|
Short: EXAS, BGFV, INVH, HZO, MPW, CAR, TXG, PEB, TSLA, RVLV, BBY, AAP Long: PLBY |
Below are updates on our thirteen current high-conviction long and short ideas. We removed Activision Blizzard (ATVI) 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. |
FedEx commented on the steep deterioration in volume they’ve seen globally this week. That same weakness is likely to negatively impact Cologuard revenue, and more indirectly their oncology business.
For both, we expect wellness visits and routine screening will come under pressure as patients defer more discretionary health services. Economic uncertainty and declining consumer confidence typically result in faster medical spending as consumers worry over losing their health benefits in a downturn, but we expect the net impact to screening to be much less pronounced than for knee surgery.
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 |
This week Olympia sports filed for bankruptcy. To be clear, Olympia is more of a mall athletic apparel retailer than “sporting goods”, similar to Champs sports. It is down to ~70 stores, it once had ~230 circa 2013, its heading into liquidation.
We’d argue this (going away) is where BGFV is headed in the not too distant future as it faces increasing competitive threats and no Nike as a vendor (see traffic below as well). We’ve seen many regional sporting goods players close down in the last 6 or 7 years, the industry has been consolidating into the few biggest players. BGFV is a melting ice cube.
INVH
|
Short Thesis Overview:
|
Active Short Invitation Homes (INVH) caught an S&P500 index inclusion last week, which we think was at least in part responsible for the recent run-up. We wanted to highlight a very important point that Keith raised: “One of the best times to short a fundamentally bearish name inside of a bear market, is post-index inclusion.”
As we await the ruling from the judge on INVH’s MTD, we continue to expect the case to go multi-state in the coming weeks/months. We disagree that the issue will be resolved via a small settlement, as the company continues to tell investors.
Meanwhile the fundamental bull case continues to weaken: we think property tax expense growth could be +7.5% to +8.5% next year which is well-above what the Street is assuming, and that increased supply via conversion of units from build-to-own to build-to-rent will create a more “elastic” market with lower top-line growth. Translation: both growth and margins have already peaked.
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 made new lows this week. The company had another insider sale by a director. Perhaps the most important news for HZO this week actually came out of FedEx, as the company explicitly described that we are heading into a global recession, and that business trends got worse in August.
The market isn’t appreciating the demand and earnings risk for HZO in a deep recession, and the company is doing deals, paying premium prices for growth at the peak which will prove to be much more expensive than expected. This name will continue to be under pressure as the macro/consumer environment weakens in the coming months.
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. |
Active Short Medical Properties (Dis)Trust (MPW) remains our top idea on the short side, and despite the YTD share price decline the stock is only trading ~100-150bps “wide” of some of the higher-quality triple-net REITs. Under the best of circumstances, assuming all of MPW’s tenant and lending relationships continue paying without issue, our view is that this stock is worth no more than ~$10/share at most.
At the same time we are growing increasingly convinced that MPW’s top tenant, Steward Health, is likely at or near the point of insolvency given emergency loans from MPW, stretching of payables via non-payment of vendors and withholding contractual employee wage increases, and no completed 2021 audit which indicates likely “going concern” issues. Steward’s credit facility matures on 9.29 and has not yet been addressed to the best of our knowledge, and our understanding is that it would be incredibly difficult for any bank group to play ball here without a completed 2021 audit.
We expect additional loan support to come from MPW, which would deepen MPW’s ownership of the cap stack of an insolvent operator. Prospect is doing even worse financially, and three weeks ago a potential buyer of the OpCos of four hospitals pulled out of the deal due in part to the above-market and uneconomic rent owed to MPW. This points to a required rent cut to make this system sustainable.
Last week we wrote about corporate governance issues as well, including a Section 16 officer and co-founder being the main intermediary between any whistleblower and the Board. We continue to believe that the equity is essentially worthless.
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. |
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.
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. |
We updated our TXG Tracker this week which is based on NIH grant award data. As we’ve been saying for the last several weeks, if the tracker data remains soft through the end of the month, the window for a recovery won’t re-emerge until well into 2023.
NIH awards most of its grants in 3Q22 and most of that in September. There is a 50% to 70% seasonal drop into 4Q typically. The number of single cell sequencing related grants are that are currently active are trending lower with the pace deteriorating.
With successive Quad 4s coming, a unfavorable factor set up, EV/Sales at 5X, and estimates that are likely too high for 2023, we continue to like the short here.
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. |
The M&A market remains a problem for the FS REITs, especially as the cost of capital continues to stay elevated and the Quad 4 backdrop persists. Historically, the REITs have been Quad 4 outperformers by offering a more defensive strategy with a high dividend yields, but with a significant amount of deferred CapEx and high leverage, the REITs look more vulnerable this time around.
Looking ahead, as seasonality likely shifts the Hotel REITs away from strong leisure demand and peak margins, multiple compression should be in play. PEB remains an active short at Hedgeye.
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 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.
RVLV
|
Short Thesis Overview: RVLV has a problem with rising returns and rapidly building inventories. On inventories, management struggled to characterize it’s problem. The balance is up 76% YY and the company admitted it has too much, but it also noted it has high quality inventory, and that it will retain its value, but because of softening demand, and the desire to reduce that inventory, there will be some measured promotions. Maybe this is possible in a normal environment, but EVERY APPAREL COMPANY HAS TOO MUCH INVENTORY. Good luck moving inventory in a measured fashion when every company is trying to clear product at the same time. |
RVLV is valued like an ecommerce growth story, but growth is slowing here materially. Negative inflation spreads are likely to clip Gross Margins in 2H as the environment gets much more competitive due to uncontrollably high inventories channel-wide in the face of rising input costs – and yes, this name still carries a serious multiple to it.
People might say it’s cheap based on a trough EV/Sales multiple of 1.4x – but we’d argue that since this company is profitable people need to look at earnings and cash flow – and it's trading at 28x earnings and 16x EBITDA with meaningfully slower growth ahead. After seeing revenue up 50% + early in the year, growth is likely to go negative by 4Q.
At best we’ll give it a 12x p/e on a $1.25 to $1.50 EPS annuity once people realize the lack of EPS growth here (sales growth offset by margin dilution), or a stock of below $20.
BBY
|
Short Thesis Overview: We moved this higher a few weeks back when the stock rallied and we made our ‘short the rally’ in retail call. The stock then was in the low $80s, but it’s corrected back close to $70. Category demand is weak, inventories high, and we think the US consumer will continue to weaken as we face multiple Quad4s. Still think you have downside here to around $55 to $60 on 2H revenue and margin risk, but the risk/reward after the drop suggests other shorts are higher conviction. |
BBY is trading at 11x earnings again after it guided down the year a couple months back, but we think there is further earnings risk to come. The company guided margins to just a little below 2019 levels, yet we are heading into a US recession.
Margins could easily be revised down another 75 to 100bps, and the stock will start to look very expensive in the $70s. Demand is slowing and inventories are high. Beyond 2022, the street is of course modeling sales and margin expansion in 2023, yet we could see a multi-year time period of reduced consumption in many of BBY’s core categories.
We see earnings downside risk to ~$5.50 and a stock closer to $55 to $60.
AAP
|
Short Thesis Overview: "Our view of the TRADE and TREND durations in Auto Parts retail is getting incrementally bearish. Long term demand drivers look intact, but near term we’re see deterioration in miles driven trends, elevated gas prices squeezing the car allocation of the consumer wallet, while general discretionary spending power of the consumer continues to be under pressure. " |
Our view of the TRADE and TREND durations in Auto Parts retail is getting incrementally bearish. Long term demand drivers look intact, but near term we’re see deterioration in miles driven trends, elevated gas prices squeezing the car allocation of the consumer wallet, while general discretionary spending power of the consumer continues to be under pressure.
That’s translating to slowing online interest on google and slowing visitation trends per Placer. The risk of the directional trend of the business does not appear to be in consensus numbers. Those consensus expectations for 2022 have marched up over 10% for each name in the last year, and imply rate of change improvement in the middle part of this year.
If these names start to see slowing results and earnings revision pressure, we suspect the trade in the coming months will be to sell the Auto Parts names that have outperformed, and swap into the beaten up names within other areas of consumer with trough multiples and EPS estimates already revised much lower. AAP is the ‘beta’ play in Auto Parts with a history of underperforming, particularly in slowing demand environments.
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 had a meeting at HQ with PLBY management this week. Punchline, we walked out of that meeting more bullish than I went in -- for many reasons. Meaningfully so. Does Quad 4 scare us? Yes.
Whole group will be under pressure until the end of 1Q23, which is why you should be relying heavily on our shorts right now. But I think Spring will mark the mother of all buying opportunities for the retail group. But to be clear, after going through the growth initiatives, liquidity risk, and capital deployment strategy with the PLBY team the new learnings made us net bullish.
