Investing Ideas Newsletter

Short: EXAS, BGFV, INVH, HZO, MPW, CAR, TXG, PEB, TSLA Long: PLBY

Below are updates on our ten current high-conviction long and short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker. Please note we removed Warby Parker (WRBY), Solo Brands (DTC), & Gildan Activewear (GIL) shorts from Investing Ideas this week.

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. 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.

After putting up a good quarter for 2Q22 which we saw coming in the weekly claims data, Exact Sciences (EXAS) maintained their full year 2022 guidance which implies screening revenue to be flat to down in 3Q22 and lower still in 4Q22.

At a high level, and if you believe management's forecast of 40% share of the screening market, there isn't much negative to read into the data.  However, EXAS screens short on our Quad Factor Screen for Quad 4, and typically even a small negative update will become a bigger performance issue for stocks on this list. EXAS screens short in part because of negative EBITDA margins and slowing sales momentum.  However, even though management reduced expense guidance for the second half, which is a positive toward their target of EBITDA positive in 2024, the cuts raise concerns for the growth rate, which they also just cut.

What was new was a new access issue for Cologuard reps getting an in person detail with a physician, which was being restricted because of COVID safety protocols, but is now being restricted because of staffing constraints. While we agree that Guardant's data release on their blood based colon cancer test is unlikely to lead to share loss in the short term, we don't understand how staffing constraints are the issue.

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.

Big 5 Sporting Goods (BGFV) | Foot Locker reported a good quarter this week, but in its opening comments, it commented on ‘comps excluding Nike’ – that’s because Nike gave FL a massive haircut in allocations. Brands other than Nike were up in the mid single digits, and yet the company still comped down 10% due to the cut from Nike. FL actually emerged in a far better position than BGFV, which Nike fired completely.

The latest earnings report had BGFV EPS down 73% vs last year, and over a TAIL duration we expect BGFV to lose money in perpetuity. Then leverage becomes a problem, then it goes away. We think the equity value here is ultimately Zero.  

INVH

Short Thesis Overview:  We added 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) legal risk around non-permitting whistleblower case + headline / political risk will result in multiple compression; relatively unfavorable tenant profile versus coastal gateway multifamily; California exposure a drag; systemically lower NOI growth + higher maintenance capex requirements going forward. Judge likely to rule on paper over INVH's MTD over the next few weeks, and we expect the case to proceed. Importantly, discovery can begin and proceed ahead of the judge's decision. Increasingly this is a fundamental short on its own merits, separate from the legal risk, with SFR margins likely to have peaked already.

HZO

Short Thesis Overview: This is definitely a play on ‘shorting the rich’. MarineMax is a retailer of new and used boats as well as aftermarket parts, maintenance, storage, financing and some other small business pieces. The pricing and mix is heavily weighted to the higher end/luxury consumer buying the mega-yachts such as Azimut rather than the average consumer buying a Boston Whaler or a new Mastercraft wakeboarding boat. Consensus has straightlined the new peak 32% margin into perpetuity and is modeling that $7 in EPS power holds steady over a TAIL duration. This company has reversion risk all through the P&L from peak revenue growth to peak margins to peak earnings power. A consumer facing high macro level spending headwinds along with a normalization of the inventory position and a mix reset back to normal selling will likely see gross and operating margins fall back to historical levels and presents ~40% downside in the stock – entirely from a massive negative earnings revision.

MarineMax (HZO) | In this macro environment one of the last things people are worried is buying boats. There was a surge in purchases and production, but it has since slowed and will continue to do so. From May to June manufacturers’ new orders of boats declined 20.3%. A 20.3% from one month to the next. June orders were also down nearly 16% YY.

We haven’t hit the bottom of this economic downturn yet, people have only just started to tighten spending. HZO has put up decent numbers the last 2 quarters, but it can’t and won’t last for them in this macro environment. Remember, Consumers don’t know we’re still facing multiple Quad4s ahead of us. And importantly, management of HZO doesn’t either. Guidance is too high, and we think this stock should be cut in half on normalized earnings.  

MPW

Short Thesis Overview: Medical Properties Trust (MPW) 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) is an accelerating train wreck, and we think increasingly likely to have at least one significant tenant issue which will ultimately result in a rent cut against very high leverage, followed by a necessary dividend cut. Could be forced to sell equity at a heavily discounted price without the benefit of an alternative and attractively-priced capital source. 2Q22 earnings did little to ease investor concerns, in our view, and in fact may have raised them. 

We see downside to a low-single-digit stock price under rent cut scenario, and worthless MPW equity under a full Steward default and consolidation scenario. Assuming all goes perfectly for MPW, the stock is worth no more than $10 - $11/share today, in our view. Very deliberately deceived analysts on the earnings call about the need to lend to Prospect, MPW's second largest tenant, which was given a $100 million expansion to an existing loan by MPW in 2Q22.

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.

Below is an overview of the Avis Budget Group (CAR) short thesis:

1. Surge In Used Car Prices Set Up Gains, Profit Surge in Last 2 Years…New Less Used Reversal: It is really that simple. 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.

2. Renting Cars Is A “Not Great” Business With Major Structural Deficiencies, Little Return Over Time: While a remnant of Cendant, it is worth recognizing that CAR shares provided a 2% annual total return over the 15 years prior to the pandemic start, roughly in line with inflation (no real return, S&P 500 was about 10% per year for the S&P 500). Hertz went bankrupt, albeit impacted by the pandemic. Prior to the pandemic, investors were concerned about ridesharing and car sharing taking share from rental…because those alternative modes were. The pandemic negatively impacted public transit, but ridership is likely to recover steadily as rider concerns fade. Alternative modes leave rental cars in a much structurally weaker position than their market shares would imply.

3. CAR Likely A ‘Value Trap’ With Low PE On Gains, Probably Worth More Like $30-$50, All Else Equal: Precisely identifying CAR’s ‘normalized’ EPS isn’t all that useful. It is likely well less than $5/share in a capital intensive, no growth industry dependent on debt financing. Capital allocation has been poor, in our view, with massive buybacks executed at recent sky-high prices. Essentially, much of the ‘win’ on the fleet was thrown in the gutter via repurchases of overvalued stock. As auto supply normalizes into 2023, demand slackens in a Quad 4 environment, and used vehicle prices stall out or decline relative to new vehicle costs, we expect shares of CAR to drop >50%.

TXG

Short Thesis Overview: For TXG, our analysis of NIH grant awards, which tie to spending on their single cell sequencing equipment and consumables, continues to 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 environment, 2023 EBITDA likely remains negative.

FY23 estimates have come in considerably for 10X Genomics (TXG) as consensus grapples with their reduced 2H22 guidance.  At this point the gap between our estimate and consensus has closed considerably. In an accelerating Quad 1 or 2 environment, that would likely be a positive catalyst for a TAM story like TXG. Its a great technology with plenty of expert anecdotes pointing to widespread adoption.

But in Quad 4, a high growth story that generates losses with negative estimate momentum remains a short we'll keep on. As for our estimate, 3Q22 is on trajectory far more negative than we anticipated earlier in the year. The consequences are significant since 3Q22 is the fiscal year end for NIH and the seasonally strongest period for new awards. The December quarter is seasonally the weakest and often new award activity falls to such a degree the odds of a positive inflection point before the beginning of FY23. With this update in mind, we remain Short TXG on the Hedgeye Health Care Position Monitor.

PEB

Short Thesis Overview: There’s no denying, Pebblebrook Hotel Trust (PEB) sports a high quality management team that has a good track record at adding value and strategically allocating capital.  In a bull market with a RevPAR accelerating backdrop – PEB should be a name to gravitate towards. However, we don’t think those positives will matter in the context of PEB’s highly leveraged balance sheet, challenging exposures (heavy urban mix), extremely difficult resort property comps, and rather full valuation as compared to peer set + history.  We see regression towards the mean in the cards on valuation + estimate reductions, which makes for a challenging combination over the NTM.

Trends in the hotel industry remain choppy but this past week of RevPAR performance was decent and showed acceleration on the prior week with RevPAR growth +11% on the week bringing the trend to +11% as well.  Given that weekday (business) demand improved modestly on the week (still soft), the ongoing leisure surge carried the industry towards some nice growth.  One or two weeks do not make a trend, but even with the solid headline numbers, the trends underneath the hood imply a widening spread between business and leisure demand growth.  Leisure proxies are outperforming business proxies by ~25% which is nearly a 2-month high. 

Given that the leisure segment is at a seasonal high right now, we would have expected more blurring between the leisure and business categories, but that doesn’t seem to be the case these last few weeks.  Ultimately, we see this as an omen for corporate demand and what it can mean when there really is a lot less weekday leisure demand in the fall.  We remain bearish on 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.

ESG/Meme names, like Tesla (TSLA) should resume underperformance in 2H22 amid tighter policy.

We highlighted recently 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.

Playboy (PLBY) | As the stock continues to hit lower highs and lower lows, PLBY found its way to becoming a sub-$5 stock. We outlined this name in our ‘Bone Bagger or Bust’ deck as a long term survivor. In other words, definitely a name to own as we near the end of Quad4.

We’ve seen some interesting pricing developments in CENTERFOLD over the past week, in that certain creators are taking up prices to subscribe – which we view as a positive. The back-end is allowing the creators to set their own pricing and explore more in monetizing their presence on the Platform. While it will take time for CENTERFOLD adoption to build, we think that this initiative alone is worth $50 in a stock price over a 3-5 year timeframe – which doesn’t include other value drivers like Honey Birdette, Core Playboy growth, Spirits, Cosmetics, etc…

A painful Quad4 name, but one of the rare multi-baggers we see in retail today – patience and duration.