its not good that the stock has performed so weak while numbers in the industry don’t even look that bad yet. Short interest has fallen some with the stock around 3x PE on street numbers.
But the earnings estimates here are wrong and will be going lower. The stock at 1.3x sales, which when coupled with the PE multiple kind of shows that margins here are likely too high, it will take reinvestment to keep the top line going, otherwise this model is in perpetual revenue decline.
WEBR
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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. |
Our conviction on WEBR short side remains high. Earnings are headed lower while leverage sits at about 7x Net Debt to EBITDA. Quad4 tends to punish high leverage in combination with slowing trends.
At a low DD EBITDA multiple, this stock is worth around $1 to $3 at best vs trading at ~$7.50 today. There’s no reason this name shouldn’t trade at 7-8x EBITDA, implying ZERO equity value – though we suspect that it will be taken private again before the equity value completely evaporates.
INVH
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Short Thesis Overview:
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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
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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 retail sales this week, the biggest underlying slowdown in May was seen in motor vehicle retail. The big ticket items are slowing.
The negative wealth effect of continued market volatility coupled with increasing rates means the consumer is feeling worse about spending on big ticket items, and financing those items is becoming increasingly expensive. We expect the category to see rapid demand slowdowns in coming months.
MPW
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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 (MPW) dropped news this week that Steward Healthcare (MPW’s largest relationship) and HCA Healthcare (HCA) scuttled proposed merger of operations of 5 hospitals in Utah. Not good.
We think Steward is on the verge of insolvency based on our numbers; both voluntarily walked away from the deal; another example of management not knowing what they are doing; MPW remains a short.
Click HERE to watch the full breakdown from The Call @ Hedgeye from 6/17/22.
GIL
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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). |
We’re starting to hear about layoffs at some large companies. Tesla, Redfin, Stitch Fix, all within the last week or so. Tech land in particular is a risk. This matters for Gildan because one of GIL’s core markets is corporate promotions.
When corporates are laying off, they are generally cutting budgets up and down the business, including marketing/promotions. Think conferences or giveaways when you get a free shirt with a company name on it. GIL’s business will see slowing trends along with significantly rising input costs. Margins here have to reset lower over a trend duration before GIL can return to a longer term revenue and margin growth trajectory.
AMN
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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) |
It was another crazy week for the market and for AMN. The Trackers proved helpful keeping us focused on pricing trends rather than the markets interpretation of Hospital comments coming out of the Goldman Sachs Health Care Conference.
For our AMN tracker and pricing continues to leak all of the premium built up over Delta and Omicron. Hospitals said contract staffing was receding less quickly than they hoped was interpreted as a new positive for AMN shares. The rally on the hospital comments was followed by AMN announcing they repurchased 1.8M shares over 2Q22, a massive number and good enough to drive EPS estimates up. No change in our outlook for 2H22 and 2023.
CROX
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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. |
Growth for CROX in the core is unmistakably slowing – with a deceleration in wholesale, retail and DTC. Perhaps it’s just the law of large numbers, but a slowdown is a slowdown. 2) Margins are extremely peaky – sitting at ~29% vs low-teens pre-pandemic.
The right margin level for this business is probably around 20%. 3) We recent ‘Hey Dude’ acquisition looks like a sign of the growth air pocket, and is a clear move outside of the core brand. It was a huge deal for CROX at $2.5bn – it’d probably have been better served to buy AllBirds at that price. This market won’t put a premium on acquired growth.
CAR
Hedgeye CEO Keith McCullough added Avis (CAR) to the short side of Investing Ideas this week. Below is a brief note.
Remind me why big pandemic winners like Avis (CAR) can't go down to where they were pre-pandemic?
This has to be one of the scarier looking 3yr Bubble Charts. Yes, it was a stock market bubble. Yes, it is crashing. And no, people still aren't #Quad4 Bearish Enough.
See Van Sciver's Industrials Pro research product on why CAR is a SELL,
KM
