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Long: PLBY, DIDIY Short: EXAS, BGFV, WRBY, DTC, INVH, HZO, MPW, GIL, CAR, KNX, TXG, PEB, TSLA |
Below are updates on our fifteen current high-conviction long and short ideas. We have removed Paramount Group (PGRE) from the short side. We have added Tesla (TSLA) to the short 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 got a downgrade from an old wall analyst this week. The downgrade was puzzling as it was basically rooted in putting a trough multiple on the company while noting a recession could mean EBITDA goes lower.
That’s essentially stating the exact market view with the stock in the mid-single digits. At this point you need something to go wrong and nothing to go right for there to be material downside in the stock. It is arguably priced where private equity entities will start doing the math on a buyout, since there are some real cash generating business in the portfolio now with a lot of optionality for growth and a core global licensed cashflow stream.
DIDIY
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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. |
This week, a WSJ article mentioned that the ride-hailing giant Didi (DIDIY) may receive a fine of more than $1 billion for data security breaches and probably its infamous decision to ignore the CAC's (Cyberspace Administration of China) remark to delay its US IPO.
Once the large fine is announced, DIDIY can resume adding new users to its platform and allow Didi's apps to be restored to domestic app stores. More importantly, DIDI can also make preparations for a HK IPO.
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’ve been building out a more detailed look at the long term outlook for colon cancer screening products, including Cologuard, Guardant, Geneoscopy, and other non-invasive tests. We expect colonoscopy to maintain its screening share over time, just as it has during the Cologuard’s launch.
Cologuard has taken its share from the other non-invasive test FIT/FOBT and we are expecting the blood based tests to compete there as well. It will be hand to hand combat as each product fights over the remaining non-invasive patient pool.
Can blood-based colon cancer screening pulls some non-compliant patients over the line? Both Guardant and Geneoscopy will be announcing data before year end which should give use the answer.
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 got a bullish initiation out of an old wall broker this week. The broker put a $20 price target on the stock. We’re not sure what method this analyst is using for that price, but it likely involves a sales multiple.
In this Quad4 slowing Macro environment, you need real cash flow to have valuation support. If the rate of change of revenue is slowing and margins are weakening, there is no reason for a stock to do anything but go down when it doesn’t have a cashflow valuation support.
WRBY has no earnings, slowing business trends, and no value support, we’d take the other side of the old wall on this one.
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. |
Big 5 has big earnings risk in 2022. Looking at the visits trend we can see in the first part of July the company is hitting YTD lows on traffic trends. The category is reverting, and Nike is no longer an vendor to help drive traffic. Earnings here will see big compression year over year and we expect the 2Q earnings coming in a couple weeks is likely to be a negative event for the stock.
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. |
SNAP reported an ugly quarter this week. Ecommerce advertising demand is rapidly falling, which is being seen due to online/DTC demand from the consumer is falling.
Cost pressures remain in the supply chain and with falling demand margins will be compressing rapidly at the same time DTC categories are reverting. Consensus expectations for DTC need to be revised down materially.
INVH
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Short Thesis Overview:
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Two weeks ago the Washington Post independently verified widespread, systemic non-permitting of Active Short Invitation Homes (INVH) assets across multiple states, not just in California. We believe it is now abundantly clear to everyone that something is seriously wrong here. The question now is, “what will the resolution be?” We should hear from the judge in the case in the next two weeks on whether he will dismiss or allow the case to proceed.
We expect it to proceed, given both the national attention as well as two California municipalities directly asking the court not to dismiss the case, thereby undermining defendant’s arguments on the PDB.
We expect the case, if allowed to continue, to move to discovery which would likely be very damaging to INVH and likely result in a significant settlement. INVH’s multiple would very likely compress under such a scenario, into what is already shaping up to be a fundamental slowdown and rolling over of the RoC from peak levels.
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). |
HZO reports earnings next week. We expect the EPS number to be decent given the company is servicing a demand backlog, but forward demand commentary and guidance is where we think there is risk for the stock.
Consumer sentiment has crashed, inflation is pressuring consumer wallets, and the job market is weakening with many companies announcing layoffs. All of this should mean demand for boats is rapidly slowing.
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) remains is overvalued by about ~$16.50/share. Although the company has not announced the earnings date yet, it typically reports 2Q on or about 7/29. We expect the company to paint another rosy picture of the situation using fundamentally meaningless metrics, disguised to deflect away from the obvious problems sitting at the heart of the structure.
Steward Health, which is ~30% of MPW’s revenue, is very likely insolvent with a near-term debt maturity at the end of September, and with MPW not just as landlord but essentially owning the entire “cap stack,” Steward is existential to MPW. We think a rent cut is inevitable to stave oof BK, which will destroy MPW’s equity. Prospect Health, comprising another 8-9% of revenue behind Steward, is very likely in even worse shape. We believe the SEC should be, and very likely is, taking a look at MPW’s recent efforts to hide Steward’s financial performance from investors. We view the efforts as borderline criminal.
It is highly likely that management becomes more volatile and efforts get crazier, as they are essentially “all in on a bluff” and stand to lose everything. At the very least it should be entertaining. Stay short.
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 got more negative data points around apparel this week. Fashion apparel brands company A.k.a gave preliminary results for 2Q well below its prior guidance and the consensus expectations.
It credited the weak results to slowing demand, a more competitive promotional environment, and higher merchandise returns. This is the theme we’ll be seeing across the apparel space in 2Q and 3Q earnings. Inventories are high, demand is falling, discounting is rapidly rising meaning margins are at risk across the space.
When you tie that with rising input costs, we think we could see industry apparel margins go from all-time highs last year, to all-time lows on the snap back. Gildan will see margin risk like the rest of the industry.
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. |
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.
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
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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; will likely continue to slide. Knight-Swift Transportation Holdings (KNX) remain shorts.
TXG
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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. |
SNAP and TWTR earnings look bad enough to bleed out the speculative appetites that have been driving what looks like a factor based rally. Our Performance, Estimate, and Factor Monitors we update daily have been pretty clear in showing us the companies with negative estimate momentum have been outperforming positive estimate momentum which has pushed the performance of the Quad 4 Shorts higher, which includes TXG.
While the rest of the US Medical Econmy has some tailwinds into 2H22, we think TXG still has to guide their 2022 lower and consensus needs to reckon with their 2023 profit estimates.
PEB
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Short Thesis Overview: For those that could not join our deep dive Hotel REIT industry presentation, 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. |
We see a lot of margin pressure coming as the industry moves on from post-Covid productivity gains and contends with potentially accelerating unit labor costs, general cost inflation, headwinds associated with uniformly re-instituting brand standards, and a move towards more occupancy and service led RevPAR growth.
PEB sports a strong management team and some unique and high-quality assets (we have been bullish on the company/stock in the past), but challenging geo and customer exposures, tough comps in their resort business, a rich valuation (for the environment), and elevated leverage put us in the negative camp. PEB has been on the Short Bias list for some time, but now sits on our Best Idea Short list.
TSLA
Hedgeye CEO Keith McCullough added Tesla (TSLA) to the short side of Investing Ideas. Below is a brief transcript from Industrials analyst Jay Van Sciver on The Call @ Hedgeye (7/21).
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Tesla (TSLA): Headlines looked better than people forecasted, but the internals are not that great; Big surge in inventory; Lower R&D and SG&A helped with earnings; Adding capacity to manufacture to produce cars that are 3-6 years old instead of investing in new capacity in an increasingly competitive market |
