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.

EXAS has broken below its pandemic lows from March 2020.  Like many things since the market peaked, that’s remarkable.  The Employment Report from BLS this morning pointed to strength in the US Medical Economy from August into September.  The Hospital PMI also showed sequential improvement for September.  But for profitless growth stocks the broader strength in the Employment Report means there won’t be any relief coming from a Fed pivot any time soon.  Even if EXAS has a good quarter, the combination of the Fed and Factors will weigh on shares.

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

NICS firearm background checks for September were releases this week.  Checks were down 8% YY. Slowing from recent months.  The background checks are a good indicator of demand for firearms, which tends to also track with ammo and gun accessories demand. 

That means the hardlines side of the business for BGFV connected to firearms is likely to see slowing demand.  Every part of the BGFV business is under pressure in terms of trends in rate of change. 

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 remains our second favorite short idea behind MPW. We continue to think that property taxes growing +6.5% to +7.5% next year, which catches up on a lag to HPA, combined with a rapidly decelerating top line leaves FY23 estimates far too high.

External growth via acquisitions will also decline meaningfully amidst a much higher cost of capital, and analysts are likely not factoring in additional earnings drag from unfavorable refinancing spreads. SFR should trade at a discount to high quality multifamily, which is a superior business. In the meantime we continue to await the outcome of the CA permitting whistleblower case, which we expect to proceed. 

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.

MarineMax closed on its acquisition of IGY Marinas which was previously announced at $480M cash plus earnouts, valued at over 4x sales.  The company is revamping its credit facilities to $1.35B debt including a $400mm term loan for this acquisition. 

There perhaps isn’t a more clear signal of peak earnings for HZO than this deal.  Taking on leverage to buy this asset at what is likely peak sales/margin trends at a high multiple.  That’s a very bad financial move heading into a recession.  

This IGY may very well be a good asset, but the timing and price we think is fueled not by return on investment but rather by the need for growth as HZO’s core will slow with the impending negative wealth effect.  Is HZO aware of the risk around crypto wealth loss in the IGY core Caribbean markets? 

There are a lot of crypto millionaires residing down in the lands around the Caribbean that were millionaires on paper in 2021, and no longer are.  

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.

As we had expected, two weeks ago Steward Health (25-30% of MPW’s revenue and a larger share of cash EBITDA) essentially defaulted on its credit facility maturing 9.29. Our read of the situation is that Citi wants out and was not willing to fully “roll” the facility, owing to Steward likely being insolvent and not having a completed 2021 audit. The latter is just wild.

Steward also did not have the cash or a third-party financing option, so rather than sending a default notice Citi likely granted a 60-90 “interim” extension after which it will begin demanding collateral. MPW may be Steward’s only option in refinancing the facility, which would result in MPW owning the entire capital structure of an insolvent operator. Steward is nothing short of existential to MPW’s equity value.

Early last week #12 tenant Pipeline Health filed for Chapter 11 bankruptcy protection. We believe the ultimate resolution there will be a cut to the current ~$15 million of rent owed to MPW as Pipeline emerges from bankruptcy. The CA hospitals are currently generating less than $3 million of trailing EBITDAR before corporate overhead, so the rent burden is completely unsustainable. This tenant relationship is very representative of MPW’s portfolio. We continue to view MPW’s equity value as essentially worthless. 

CAR & TSLA

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. 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 have TSLA & CAR as Best Ideas Shorts. Value can be defensive. Already cyclically depressed industries heading into a weak economy are similarly defensive – auto sales aren’t far off GFC lows.  As we go through a Quad 4 environment, we expect positioning defensively in our cyclical coverage to be a key to alpha generation. 

TXG

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.

Into earnings season we go! Revenue of EBITDA estimates have not budged since August for TXG.  The big month for NIH grants has come and gone and the roll off of older grants won’t peak until 1H22. 

Expectations have fallen for 2023, but compared to $509M in 2022, $642M in 2023 still looks like a stretch.

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.

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.

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.

Apparel Import data for August is in, and imports and import prices (i.e. inventory) are on the rise. Import units were up 8% YY and average import cost was up 19.3% YY (the highest ever). Levi’s reported this week with inventories up 43% and 1/3 of that was due to cost of goods inflation. More goods, plus more expensive goods, plus slowing demand is not good for Revolve (or apparel in general).

The entire apparel space is going to get very promotional in the coming months.  Gross margins are going to take a real hit as these peak import prices start to flow from the balance sheet to the income statement as the goods are sold.

Last week it was trading at approx. 27x earnings, this week its 24x earnings (stock went down), but that’s still too high for what this company’s current future is in terms of earnings growth. 

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.

Core consumer categories for BBY are showing weakness.  PCE spending on video, audio, media, etc. category YY is growing at a slower rate. July growth was nearly 8% YY while August growth slowed to 6%.

We had highlighted the slowing traffic trends lately at electronics stores, but this updated PCE data shows that the slower traffic is translating to slowing sales trends as well.

Even though the stock closed the week at a low of roughly $64.50, we still think there is downside here to around $55-60 if note more on the potential for a big negative earnings revision.

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. "

Taking a look at AAP store visits, the trends are not good. Both YY and vs 2019 visits growth is slowing in recent weeks and months. We think the space is being pressure by miles driven as gas prices rose, and inflationary pressures on the core consumer. 

Meanwhile AAP has a history of underperforming and facing margin pressures in slowing environments.  Trends here look bearish for the AAP earnings relative to expectations. 

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.

It was another Quad 4 week for PLBY.  The stock saw some pressure like the majority of growthy consumer names.  We’ve keeping an eye on the recent relaunch of CENTERFOLD a few weeks back. 

The changes give more power to creators on pricing and direct content payments.  We’ll see how the marketing and monetization strategy progresses, but it’s hard to see how creators with such a large draw won’t be able to generate at least some real revenue flow to the platform. 

We have also been seeing a change in strategy where creators are doing their own direct marketing reach out to members of the CENTERFOLD emailing list to drive engagement.  If this platform can gain any momentum, it would quickly flip the script on the stock and investor sentiment.