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Short: EXAS, BGFV, WRBY, DTC, INVH, HZO, MPW, GIL, CAR, TXG, PEB, TSLA Long: PLBY |
Below are updates on our thirteen current high-conviction long and short ideas. We have removed DiDi Global (DIDIY) on the long side & Knight-Swift Transportation (KNX) on the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
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. |
Guardant is planning to release their ECLIPSE data for their blood based colon cancer screening product in 4Q22, later than their previous guidance. At the same time they highlighted an effort they think brings them reimbursement sooner than the scheduled 5 year update to the USPTF and guideline inclusion in 2026. They think they can get into American Cancer Society guidelines sooner, while also leveraging legislation that pressures the current USPTF timeline.
From their earnings call:
“We are pleased by inclusion of report language in both House and Senate appropriations bills that urges the USPSTF to utilize its early topic update process, and review new screening technologies upon FDA approval.
In addition to this momentum from appropriators, we are also encouraged by recent letters to United States Department of Human Health Services from the Energy and Commerce Democratic Leaders and Senator Marsha Blackburn, which raised important questions about the USPSTF process and demonstrate congressional interests in addressing this issue.”
GH is playing some hardball!
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 stock had a decent week hitting month long highs along the greater market rally, but it doesn’t mean much for a company that won’t be able to perform. With demand slowing and the macro environment pressure, revenue growth is going to slow, and margins will take a hit.
The company won’t be seeing profit anytime soon and a no profits in the market doesn’t tend to get a bid. Combine all these factors and you get growth well below expectations and numbers coming in below expectations. We’ll see the magnitude of the impact of slowing trends and the macro environment when Warby reports Q2 2022 earnings next Thursday, August 11th.
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. |
BGFV put up an ugly quarter. Big comp declines, with margin pressure, and earnings crashing. Comp store sales were down 22% YY The earnings were 41 cents, down from $1.63 last year and below the expected 46 cents from the street.
The company guided to $0.27 at the midpoint for 3Q while consensus expectations were $0.89. This P&L is in crash mode, and its not going to get any better. BGFV faces rising competitive threats, with no Nike to drive traffic/sales, and is going to see material reversion in core categories.
That all means earnings continue to crash. Earnings here are likely going to zero or worse, which should take the stock there as well.
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. |
Another durables and multi category company that was a pandemic winner, YETI, reported earnings this week. It missed the quarter and had to guide down full year expectations. Demand is slowing across the board and inventories are rising in both quantity and cost due to inflationary pressure.
This means a hit to margins with increased markdowns. DTC is likely seeing the same trends as YETI from an industry perspective.
INVH
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Short Thesis Overview:
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Active Short Invitation Homes (INVH) reported 2Q22 results two weeks ago, and just this past week former long AMH confirmed that expenses are accelerating and margins compressing and likely to continue to do so moving forward. We think this will be realized across the SFR space, particularly as property tax expense growth “catches up” on a lag. 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. Our understanding is that, while the judge decides how the case will proceed, discovery can both begin and proceed. Just not a great setup across the board.
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 was down about 5% this week after reporting earnings last week, perhaps the market is waking up to the risk. Some old wall firms are beginning to doubt their bullish conviction in HZO as well as one late last week lowered their price target on the stock from $74 to $66. That target will likely have to be revised lower again. We see lots of risk to the downside.
To reiterate, HZO is a company that’s business model is based on selling multi-million dollar yachts to its upper-class customers in an economic environment that has seen demand for discretionary goods fall. Furthermore, we are beginning to see the wealth effect take hold, where the U.S. upper class is expected to lose a significant amount of money. This will obviously be detrimental to the yacht industry.
We maintain our belief that HZO is sitting at its peak in earnings and profitability, while slowing macro and consumer trends will continue to pressure the business in the coming quarters.
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 our top REIT short pick by far, and we are increasingly convinced that we are on to something with this one. This past week the company reported its 2Q, and candidly we are still ticking through it all as there is (always) so much to digest and try to make heads/tails of.
Our initial takes are as follows: (1) the $150 million loan from MPW directly to Steward is consistent with our expectation and consistent with an insolvent tenant, (2) the ~$800 million of run-rate EBITDAR makes no sense on multiple levels, (3) Prospect is also a complete disaster, (4) it was interesting to hear the CFO admit that a parent-guaranteed master lease is a corporate obligation (as we have been saying), and (5) the response on why they are not providing Steward financials was nothing short of embarrassing.
We want to be fair – it was encouraging to hear a more critical tone out of the sell-side, which we would like to think means the work is having an impact. Some of it is just too egregious to ignore. 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). |
GIL reported earnings this week. It was a pretty good quarter, coming in ahead of expectations with solid revenue results. We think the setup remains bearish. The company acknowledged it is seeing slowing trends recently and that the industry has elevated inventories.
The bullish development was the company taking up pricing to offset costs. But with high inventories in the channel, and cotton now falling, the distributors will likely extend replenishment orders out as far as possible, perhaps even looking for GIL to readjust price lower. That means GIL could see low demand for an extended period of time while also facing high input costs. We actually like the long term outlook for GIL, but the multi quarter fundamental setup remains bearish.
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. |
The discussion about CAR with investors generally revolves around the underlying earnings of the rental business. Does it go back to $3 or $5 a share, or could EPS be more like $10 or $12 per share in a less competitive, supply constrained market? We think that the issue is likely to be as much the multiple the market ascribes those earnings as much as the earnings themselves.
Car rental is generally seen as GDP-minus growth, with ride sharing, car share, and public transit options taking some volume. It is also just an asset intensive business facing structural challenges around having the right assets in the right locations. Utilization was down vs. 2Q 2021 in the Americas.
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. |
The Macro Team extended Quad 4 into 2023 with forecast updates this week. Meanwhile, performance has been driven by weakening estimate revisions and all of the factors that typically do poorly in Quad 4, which includes TXG, which has spent another week on the Quad-Factor Short list.
We did notice a news article “10x Genomics Lays Off Approximately 100 Employees” (GenomeWeb, August 4) which does not bode well for the quarter or the outlook, but we’ll see when they report next week.
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
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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 |
Vehicle EV Tax Credit: The bill would eliminate the manufacturer specific caps on tax credits but introduces a series of new hurdles, including income and price caps ($300k joint income, $55k for car / $80k for truck SUV). For the first half of the $7,500 credit, it requires that the battery materials come from the US or from countries with which the US has a free trade agreement. That’s okay for ALB, which is in Australia, the US, and Chile. For most EVs, producers haven’t been paying too much attention the provenance of the minerals…and would almost certainly prefer not to in the case of cobalt. For the second half of the credit, a significant portion of the battery must be manufactured in North America. Most batteries are made in China.
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. |
Earnings for PLBY on Tuesday. The market expectation into this event are incredibly low. The company should arguably take down expectations some to set a more beatable bar with the market giving it a pass to do so.
The company needs to get a clear message out about where it sees its biggest growth opportunity in terms of profit generation and how its investing and executing to make that happen over a certain duration. If will be an important event, yet we think this company has to deliver multiple quarters of solid profitability before the market will really take notice.
