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Short: EXAS, BGFV, INVH, HZO, MPW, CAR, TXG, PEB, TSLA Long: PLBY, ATVI, FISV |
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.
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. |
The start of the month means we will be refocusing on our Tracking data trends. For EXAS we will see the August updates for the claims trend in physician visits, wellness visits, and new and existing patient trends, in addition to the Cologuard claims update.
Health Care Labor has been softening recently, although for some subgroups demand has been accelerating. For Cologuard volumes, management was cautious into second half, but we haven’t seen it yet in the weekly claims updates.
The conference season is heating up in September and we’ll be listening for any changes to the narrative and watching the data. Quad 4 should dominate the shares, but on the lows of the last 3 years, we’re also thinking of the other side.
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 |
Taking a look at updated store traffic trends, BGFV has seen some improvement in August, but visits are still down high single digits YY. The trend also doesn’t look quite as good in the most recent weeks if comparing to 2019, as the company is lapping the Delta variant wave spread in California of August 2021.
We think trends are likely to get worse as we get later in the year. The consumer is seeing more pressure, the sporting goods category will continue to see demand reversion, and BGFV continues to operate without Nike as a vendor losing a core traffic driver.
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 in the coming weeks, and we expect the case to proceed. We also think the probability is rising that this moves to a multi-state complaint. 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. |
HZO saw an insider sale this week. It wasn’t huge, 3k shares by director sold at around ~$40, but it’s the second sale in the last few weeks coming as the market saw a rally while most macro consumer data continues to weaken.
The PCE data reported last week actually had a slight rate of change improvement in the HZO related “Pleasure boats” category after a couple months of slowing trends. Still we think there is massive demand reversion risk.
A big catalyst will be the weakening job market, as this week we heard another slew of companies announced layoffs at the corporate level. These are high paying jobs that will impact the high end discretionary market like Boats. Lots of earnings downside to come for 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 remains our favorite short idea. The equity is worthless from a fundamental perspective, owing to the company’s circular liquidity support of large, distressed tenant operators via loans, as well as its own excessive leverage.
Now the stock’s cost of capital is broken and the management team has lost all credibility, which typically results in an elongated “death spiral” for a triple-net REIT. At the same time, there is a near-term catalyst in the form of Steward Health’s credit facility maturity which occurs on 9.29.22.
We believe MPW already started the process of refinancing this loan in 2Q22 via a new $150 million loan facility, with additional loan support likely on the way this quarter. Finally, the stock is signaling bearish TRADE and TREND. Short it, or stay as far away as you can.
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 just happened to own a large fleet of used vehicles during an unprecedented surge in used car prices. These gains dribble into earnings, fluffing up results and, we believe, CAR’s share price.
As used car prices normalize and drivers return to public transit, ridesharing, and livery services, we doubt that CAR can hold investor interest in an industry that has historically delivered lousy long-term returns for investors.
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. |
Shares have been making new lows in the last week as the macro headwinds have teamed up with the fundamental deterioration that began almost a year ago and has continued through the disappointing 2Q22 results and 2022 guidance.
With short term performance range of +50% to -40% the shares have been volatile to say the least. We’ll be updating our Tracker and tuning into upcoming conferences in September. September is the seasonally strong month for NIH awards every year as they close out the fiscal year.
It's followed by little to no activity in the December quarter. 2023 estimates have come down considerably since 2Q22, but if September NIH activity continues on the recent trend, there will be another round of downside.
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. |
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. |
This week on The Macro Show, Hedgeye CEO Keith McCullough highlighted implied volatility discounts hiding in mega-cap portions of the market and how that fuels complacency within bubbles.
“If you go back to the options market rally in July, there was one day in particular when Tesla (TSLA) call options represented 44% of total single stock call options volume on the day. 44%. Think about that,” says McCullough. “The bubble is still in those bubble caps, on any metric evaluation. ”
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. |
We got some good questions from Retail Pro subscribers this week in our Ask Me Anything in The Arena session. Several were on PLBY. The skepticism on the CEO’s leadership remains fueling the activism debate. There were also some questions about the recent performance of Yandy and our expectations for it. Yandy will continue to struggle in a Quad 4 environment – because it’s Yandy. It’s low to mid-tier product.
We couldn’t care less if it were part of the Playboy portfolio. It is hardly an aspirational assortment and it’s definitely not high-end like Honey Birdette that appeals to a more ‘price agnostic’ customer. The company bought the Yandy brand more for its PP&E infrastructure and consumer direct team than anything else. But overall, it’s not a big growth engine in the model longer term – even after we exit Quad 4.
It may take several quarters of execution to see the growth initiatives drive P&L performance, but we continue to think there is a huge opportunity from improved monetization of this brand.
ATVI
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Long Thesis Overview: We continue to believe an antitrust case to block the Activision deal would likely fail in federal court. As a horizontal transaction, the deal would leave Microsoft in third place behind Sony and Tencent in the game publishing market. As a vertical transaction, theories of antitrust injury are more speculative and readily offset by efficiencies that can lower consumer cost and improve customer convenience. |
We expect Microsoft to continue its affirmative strategic approach to smooth the path toward eventual approval. The company's preemptive offer of concessions, its support of particular aspects of the Administration's big tech competition policy agenda, and now its concessions to win labor union support for the deal all point toward a flexible campaign to get the transaction over the goal line.
To the extent the prospect of an enforcement challenge, regardless of underlying legal merit, represents a near term concern, Microsoft's preemptive approach to reduce potential deal opposition gives the FTC solid policy reasons to stand down.
FISV
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Long Thesis Overview: Based on the company's strategic M&A, execution of synergies, and investments in omnichannel, software, SaaS, the cloud, and global diversification, market share worries appear to have been adequately confronted. Moreover, strong cash flow generation has driven down leverage from 4x to 3x EBITDA, funded strategic investments, and helped repurchase ~6% of shares outstanding over the past 24 months. |
Given its leadership in card issuing and merchant acceptance, Fiserv has sizeable scale advantages and a deep network of bank relationships, which together with its investments in technology form the company's defense against growing competition from fintechs.
On the merchant side, we look favorably upon the company's dual targeting of enterprise and SMB clients through its omni-channel software platform, Carat, and its cloud-based PoS system Clover, particularly as it adds vertical specialization and increases the penetration of value-added services.
Regarding it's core banking business, we continue to view Fiserv as a beneficiary of the digital transformation of regional banks and credit unions, which the company is servicing with its cloud and SaaS solutions.
