Investing Ideas Newsletter

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 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.

Despite a good quarter and good claims trend, EXAS shares have been fading on their forward guidance, recessionary headwinds, and competition.  Shares also score poorly on factors in Quad 4. 

With poor guidance reflected in continuing negative estimate momentum, a key factor in our Quad-Factor screen we’re sticking with the short here.

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.

WRBY reported earnings this week.  WRBY put up minimal beats in EPS, revenues, and EBITDA, and guided down for the full year – not surprising. Original guidance had revenues growing 20-22% YY, now they are projected to grow 8-10%, guiding down approx. 10%.

Gross margins are also declining as sales of contacts increase vs glasses. Store productivity reached its peak of 90% of 2019 in May of this year and has been falling since. Management used 75% productivity for the low end of their revenue guidance. The company reduced its workforce by 63 corporate employees, in order to reduce SG&A, yet they plan to increase marketing spend in 2H and continue to open new stores.

WRBY’s goal to increase optometric services in the store fleet becomes increasingly expensive as the company continues to add additional stores. The stores generate on average $2.1mm of revenues annually with a 35% margin. The store base and further growth seems expensive to maintain as productivity is declining. 

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.

We’ll start to get earnings from other sporting goods and athletic retailers in the coming 1-3 weeks.  We’ll be looking to gauge the industry trends in recent weeks as well as the forward outlook on the magnitude of demand reversion. 

We’ll also look to see what the implied share loss for BGFV looks like relative to the results of the other players in the space.  We think BGFV earnings continue to head lower taking the stock with it.

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.

DTC reported Q2 2022 this week, with both an EPS and revenue beat but miss on EBITDA. Despite having 53.3% revenue growth in Q2, the company took down full year revenue guidance of YY growth to mid-20%s. Prior guidance had revenues growing 34-41% YY. Growth in Q2 makes sense since people are out enjoying the summer weather and still spending on goods.

A 53.3% growth is solid performance, especially considering the how strong the last couple years have been.  This company has experienced incredible growth over the last 3 years.

As the revised guidance suggests, we continue to expect slowing trends and demand reversion, the area to be incrementally concerned about for DTC is margins, as we are hearing about inventory problems and the need for promotions in other home durables like grills (reiterated by COOK earnings this week), and appliances. 

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.

Invitation Homes (INVH) reported 2Q22 results three weeks ago, and just this past week fellow short TCN reported that property taxes were up +15% y/y. We don't expect SFR property tax growth to get this high, but we also don't expect +5% growth to continue and instead move into the high-single-digits.

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. We believe a non-cycle tested and less capital efficient SFR should trade at a discounted multiple to large, more seasoned multifamily. This would send INVH toward the low-$30/share range.

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 announced a bearish acquisition this week. MarineMax is acquiring IGY Marinas for $480M cash plus earnouts, over 4x sales.  The company is revamping its credit facilities to $1.35B debt including a $400mm term loan for this acquisition. 

There perhaps no more clear of a signal of peak earnings for HZO than this kind of deal.  This may very well be a good asset, but the timing and price we think are fueled by the need for growth as HZO’s core will slow with the impending negative wealth effect. 

HZO is levering up and paying up for an asset that is likely operating at peak profitability.  Never a good sign heading into a recession.

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.

Medical Properties Trust (MPW) remains our top 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.

Finally, it appears that the CFO straight up misrepresented on the earnings call whether MPW would lend to Prospect, saying three times "No," while MPW had extended an additional $100mm in debt financing during 2Q that went undisclosed elsewhere. 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).

Hanesbrands(HBI) reported earnings this week.  This is one of the closest comparisons to GIL, though they are still different businesses.  HBI put up a big miss and guide down on weak revenues. 

The important read here is the negative outlook is a good gauge for the demand in GIL’s retail channel business as HBI’s core offering is basic apparel at mass retail.   Again, HBI’s guide is bearish, while GIL isn’t providing guidance this year. 

We think the setup for GIL in 2H is bearish with demand risk in both its businesses, retail and screen-print and margins pressure from discounting and rising input costs.

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.

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

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 updated the tracking data for TXG and so far this quarter, things are looking worse than we had originally anticipated.  We think the stock rallied off the lows and through the 2H22 guidance cut because consensus thinks estimates have fallen enough. 

Consensus is still above our 2023 estimate, but not by much, but our numbers are heading lower if grant volume continues its current trajectory.  

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.

Hotel REITs have historically outperformed the rest of GLL in Quad 4 environments and our contention is this is a legacy view because this time is different. There are no real dividends, leverage ratios are high, and RevPAR is set to decelerate, and margins expectations are much too high. 

Sets up for disappointing earnings in the coming years. We are negative on the hotel REITs space. Now is a good time to press the shorts like Pebblebrook Hotel Trust (PEB)

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

We highlighted last week that the EV tax credit modification essentially gutted credits for most OEMs by limiting battery mineral sourcing and production locations, as well as introducing income and MSRP caps. 

We’re hearing that this modification may run into problems with the Byrd rule, essentially removing the provision unless the Senate gets 60 votes to keep it (basically takes it out of reconciliation).  We expect that there is heavy lobbying against this provision from every OEM whose credits had not already expired (only helps TSLA and GM).  Our best guess is that this provision comes out of the bill or is modified in some way that makes it less onerous. 

Manchin is no fan of the EV tax credit, and Democrats may be better served by leaving it alone.

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.

Let’s start off with the obvious, we’ve been dead wrong on this long call in 2022. We’re #accountable to every call we make. We have about 60 active calls in retail right now – the majority short side, and have a track record that I (McGough) am extremely proud of. But we were loud on PLBY long, and so wrong. We own that call. After seeing it more than double in Quad2 in 2021, the stock has cratered in Quad4 and now the TREND fundamentals are falling well short of our expectations as both macro and execution are pressuring near term results.  What we got very wrong was thinking that the business TREND (the pods) would trump the Macro and Market environment (the Quads and Signal).  The business hasn’t performed, and even if it came in as expected, the Macro is so bad (retailers dropping like flies) it would have still likely won the TREND battle.

Management got ahead of its skis last year on setting expectations on growth opportunities and 2022 fundamentals, while also making some investment mistakes in trying to rush the building of CENTERFOLD. That was a gaffe, but it seems like since internal talent has been recruited, KPIs (and gross revenue per creator) have been climbing nicely.

As for what to do from here, if we think about the long-term opportunity, we still think there is massive upside if the brand monetization can be improved and the brand relevance be leveraged into these new businesses.  The only thing that might be different is the level of conviction in execution over time.  Management made some mistakes for sure, but this is still a very young public company, and one which is still building out the talent team to drive the business forward. It’s a startup all over again.

If we think about the value of PLBY, reversing (hypothetically) new investments and going back to more licensing focused model and adding the Honey Birdette business, it would arguably make for a stock roughly 3x-5x the current price.  Fixing the licensing structure would take that value up another 2x (perhaps no better time to do this given it requires no capital and minimal one time SG&A). It’s the “non-core” assets and the disdain for management by the retail community that has this stock trading where it is today.  So the question is will the investment in new growth initiatives (a lot being in labor) create material incremental value or destroy the value of the quality/performing assets.  We think there is still too much opportunity in the growth initiatives to give up on them, and the stock, at this price.  CENTERFOLD may be moving slowly, and it will take time to get it right, but if successful could rapidly flip the script on this stock. We think CENTERFOLD alone could be worth over $25 per share if management can get it even marginally successful. If it achieves only 25% of OnlyFans’ GMV its worth $50+ per share – that initiative alone. For now, barring a big ramp in CENTERFOLD GMV, we think the stock is likely stuck in the single digits for 6-12 months while the Macro is a headwind and until the company can deliver several good quarters and profits.  Long term we continue to think this company can be worth many multiples of where it is trading today. Trust us, we shook the etch-a-sketch clean after this quarter, completely re-evaluated our thesis, and still think that the long term upside is meaningfully above the $6 (and $300mm market cap) we’re looking at today. Yes, you have to have a high risk tolerance, suck up the volatility, but owning this name in the mid-single digits should pay off BIG over time.