Investing Ideas Newsletter

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

Below are updates on our fifteen current high-conviction long and short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.

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.

Estimate momentum is barely positive for EXAS.  As we saw with HOLX, there are concerns with how the weakening economy will impact screening tests such as Cologuard.  In the hierarchy of spending, health care ranks reasonably high, but not every unit of health care is interchangeable.  

Just as consumers are making choice to purchase more food and less clothing at Wal-Mart, medical consumers make choices about ER visits, check ups, and prescriptions. We suspect Cologuard may be lower down on the priority list.

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.

Even in an up market this week WRBY couldn’t push to new near term highs. This is a model that won’t be profitable for years, and even when it becomes profitable it will likely carry a lower margin than the street expects. 

The category is now under pressure after the post lockdown demand backlog has been satisfied and brand interest on google continues to trend well below pre pandemic levels.   When you add all those together, this is an expensive stock with slowing trends and growth that is likely to underperform expectations.

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.

BGFV is reporting earnings next week on Tuesday after the close.  We continue to think that this company will see significant earnings pressure over the next few quarters and beyond and we expect to get evidence of that on the earnings print. 

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.

This week another summer durables company WEBR provided ugly prelim results for 2Q.  Revenue miss, with 3Q EBITDA to be “marginally profitable” well below street around $75mm.  Demand in the category is reverting, too much inventory, markdowns accelerating. 

That is very much the setup we see for the core solo stove product at DTC.  DTC might have some long term growth, but the trends in the business right now are going the wrong way.

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.

Active Short Invitation Homes (INVH) reported 2Q22 results this past week, and we labeled it “Stagflation REIT.” We see the data showing that the RoC on top line SSRev as well as forward looking leasing spreads is in the process of rolling over.

At the same time turnover costs, R&M expenses and maintenance capex are all accelerating, while property taxes (which usually accelerate on a lag) are still running sub-5% y/y. We see that number compounding at +6-7% going forward. I.e., INVH’s margins are set to compress from peak levels, heading closer to the low-to-mid-60% range. No one is modeling that outcome, and therefore FY23 numbers are too high.

Meanwhile, we await the outcome of the qui tam case at the same time regulatory pressure is picking up. Just not a great setup.  

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).

MarineMax (HZO) reported earnings this week.  It was an EPS beat on a revenue miss, with management highlighting that a supply chain is holding back sales, while simultaneously saying that business trends are accelerating.

To be clear, they didn’t explicitly state accelerating demand other than business getting better when spring warmed up.  Acceleration was likely more that the company moved further into the backlog and accelerated deliveries/revenue. raised EPS guidance from $7.90-$8.30 to $8.05-8.45 and also guided single digit to low teen revenue growth (depending on supply chain delivery), a flat unit growth, and a low single digital annual comp.

So management is staying bullish, despite the wealth effect taking hold, for a business that sells multi-million dollar yachts.  Management also admitted that customers may not be willing to put down large deposits and wait months for their boat delivery, like they did last year, which suggests a lower consumer appetite to spend (ie demand).

We think HZO is sitting at the peak, and slowing macro and consumer trends will severely pressure the business in the coming quarters.

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.

Best Idea Short Medical Properties Trust (MPW) remains our top short pick, and is overvalued by about ~$17/share. MPW is set to report 2Q22 results before the market opens on 8/3. 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

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).

We got more very negative data points from retailers this week as it relates to supply and demand dynamics in apparel.  WMT preannounced a bad quarter and flagged margin risk around having to clear out inventories, particularly in apparel.  

GIL is a supplier to WMT, so if WMT is having any discount pressure on GIL product, GIL will also feel some pain.  CRI had similar commentary noting that it has high inventories from ordering more since it couldn’t get enough last year, while flagging margin risk as the consumer is feeling pressure.  TREND setup remains bearish apparel and bearish for GIL.

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.

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.

We were surprised that KNX shares reacted positively to last week’s earnings report.  We all know contract rates lag spot – the trailing results are largely irrelevant.  Management said, “demand is waning” and the market will depend on small carrier capacity constraints to keep rates up…even though spot rates have already fallen. 

If logistics network speeds increase as we expect – i.e. slowing macro growth removes congestion – we shouldn’t have to wait to see the impact of falling rates and higher costs in coming quarters for our thesis to play out. 

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.

In the last week Quad 4 Factor Shorts have been underperforming and estimate momentum has been returning to its normal orientation of positive is good and negative is bad.  For a while there it was bad factors and bad fundamentals were working the best. 

This week, not so much.  As earnings season gets going and companies report reality, the average for all of Health Care has now crossed over into negative.   For TXG we think this means the bearish side of Quad 4 will have lots of company and the incrementally negative datapoint, such as continuing declines in 2023 revenue and profitability that goes negative, will be negative for prices.  

PEB

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

Short Thesis Overview: 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

In much the way described at the open here, Tesla ‘beat’ a lowered consensus.  It was a low-quality print, with free cash flow less regulatory credits & stock-based comp a negative number.  The surge in inventory, partly an artifact of FIFO lagged inflationary pressures, sets up potential gross margin weakness for 3Q22.  ASPs looked surprisingly frail given less China production.

Adding capacity for a legacy model into a macro downswing and extensive competitive entry doesn’t seem like a great idea for a company with an equity trading at ~8x that of its peers.  We remain bearish, while recognizing that this meme stock, cult favorite has a management team that wants to squeeze shorts. 

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.

PLBY continues to act poorly.  The market style factors are certainly working against it in the absence of news catalysts.  It is small cap, growthy, with some leverage all things that Macro Quad4 doesn’t like.  

Earnings are a couple weeks out, and the company will have to put up decent numbers and evidence of execution to get the market interested in this name again.  We see no change in the long term business opportunities for PLBY to enhance monetization of this brand.  However the company will have to deliver multiple quarters of good numbers before this stock starts to get a real bid.

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.

Didi lost market share on private car orders after Didi's 26 apps were taken off the shelves by regulators in July 2021.  However, if you look at Didi from a bigger picture perspective in China's transportation market, they're surviving. 

When I compare Didi’s orders vs total passenger traffic, it’s climbed back above its July 2021 levels. In central cities, it’s down but the trend seems to be improving.  Ride-hailing from apps is still commonplace in China, with Didi being the preferred choice.