Investing Ideas Newsletter

Long: PLBY, PGRE, DIDIY Short: EXAS, BGFV, WRBY, DTC, INVH, HZO, MPW, GIL, CROX, CAR, KNX, TXG

Below are updates on our fifteen current high-conviction long and short ideas. We have added Knight-Swift Transport (KNX) and 10x Genomics (TXG) to the short side. 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.

Stock is down nearly 31% since PLBY announced the authorized $50mm share buyback program on May 17^th. There may be some pressure on the apparel business given the entire channel is starting to see elevated inventories and increased promotions. 

However the PLBY business is much more than near term apparel trends.  CENTERFOLD continues to add creators and the opportunity here looks immense. Over the past couple weeks Victoria Villarroel and Teela LaRoux joined the platform as creators, combined they have over 2mm followers. 

It’s hard to see how CENTERFOLD doesn’t have at least moderate success in generating revenue given the continued additions of content creators. If just moderately successful CENTERFOLD would be worth multiples of the PLBY EV today, not to mention the value of the rest of the assets that we think is still worth upwards of billions over the long term.

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.

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

Long Thesis Overview: When you look at DIDI, it’s natural to compare with UBER to have some perspective. From a mobility bookings viewpoint, DIDI leads UBER. But UBER with more than half of its total gross bookings coming from food and other segments, its total gross bookings is much higher than DIDI’s. From a monetization perspective if you take out incentives, UBER is also much higher than DIDI.  International is also a better contribution for UBER. However, given DIDI’s presence in China, it has an edge on MAUs.

DIDIY - should indirectly benefit from Premier Li Keqiang's policy support on EV (electric vehicle) consumption.  As mentioned in our DIDIY presentation, Didi has a small EV fleet called the D1 (world’s first EV ride-hailing car).  The D1 is a collaboration between automaker BYD and Didi. 

Meanwhile, the EV stocks (NIO, XPEV, LI) are all getting a boost as is UXIN (tiny online used car company) since the policy also promotes the used-car market.

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.

Cologuard continues to have a good 2Q22 in Cologuard claims volume alongside a strong rebound in colon cancer screening.  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. The rally over the last few weeks has been characterized by a factor-only trend.  Estimate momentum has had zero impact on performance, so companies with positive and negative momentum have not separated in performance terms. 

Meanwhile high short interest, small caps, and low to no debt to total cap companies have been ripping off the lows.  The performance monitor has been on display with plenty of names up 50% or more in the last week!  

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.

By the end of the month WRBY will open a new store front in Rockville, MD and in November WRBY is set to open a store in The Avenue in the East Cobb part of Atlanta, Georgia. These are just two of the many new stores the company is planning to open this year.

WRBY is continuously increasing brick-and-mortar footprint, which is not an inexpensive feat. It presents significant risk as WRBY was established as a DTC online brand focused on providing value to its customers and disrupting traditional brick and mortar eyewear companies.

 Now it’s becoming one of the brick and mortar players it used to disrupt. The company’s margins will take a hit with these increasing rent levels, and it won’t be able to deliver profits as fast as expected. 

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.

Our SIGMA analysis for BGFV shows a bearish positioning.  The company is in quadrant 4, where margins are compressing and inventories are outgrowing sales. 

This is a bad setup for margins.  It’s even more bearish when you consider that Nike is not longer being carried as a direct vendor, meaning that inventory base is being removed, though of course the sales are also being lost which is a big problem for the BGFV earnings stream.  EPS can fall violently at this company.

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.

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

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.

This week the plaintiff, Blackbird Special Project, LLC, in the qui tam case against INVH filed a motion notifying the court that two cities, Corona and Riverside, CA, have opposed the dismissal of the case on the basis of the California False Claims Act's ("CFCA") public disclosure bar ("PDB").

Recall that INVH had filed a motion to dismiss, and plaintiff filed its response at the end of June; as per the filing yesterday, the CFCA affords government entities the right to oppose and thereby block dismissal; INVH remains a short

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).

HZO benefitted significantly from the changing supply and demand dynamics during the pandemic.  The 2021 YY average price for boats sold in the US was up 32%, that’s on top of +6% in 2020. Price increases were biggest in the over 80’ feet category, but everything went up.

With the current macro environment hurting demand trends for other large luxury items, like furniture and auto, HZO will be facing weakening demand and prices will, at a minimum, not grow at the same high rate they did last year, big sales reversion is likely.

Source: BoatsGroup

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.

Evolving train wreck, increasingly likely to have a significant tenant issue this year which will result in a rent cut against very high leverage, followed by a necessary dividend cut. Could be forced to sell equity at a heavily discounted price, creating a reflexive "doom loop."

We see downside to a low-single-digit stock price under a worst-case scenario (essentially a "donut"), and likely only "worth" $10-11/share today at best under a status quo scenario

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).

Took higher on short bench over the weekend. With a recent increase of volatility in cotton prices, we historically see bad prints in this type of environment. GIL remains on the short bench on the Retail team's position monitor. 

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.

A week ago, CROX stock hit the lowest value ($46.08) in a year, as well as the lowest trading volume. The stock has seen a small rally closing this week around over $12 higher than that prior low. CROX has been running more promotions lately than last year at this time.

The company just had a 3 day extra 15% off of sale promotion and a few days later there is already another 15% off sitewide promo. These promos will help drive sales, but it will come at the expense of margins. Maybe it’s feeling the pressure from people returning to buying formal wear and dressier shoes.

At least Crocs have regained an “on trend” image, as it’s not embarrassing to be seen out in Crocs anymore.  Still this brand is at peak margins and coming of peak demand trends that both look to be seeing rate of change weakness.

CAR

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.

CAR just happened to own a half million used cars as used car prices ripped higher.  We prefer this ‘cocktail napkin’ aspect of the thesis, with little nuance required beyond noting the repurchase of richly valued shares with gains.

Third, it was noted that results would continue to be strong in the next couple of quarters relative to consensus estimates; we might be early.  We do try to be a bit early so that others can put ideas through their own processes – a feature, not a bug.  Still, CAR’s share price may be one that responds negatively to ‘good’ headlines, a typical characteristic for an inflated equity whose time is running out.  

knx

Hedgeye CEO Keith McCullough added Knight-Swift Transport (KNX) to the short side of Investing Ideas this week. Below is a brief note.

Especially on economically cyclical stocks, think long and hard about what their Full Investing Cycle #slowdown in earnings are going to be with #RecessionRisk rising...

One of my favorite recent #VASP Signals (on the bear side) of that remains Knight-Swift Transport (KNX). See Jay Van Sciver's Industrials Pro research product on why.

Q2 Earning Season starts this week. It's going to be nasty,

TXG

Hedgeye CEO Keith McCullough added 10x Genomics (TXG) to the short side of Investing Ideas this week. Below is a brief note.

There are > 50 high quality (i.e. Shorts that have generated alpha and continue to signal Bearish on both my TRADE and TREND durations) Hedgeye Shorts that I could have had on coming into today... 

But I did not.

Coaching Notes: A) I don't coach "short and hold" B) I coach covering on red and re-shorting on green C) I coach patience and process The only thing that's changed since my cover TXG signal is time and space. In fractal (and life) terms, that's an important thing to solve for! Now you get re-short more on green on #decelerating volume with panic-ridden hedge funds doing the opposite of my aforementioned ABCs.