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Long: PLBY, PGRE, DIDIY Short: EXAS, BGFV, WRBY, DTC, INVH, HZO, MPW, GIL, CROX, CAR |
Below are updates on our thirteen current high-conviction long and short ideas. We have removed Torrid Holdings (CURV) & Weber (WEBR) this week and added DiDi Global (DIDIY) to the long side. 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. |
PLBY had a tough week alongside other growth consumer names. The value here is incredibly low compared to the assets and growth drivers we see ahead for PLBY. One in particular is Honey Birdette.
This high end lingerie company has been seeing high growth with high margins, and assuming it continues the growth trajectory, it will arguable be worth multiples of the PLBY EV today. Below is a slide form our presentations earlier this year detailing out the company’s commentary around the growth opportunity of the brand.
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. |
Recently we re-added Paramount Group (PGRE) to the Active Long list, as there were two significant developments: (1) the stock fell to below $8/share from the mid-$11/share range where we had removed from the list, offering a more attractive return profile to the ~$12/share offer from Monarch, and (2) Monarch doubled the size of its position since originally surfacing and following making the offer.
Our understanding is that Monarch is a serious bidder and has likely set its cost basis low enough at around ~$9.30/share where it can “roll” its equity into any deal and play for a private equity-type return profile over a 5-7 year hold. We think Monarch is playing for keeps, and expect them to potentially pursue Board seats at the May 2023 annual meeting with a deadline to announce nominees in November 2022. PGRE should not be a public company, and longer-term shareholders would likely be supportive of a take-private at $12/share.
DIDIY
Hedgeye CEO Keith McCullough added DiDi Global (DIDIY) to the long side of Investing Ideas this week. Below is a brief note.
Been a while since a sent out a buy signal on a single stock...
That's because chasing like a panting dog at this time last week was the amateur-hour thing to do! Now though, after a nice big crash/correction, I'll send you one.
And it's not a US stock. It's a Chinese stock: Didi Global (DIDIY).
As you know, China, unlike the US, is signaling #Quad2. See Felix Wang's China Pro research product for reasons to buy this name and many more.
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. |
We updated the claims chart for Cologuard along with NVTA, GH, MYGN claims trends. Cologuard is having a good 2Q22. That’s a good thing for our pent up demand thesis, but in Quad 4 and with liquid biopsy competition looming, is less important.
You can see the claims trend for EXAS and the other genetic testing labs in our Health Care Presentation linked each morning in the Morning Brief. NVTA would be a long if there wasn’t several more years of losses coming and GH might be a long if the current volume trend was stronger.
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. |
Warby Parker caught a sell side price target cut this week. The stock still remains 50% buy and 50% hold from the Old Wall. Zero sells on it in its public history. The street remains too bullish, the profit bar remains too high too soon, and the macro and industry setup remains negative. This stock made new lows this week, and has plenty more downside ahead.
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. |
In the May PCE released this week, the sporting goods category in which BGFV operates saw a 400bps slowdown from last month in growth vs 2019. The category is reverting and BGFV will be rapidly losing share given it no longer Nike as an offering or traffic driver. Earnings and the stock still heading lower.
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 recently, 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.
INVH
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Short Thesis Overview:
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Active Short Invitation Homes (INVH) had a recent development on the legal front, with the plaintiff-relator filing its response / opposition to INVH’s motion to dismiss in the qui tame whistleblower case. The opposition was based on three distinct legal concepts, most notably misapplication of the Public Disclosure Bar (PDB), the concept of adequate specificity in the allegations and that INVH’s actions “must rise to the level of recklessness or intentional conflict.”
We DO NOT expect the case to be dismissed given the arguments, the potential implications of the case itself and our understanding of the judge’s preferences. Rather, we would expect the case to likely proceed to discovery which, based on our work, would very likely be extremely damaging for INVH and lead to a settlement across multiple jurisdictions (not just California).
The multiple compression from such a chain on events could be significant, and come on top of a fundamental cyclical slowdown in the RoC. We expect a ruling on whether to proceed / dismiss later this Summer or early-Fall.
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). |
A couple negative demand data points for HZO this week. May PCE was reported, and looking at the pleasure boat category vs 2019, in May it saw a 750bps slowdown vs last month.
Additionally we saw a downward revision in RH’s demand trends due to Macro headwinds. If rates, high end sentiment, and market volatility are hurting RH demand, it has to be also hurting HZO demand trends. Lots of earnings reversion risk with minimal growth drivers for HZO.
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. |
Best Idea Short Medical Properties Trust (MPW) is our top short pick here, and we believe the equity is essentially worthless with a significant downside catalyst on the horizon in the form of Steward Health. As we have said from the beginning, we believe that several operators, most notably Steward, are likely distressed credits that will ultimately “soft” default and require either additional MPW support or a lease restructuring.
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 any such support. We believe Steward is essentially insolvent and burning ~$200 million of cash per year, has no remaining sellable or financeable hard assets, and has its credit facility maturing in September. At the same time, Steward accounts for nearly ~30% of MPW’s revenue between rent and loan interest, with MPW acting as BOTH landlord and largest unsecured lender.
MPW could likely “kick the can” on Steward by reducing the rent, but that would both (1) force a dividend cut and (2) very likely send MPW immediately into the single-digit stock price range. Things are getting interesting for MPW heading into the Fall. Short it, as there is still ~$15/share of downside from here.
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). |
There has been a lot of volatility in Cotton prices lately. The cause has been attributed to investment fund activity in the commodity, but it’s definitely not good for GIL. The best cotton situation for GIL is slow gradual cotton inflation where it can manage costs and pass through pricing periodically driving higher revenue.
The rapid rise puts pressure on the cost of goods as well as making its distributors overbuy in anticipation of a price increase. Now if we see a sustained rapid move to the downside we could potentially see the distributors get lean again in anticipation of potential price reductions yet with high COGS still in terms of what is coming in the chain.
So that would mean building costs and rapidly falling orders demand for GIL.
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. |
Crocs launched a collaboration this week with luxury accessories brand MCM. The collaboration has two styles decorated with typical Crocs accessories now branded with MCM. These kind of collaborations have been part of the brand transformation over the last few years.
Crocs is trying to level up and gain more fashion cred through this collab. They can be nice little revenue drivers and brand enhancers. The problem is this strategy is getting long in the tooth, and the brand is finding a peak. It has to find new growth avenues. Interest is slowing and the category is weakening.
These luxury collaborations will pack less punch. Heading into July 4th weekend, the company is running an “up to 50% off sale on select styles”. Promotions are up and demand is waning, margins are likely to see coming pressure.
CAR
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Short Thesis Overview: There are many other considerations that could enter, but the factor that took adjusted EPS from ~$3.50 in 2019 to ~$33 over the last four quarters is used car price gains/reduced depreciation. Used car inflation soared well ahead of broader inflation but is now stalling/rolling-over in the past year. Electric Vehicles, if broadly adopted, would potentially bring much larger depreciation rates as solid-state batteries or other technologies evolve in coming years. CAR’s profits should fall with it as the rental fleet turns over. |
There are many other considerations that could enter, but the factor that took adjusted EPS from ~$3.50 in 2019 to ~$33 over the last four quarters is used car price gains/reduced depreciation. Used car inflation soared well ahead of broader inflation but is now stalling/rolling-over in the past year.
Electric Vehicles, if broadly adopted, would potentially bring much larger depreciation rates as solid-state batteries or other technologies evolve in coming years. CAR’s profits should fall with it as the rental fleet turns over.
