Investing Ideas Newsletter

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 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.

Remarkably EXAS scores reasonably well in our revised Quad-Factor model. Its doesn’t make the cut and screen long, but its close to the cutoff. 

It ranks within the top 35% of outcomes. The above average ranking is based in part on the enterprise value and the acceleration of estimates into 2023, although less worse is a better description of the trend.  Estimate momentum is still poor, although we will update our Cologuard claims data for September next week and see how they are closing out 3Q22.

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

Nike reported earnings this week, and though BGFV no longer has Nike as a vendor the industry reads are decidedly bearish.  Nike has too much inventory in the retail channel caused by supply chain timing issues and the recently slowing consumer demand. 

If Nike is having problems, any athletic footwear is likely seeing the same issues.  That means we are going to see lots of discounting in athletic footwear and apparel in the coming months.  BGFV like every retailer of athletic wear will see margin pressure on top of the slowing revenue trends.  BGFV continues to be a share loser and with earnings model in big trouble.

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.

The fundamental bull case  for INVH 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.

Yet another precarious week in financial markets, volatility is high and we think there is building risk from the wealth effect. Confirming that trend was RV shipments this week from the RV Industry Association which reported RV shipments down 36%yy in August. 

RVs have similar consumers and similar demand drivers as boats.  MarineMax is going to see rapidly falling demand as rates rising pressures affordability and discretionary demand falls from weak consumer sentiment.

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.

On Thursday, 9.29, as we had been talking about since April, Steward Health's ABL revolver matured without any announcement from MPW or Steward. Steward is MPW's largest tenant at 25-30% of revenues, and based on the math and available data is very likely insolvent in our view.

The following day on 9.30, Steward announced that it had obtained an "interim extension" from Citi, ahead of terming out this maturity with longer-term permanent debt. In our view this means two things: (1) Steward did not have the cash to retire the revolver, and (2) Citi was neither willing to send a default notice at this time nor willing to extend additional credit. A borrower that does not have the cash and cannot obtain additional credit used to be called insolvent or in technical default.

Despite the rosy language in the release, with no comment whatsoever from MPW management, we view the release as largely confirmatory of our short thesis. MPW appears to us to be headed for a Steward rent restructuring. The equity remains substantially overvalued and is very likely near 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.

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

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.

TXG ranks poorly in our revised Quad-Factor model.  We’ve been working out a way to map an individual ticker to a probability of a positive or negative outcome.  To do this we’ve categorized every ticker into a handful of categories based on 6 factors.

Prior Quad 4s and for stocks that share TXG’s factor category across enterprise value, valuation, margins and estimate momentum, the weekly batting average and performance ranks in the lowest 10% of outcomes.  We’ve been over the fundamentals enough, but with the Quad-Factor model, we feel much better anchoring on the falling knife rather than how far its dropped.

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.

More negative data points this week. Outbound travel is dwarfing inbound travel and many hotel REIT customers are opting for overseas vacation. High end customers plan on taking 72% more international vacations than 2019. Negative for U.S. centric REITs; stagnating airline data affects corporate travel. Hotels need corporate travel to recover as leisure drops off. Pebblebrook Hotel Trust (PEB) remain short.

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

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.

A couple of read throughs from Boohoo for RVLV this week. First, an article came out where Boohoo said it was “navigating demand and reviewing requirements” and one of its suppliers said Boohoo has been cancelling a bunch of orders.

Obviously, demand is down and inventory is up so it is trying to cut back in order to manage inventory. Then Boohoo released Q2 earnings, which were down, and significantly guided down revenue for the full year (prior guidance was LSD and now its projected to be around a 10% decline). Not to mention the massive promo featured on the website of 50-80% off EVERYTHING plus an additional 20% off.

All of this is increasingly bearish for RVLV, who has nearly half of its total product offering on sale right now. Demand is waning, returns are at peaks, inventory is rising. With sales growth hitting peak levels for the last 4 quarters and now needing to comp those levels, maintaining that high level of growth, especially in this macro environment, just isn’t possible. So top line is going to break and with declining demand and high inventory, there is going to be a ramp in promo activity, which is going to hit GM and the bottom line. It’s a pretty bleak outlook for a company trading at roughly 27x earnings. 

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.

Another week of declining in-store traffic for basically all of retail. Electronic Stores had the largest decline YY (see chart below). Business will continue to slow and people are just not getting that. Even though this stock hit 3 month lows this week, we still think there is at least another 10-15% downside left. 

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. "

KMX reported a miss this week, citing inflation pressure, high interest rates, and low consumer confidence as the reasons. Arguably, if consumers are not spending on a new vehicle (whether brand new or new to them) then they’ll probably be spending to maintain their current vehicle.

So this KMS miss may not seem all that bad for AAP, but with prolonged high inflation most likely passed onto the consumer, routine maintenance will be put off and we are bound to see trade downs. There is no doubt that macro read will mean sales across the entire auto industry will continue to slow in the coming quarters.

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.

PLBY at these valuations is very much a boom or bust call, meaning the company is either going bankrupt or going up at least 5 to 10x whenever the macro stabilizes and the company executes. 

We still think a bankruptcy is unlikely here.  This company has real assets, it’s not like tech companies with no cash flow where the “ip” is the only thing of value.  Honey Birdette has real value, the licenses have real value, the artwork and content library have real value. 

All of which could be monetized in whole or in part if needed to provide capital.  The weakening consumer and recessionary environment is definitely hurting business, but we think the value here is much greater than what the market is assigning.