Investing Ideas Newsletter

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

Below are updates on our fifteen current high-conviction long and short ideas. We have removed Crocs (CROX) from the short side. We have added Pebblebrook Hotels (PEB) 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.

The growth and brand engagement initiatives continue to march on at PLBY.  CENTERFOLD added yet another creator in Danielle Alcaraz, an LA model with an Instagram following approaching 100k. 

PLBY also announced a big step in its Rabbitar initiative with the company partnering with The Sandbox to launch a Playboy MetaMansion in the metaverse.  We don’t consider the NFT initiative to be overly significant in terms of driving revenue and profit opportunity, but it does have brand enhancement and consumer engagement potential.  Since the Sandbox announcement, Rabbitars have been trading at elevated volumes and rising prices on Opensea. 

The current valuation of PLBY essentially implies none of the growth initiatives are successful, and the acquisitions the company made are worthless.  We think the brand monetization and profit growth coming here over 3-5 years will justify a price many multiples of where it is today.

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.

Losing a second ~$30 million tenant in ~3 years, for a company that should be stabilized at somewhere around ~$400 to $425 million of annualized cash NOI, really speaks to a few things: (1) despite the company's pushback to this, its office product is increasingly non-competitive except on price to newer assets at Hudson Yards, OVA , the broader West Side etc., (2) there is really no end in sight to the "hamster wheel" effect for PGRE's earnings, and (3) again, the product is totally commoditized while at the same time being secularly challenged, so any valuation higher than Monarch's bid seems EXTREMELY unlikely. PGRE is going nowhere but sideways at best from a fundamental perspective for the foreseeable future, 2 steps forward and probably 2.5 steps back, and the reality is that the public markets are not going to pay a multiple or anything close to "NAV" for that. 

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. 

One point we are working through is the share change between Cologuard and screening colonoscopy.  We disagree with the "significant share gains" that management discussed during the pandemic.

While Cologuard appears to have experienced a less tumultuous disruption in volume during the initial lockdown, therefore resulting in a temporary share gain, Cologuard looks to have returned to roughly 14%-15% of the testing volume. Cologuard's share did improve above this range during subsequent waves, but has largely drawn from FIT and FOBT.  The long term TAM is smaller if Cologuard is restricted to non-invasive testing and screening colonoscopy holds its share, even during a pandemic.

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.

This week WRBY got a price target reduction from one of the original bulls on Old Wall.  This name has been crushed year to date, down about 75%, and the sell side is recognizing how the market wants to treat unprofitable consumer growth stories, which is very poorly. 

With a high likelihood of recession the investment community doesn’t want to touch these cash burning, historically high multiple names given there is no valuation support.  We remain bearish WRBY.

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.

Retail sales for June were reported this week.  One of the weaker store categories, in fact the worst, when looking at the growth trend compared to 2019 was Sporting Goods stores.  Sales were up slightly YY, but slowing 60bps on vs 2019 growth. 

The core BGFV category continues to see gradual reversion while the company continues to suffer from the loss of Nike as a traffic driver.  Earnings will continue to be under significant downward pressure at BGFV.

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.

Retail sales for June were reported this week.  One of the weaker store categories, in fact the worst, when looking at the growth trend compared to 2019 was Sporting Goods stores.  Sporting and outdoor demand is gradually reverting.  

We suspect DTC will want to keep growing revenue for its core Solo Stove product, which perhaps will mean margin pressure with some discounting incentive to consumers.  The market clearly thinks then consensus numbers are wrong here, but stocks rarely go up with earnings are being revised materially 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.

First and foremost, as we said last week following Riverside and Corona objecting to the case dismissal, in our view the most important implication is that the early narratives are effectively dead. This is not only a credible and significant issue, its GROWING in size and scope. This was not a politically motivated "ambulance chaser" in San Diego trying to make a quick buck, rather what is likely to be only the first volley in a series of complaints across multiple jurisdictions.

We expect additional cities of the remaining 16 in CA to object to the MTD before oral arguments on 7/25. We expect discovery to be very problematic for the company. All else the same these recent events increase the probability the case is not dismissed and increase the probability the case heads to discovery. It also increases the probability that additional jurisdictions, both state and federal, look into the matter, given the high profile of the WaPo. Put simply, it cannot be ignored.

As clearly as we can state it, THIS IS REALLY BAD. Given these rising probabilities, this translates into a higher probability of an unfavorable outcome, which also translates into a lower stock price as the buyside begins handicapping things differently.  

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 got a downward price target revision from the Old Wall a week back.  The sell side is waking up to the macro risk here for the core business for HZO of selling boats.  Inflation in June remains high with the 9.1% growth YY, 41 year highs. 

That is putting real pressure on consumer’s capacity to spend. Meanwhile, the threat of further fed rate hikes creates concerns around a potential recession, meaning those that have the money are going to put off big purchases and be more cautious around near term spending. 

We got several updates of company’s cutting corporate/management jobs this week.  Those are high paying roles where cutting them hurts higher end recreational consumption.

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.

In April, obviously following the end of 1Q22 but before the 10-Q filing on 5.10.22, Active Short Medical Properties Trust (MPW) apparently funded ~$60 million for Steward's purchase of the vacant Nicklaus Children's hospital in Miami-Dade, with MPW as owner of the real estate. The hospital does not open until mid-2024. 

MPW did not disclose this as a "subsequent event" in the 10-Q or any 8-K, despite it being VERY material given that Steward comprises 25-30% of MPW's revenue and is experiencing financial distress up to and including potentially being insolvent. 

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).

Clothing stores were a weak category in retail sales this week. While retail accelerated moderately, clothing stores slowed from the May trend both in YY growth and vs 2019 performance.

In addition we are seeing building continued data points around building inventories from many apparel retailers.  Demand is slowing with inventories high, the entire apparel landscape will be getting more promotional and GIL will see demand and margin pressure like the rest of retail. 

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

Short Thesis Overview: When cyclicals inflect, the degree of ‘cyclicality’ often surprises the market. M&A often looks ill-timed post-peak, with touted EBITDA multiples far off. Falling rates can hit both margins and revenue. Lower utilization can kick up unit cost. Operating ratios can correct sharply in just a few quarters. We expect ~30% relative underperformance from a basket of truckers, a group with a challenged industry structure that often makes it a good ‘source of funds” underweight/short position. While we model smaller EPS misses, it is reasonable to expect a KNX to return to ~$2.50 in EPS for 2023 vs. ~$5.00 if our cycle expectations are correct.

Truck Rates continue to slide despite PPI numbers; slid quite significantly in the last week; down 11% YoY; down 18% YTD; seeing a massive increase in costs and decrease in rates over the last 3 weeks; will likely continue to slide. Knight-Swift Transportation Holdings (KNX) remain shorts.

TXG

Short Thesis Overview: Inside our Morning Brief you’ll find a link to the Health Care Presentation deck, a compilation of the data series we monitor and keep up to date for our Position Monitor ideas.  For TXG this includes our analysis of NIH grant awards which tie to spending on their single cell sequencing equipment and consumables.  At each update, the data for 2Q22 has come in weaker than our bearish forecast.  Heading into 2H22 the headwinds get worse.  When they report 2Q22 we think they will temper their forecast for a steep recovery into year end which not only has consequences for 2H22 estimates, but more important in this Quad 2 environment, 2023 EBITDA likely remains negative.

We got the first leg of weakness from TXG last night when they pre-announced a disappointing 2Q22.  Most of miss came in their Asia Pactific revenue, which was down sharply sequentially.  Revenue in the Americas was up high teens sequentially, but agians a depressed 1Q22, and the bigger issue is revenue only grew 8% year over year for the segment.  The next leg will be their update to 2022 which they had previously expected to ramp significantly to hit their 600M to 630M target range.

If they lower the range, but restrict the problem to shortfall in Asia Pacific, but maintain a the back half ramp for the rest of the business, there could be a rally in the shares, but we’d short that.  If they take the range lower, it will be a big problem for the stock as 2023 revenue estimates and long term profitability come into question.

PEB

Hedgeye CEO Keith McCullough added Pebblebrook Hotels (PEB) to the short side of Investing Ideas this week. Below is a brief note.

Who's buying hotel stocks with #Quad4 #RecessionRisk Rising? 

A: The Macro Unaware

Unlike the conflict of interest Old Wall "research" people keep pitching to you on Old Wall TV, Todd Jordan's Gaming, Lodging, and Leisure Sector Pro product is the real Long/Short research deal.

Here's a little summer-time taste of that for you today on Shorting Pebblebrook Hotels (PEB):

Takeaway: Follow up to this week’s hotel & HE Macro’s themes calls – add negative wealth effect to the mounting issues facing hotel REITs. PEB at risk For those that could not join our deep dive Hotel REIT industry presentation on Tuesday, we’d encourage you to review the replay and related materials.  It’s a high conviction short call for us which was bolstered by Hedgeye Macro’s Q3 Themes call on Wednesday.  Today’s note represents the first of a series of follow up analyses that we’ll publish in the coming weeks ahead of earnings.  There’s so much going on in this cyclical space and it’s not just macro and we just ran out of time and space for Tuesday’s deck.