Investing Ideas Newsletter

Short: EXAS, BGFV, INVH, HZO, MPW, CAR, TXG, PEB, TSLA, RVLV, BBY, AAP Long: PLBY, ATVI

Below are updates on our fourteen current high-conviction long and short ideas. We added Revolve Group (RVLV), Best Buy (BBY), and Advance Auto Parts (AAP) to the short side. We also removed Fiserv (FISV) from the long side. 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. 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.

We’re seeing and hearing the data and anecdotes turn more positive this past week.  There is a growing risk the broad medical consumption is picking up out of the summer months.  Comparisons ease heading into 2H22, although EXAS is still facing a tough comp on COVID testing that has largely dissipated.  We will update the claims trend for Cologuard next week looking for evidence of a change in trend.

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

ASO reported earnings this week and it was a solid quarter. It beat EPS while delivering sales in line with expectations. ASO comps were down 6% YY, recall BGFV’s comps were down 22% YY in 2Q. 

That highlights the massive share loss for BGFV.  Worse still is that ASO and DKS are putting up strong earnings and cash flow, meaning the biggest and strongest competitors are getting stronger and building the capital war chests to continue to drive growth and share gains against the weakening BGFV. 

The company will continue to lose share and lose customers, much like it lost a core vendor in Nike.  Earnings for BGFV will continue to head lower. 

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 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

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 hit new lows this week, on no new company news.  Oddly enough it happened in a week when other retailers actually saw a rally around the Goldman Retail conference. 

We think the consumer continues to weaken, and the wealth effect from pressure on multiple asset classes, particularly housing prices will be seen in the coming months. That means accelerating demand risk for HZO and further pressure on the stock.

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 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

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

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.

Our daily Monitor updates for Estimates, Performance, and Factors across our universe has been picking up a positive trend recently.  Fundamentals are driving stock performance and estimates seem to have stabilized. 

Even though we’ve seen Health Care rally, TXG has barely budged off the lows.   Those observations are related in our view.  TXG estimates continue to contract and the market is back to trading off of fundamental trends.

The factor-based rally off the June lows and even through the downside that followed has treated good trends the same as bad ones.  We’ll update our TXG Tracker next week and see if we should expect further fundamental decline.

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.

It might be the season of “back to school” but the data suggests it’s still not “back to the office” time yet.  Will it ever be circa ’19?  The latest data out of Kastle Systems shows that office utilization remains impaired and has barely improved in the last 3-4 months, which could be another indication that white-collar corporate travel recovery won’t be inflecting.  There has been improvement for RevPAR in key urban markets and our other “White Collar” business travel proxies but the bulk of the acceleration has likely come from a series of long weekends, holiday timings, and the return of city leisure broadly. 

With summer now in the rearview, hotel bulls seem to be banking on accelerating weekday RevPAR; unfortunately, it’s doing just the opposite.  The hotel REITs and C-Corps have flagged the “return to office” as a catalyst for their urban portfolios to start seeing improving growth, but we’re still waiting on that catalyst to come to fruition.

Structurally though, we have asked ourselves the question: can weekday transient demand fully recover especially in urban markets, if the regular office week is no longer part of everyday life?  Sure, there’s been a gradual pick up in office utilization since Jan/Feb, and it could push higher in the months ahead but most offices in key business transient hubs (NYC, SF, Chicago, LA) are still showing utilization rates of ~40%.  Conversely, will the concurrent correlation between office utilization and RevPAR growth hold up and lower city / office utilization keeps business travel at bay?  So far, it would appear so.  There’s a variety of factors at play here and we’re just using the office data as another way to track the multitude of headwinds for the sector.  Just this week reportedly Google is planning to cut back on business travel expenditures just a month after MSFT and others made similar claims. 

Until proven otherwise, the urban weekday business travel remains a secular risk for the FS REITs and could be exposed later this year as the huge contribution from resorts and leisure destinations fade.  We see healthy downside in 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.

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.

RVLV

Hedgeye CEO Keith McCullough added Revolve Group (RVLV) to the short side of Investing Ideas this week. Below is a brief note.

Gotta love bear market bounce days, even if they've been few and far in between as of late...

Coaching Notes:

1. Looking for the lunch-time-lull names that are higher on decelerating volume intraday 

2. Looking for US Consumer Discretionary Shorts (XLY) like McGough's Revolve (RVLV)

3. VIX Refreshed Risk Range has a BIG higher-low now = 22.63-29.21

We'll see how many people need to buy the RVLVs at VIX 27-29.

BBY & AAP

Hedgeye CEO Keith McCullough added Best Buy (BBY) and Advance Auto Parts (AAP) to the short side of Investing Ideas this week. Below are two brief notes from Real-Time Alerts.

Who wants to run out to Best Buy (BBY) and grab another TV (legally) because "the bottom is in"?

Coaching Notes:

1. This stock is a great example of one that got smoked (last week) on #accelerating volume ... and is bouncing to lower-highs with weak-handed-hedgies covering on #decelerating volume

2. Find more fractal patterns like this one on your own. They are beautiful.

3. Brian McGough remains The Bear on the BBY,

Another one of McGough's Short Ideas (with the same fractal pattern as BBY) that I have been waiting on is AAP...

See his Retail Pro independent research product on why,

KM

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.

We ‘get it’ that this company and management team is hated. In 29 years, I don’t think I’ve ever seen such hatred towards a name – yes, including Radio Shack and JC Penney. But like it or not, this is one of the companies that’s proactively preparing for multiple Quad 4s. Pulled guidance, layoffs at corporate, sold the corporate jet, and just Friday a week back PLBY filed a $250mm mixed shelf (which has a 3-year duration). 

Generally it tells us what we already know, the company is managing the business for cash, as liquidity risk is the only factor we can point to that can cut the stock in half and make it an official ‘bone’. The consensus view on this company is that it is ‘unsalvagable’, but how we’re doing the math, the NPV of the future guaranteed licensing stream is worth alone where the stock is trading today.

It’s currently got ALL the factors that don’t work…horrible sentiment, growth narrative (growth narratives hate Quad 4), small cap, levered, no GAAP earnings, and minimal ‘traditional’ valuation support (PE, EV/EBITDA). We have a meeting in LA with CEO Kohn and CFO Barton next week. I’m going armed with the tough questions. And I’m not holding back. Expect an update on the name, and what I learned, and changes to my thinking going forward shortly thereafter.

ATVI

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.