Below are updates on our twelve 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 added Activision Blizzard (ATVI) and Fiserv (FISV) to the long side of Investing Ideas this week.
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. 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. |
Estimates continue to deteriorate for Exact Sciences (EXAS) week over week, as they have for much of the last year. The risk on rally has not been as beneficial to shares as it has for many other unprofitable and speculative names, even though negative estimate momentum has been such a positive factor, along with high short interest, over the last several weeks. The macro headwinds are becoming increasingly evident, including the most recent housing data. We think consumer weakness will find its way into wellness visit trends which we get to update for August the week after next when we update our claims data. Stay tuned.
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 Sporting Goods (BGFV) | DKS reported Q2 2022 earnings this week, coming in with a slight beat. The company took up guidance for the year to $10-$12 from $9.15-$11.70. Maintaining a $2 range in EPS half-way through the year just shows management doesn’t know what to expect. If a strong management team like at DKS can’t figure out demand and the macro impact for the rest of the year, how is management at BGFV supposed to do it?
Also keep in mind that Nike is INCREASING allocations to DKS, while it outright fired BGFV as a customer. Management teams all over are struggling to guide and plan for the rest of the year, BGFV is no different. We expect BGFV to lose money in perpetuity over a TAIL duration, with an ultimate equity value of zero.
INVH
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Short Thesis Overview:
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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
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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) | On the earnings call this week the WSM CEO said, while insinuating we are not currently in a recession, the macro environment actually will not affect the company because home furnishings and home improvement sales lag home sales.
Now looking at luxury e-tailer FTCH management’s comments from the Q2 Earnings Press Release – said that 2022 will be a slower year and acknowledged that the macro environment will impact performance and projections. Management actually lowered guidance for the full year to account for this.
The luxury market is in an interesting place right now. Management teams either are macro aware in forecasting or guide based on what they have seen so far. The good/smart management teams are the ones including the macro environment in their guidance – can’t ignore that we are in a Quad4 now and we have four more of them.
Spoiler alert: we think the HZO management team is not one of the smart ones. This company is egregiously over-earning right now, and with home values falling, equity markets continuing to collapse, buying $3mm yachts won’t exactly remain at the top of consumers’ shopping list. Needless to say, we remain short HZO.
MPW
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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
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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. |
Avis Budget Group (CAR) is a value trap. This stock has been an inflation winner as used car prices soared. What a year to happen to be holding half a million vehicles, ~67% since the start of the pandemic and 47% in 2021 alone. Gains disappear as new vehicle costs increases catch-up with used price increase – it’s the spread that drives accounting profits.
Add in disinflation and a slowing Macro environment and that isn't a good set-up for CAR.
TXG
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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. |
There was a good transcript of an expert call we highlighted in a Morning Brief this week that agreed with our outlook for 10X Genomics (TXG). On the one hand TXG is a standard for single cell sequencing. On the other, there is an open battle with more than one competitor for spacial analysis. In life science research being first and being the best matters because anyone who comes after has to build on existing research using the materials and methods. If the next leg of growth is in spacial, NSTG looks like they have an advantage, and they are not the only legitimate competitor.
PEB
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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. |
We’ve built up leisure demand models using alternative data sets; reacceleration we’ve seen in August will moderate in September and October; Europe has seen a nice acceleration in leisure demand in July and August but bookings are starting to roll over as we head into the Fall. Any moderation in leisure is a bad thing for hotels and hotel REITs. We remain short Pebblebrook Hotel Trust (PEB).
Watch Gaming, Lodging & Leisure analyst discuss this alternative data set on "The Call."
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. |
Tesla (TSLA) remains a wildly overvalued ESG/Meme/Retail bubble name that is in a longer process of revaluing, as we see it. The ‘quality’ of the company's most recent quarter was poor, with very little free cash generated. Cash from operations less capex, and regulatory credits & stock-based comp is a negative number.
By revenue, Tesla reads as a single product company, with the Model 3 and its hatchback Model Y holding down sales for at least the next year. Competitive entry is omnipresent from Rivians to the VW ID series to Volvos, Audis, Polestars, and Hyundai. Most offer compelling advanced ADAS – there is nothing particularly unique or special anymore; at a comparable valuation to other OEMs, Tesla would trade around $50 - $100 per share.
We’ll stick on the short side. Adding capacity for a ~4 to ~7-year-old design into an economic downturn and extensive competitive entry may not be…effective…and we’ll will look for that inventory build to compress gross margins in the upcoming quarter.
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. |
Playboy (PLBY) | Activist activity is picking up at PLBY, with a major shareholder calling for the ouster of CEO Ben Kohn. We’re not going to pick sides in this fight – not yet at least -- but the main argument is that this stock is trading at a massive discount to liquidation value of $600m (current EV $410mm), which is 100% true. Any and all growth initiatives at the company are currently being valued at LESS THAN ZERO.
We’re not sure if the activists will win the fight given the big PE ownership stake, but shareholders getting louder about strategic direction definitely can’t be a bad thing for the stock.
ATVI
We added Activision Blizzard (ATVI) to the long side of Investing Ideas this week. Upon adding ATVI, we included a lengthy note written by Telecom Policy analyst Paul Glenchur published on 6/15/2022 explaining why we like long ATVI. For more on the thesis, give that a read.
FISV
We added Fiserv (FISV) to the long side of Investing Ideas this week. Upon adding FISV, we included a lengthy note written by Financials analyst Josh Steiner published on 7/26/2022 explaining why we like long FISV. Check it out.
