|
Short: EXAS, BGFV, INVH, HZO, MPW, CAR, TXG, PEB, TSLA, RVLV, BBY, AAP, ULTA Long: PLBY |
Below are updates on our fourteen current high-conviction long and short ideas. We have added Ulta Beauty (ULTA) to the short 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. |
In our morning routine, we review StreetAccount’s Sector recap for Health Care and the the callouts for Notable Gainers/Decliners. There has been some clustering of negative performance among the genetic testing labs, EXAS included. The explanations tend to assign an event or news items, but not always. This week it was “-3.0% EXAS (EXACT Sciences): NEJM screening study; sell-side comments.”
The NEJM study shows screening colonoscopy catches colon cancer, but does not improve death rates, raising questions about the efficacy of screening. It’s highly doubtful there will be any changes in screening methods any time soon, though, so as an explanation for a -3% move in EXAS, highly suspect.
On other days the comment is generic, like “-5.4% EXAS (EXACT Sciences)”, or “+8.6% EXAS (EXACT Sciences): diagnostics space outperforming”, or “-3.8% EXAS (EXACT Sciences): follow-through; stock is down (10%) WTD.” In our view, the better headline is “Quad 4 Factor set up for EXAS is highly probable to produce downside this week and next and the week after that.”
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 has been growing its assortment in Dick’s Sporting Goods while cutting at other retailers like BGFV. A core reason for this is Dick’s upgrading its entire footwear presentation while investing heavily in its store experience.
Great brand presentation and customer experience makes Nike happy as a vendor. What it also means, is Dick’s is likely to win share in core markets in all categories. BGFV lost Nike because it didn’t invest, and now it’s likely to lose in other categories as competitors like ASO and DKS provide a better store experience.
Like everyone in sporting goods, BGFV benefitted from some competitors going away over the last 5 years. Now however it is one of the worst operators and big competitors are getting stronger. We don’t see a way out for the EPS profile of BGFV to do anything but disappear over a multi-year basis.
INVH
|
Short Thesis Overview:
|
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. |
HZO saw new lows this week. In a deep dive into the housing space we highlighted data from Redfin around the relative weakness in the luxury home space. Those who wanted to buy a luxury house did, and those who were hoping to are probably not feeling financially comfortable to do so in the current environment.
We’re seeing similar trends in RVS, and most likely in the core category for HZO of luxury boats/yachts. Continued market volatility and rate increases from the fed will pressure spending on high ticket luxury items and ultimately drive HZO’s sales and earnings lower.
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, three 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. In the end, however, we believe the ultimate outcome is that MPW/Steward mutually "agree" to reduce the rent.
Steward is nothing short of existential to MPW’s equity value. Two weeks ago #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: 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. |
It’s been much harder remaining short here at $25 than it was at $80. The comfort of a high multiple, high estimates, and an emerging Quad 4 was fuller with expectation then. It’s a good reminder though, that we went through this at $47 in August worrying less about the fundamental case, but if the bearish outlook was “in the stock.” With successive Quad 4s in front of us and a factor set up, the right call has been to stick with it.
Keith has been saying crashes happen from oversold conditions, which means as much as TXG has declined from its peak, the odds of more downside “even down here” remain high.
We’ve spoken to a few institutional investors in recent days who agree with our TXG short thesis but who are more concerned with a big rebound to put it on. That’s been a mistake missing out on a 50% decline in 2 months. It’s probable that it will be a mistake from $25 too.
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. |
Another sale at RVLV, not a surprise given the company is over inventoried. RVLV is having a nearly weeklong “Surprise Sale” which started at up to 50% off 2 days ago and is now at up to 65% off product. 25,347 items to be exact.
This is the same story we’ve been saying for a while, high inventory with low turnover will result in high promos which will hit gross margins. Earnings are headed lower while this stock is trading at a mid-twenty’s multiple when it should really be trading around a mid-teen’s multiple or lower.
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. |
Best Buy store visits are continuing on a downward trend in recent weeks. Visits peaked in February and hit a low in April. The level of store visits has not recovered and it continues to decline and at a larger rate.
The stock price has hovered around $64 for the last few weeks, at that price there we still see downside to around $55 given the demand risk in its core categories as the Fed works to stifle demand to slow inflation.
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. " |
Some more incremental data suggesting earnings risk for AAP. ORLY has been taking share from AAP lately as store visits have been improving at ORLY and worsening at AAP, increasing the spread between the two.
AAP was in the middle of a margin expansion story as we have seen demand slow for the business, that means margin pressure from slowing sales will bring further multiple pressure as investors will doubt the margin bull thesis that management has communicated. We remain bearish on AAP earnings relative to expectations.
ULTA
Hedgeye CEO Keith McCullough added Ulta Beauty (ULTA) to the short side of Investing Ideas this week. Below is a brief note.
During a #Quad4 Bear Market Crash, there are LOTS of intraday bounces...
Coaching Notes:
1. That's implied with Volatility in the 30s (i.e. LOTS of intraday Vol)
2. Not many are professionally trained at executing in these bear market OODA Loops
3. Capitalize on that and find things that are up on #decelerating volume within Bearish @Hedgeye TRENDs like McGough's SELL idea on Ulta Beauty (ULTA)
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’re approaching Halloween, which is an important selling period for PLBY. Last year its original Playboy Bunny costume was in high demand. So far this year demand indicators still look solid with google trends interest up 14% YY on average over the last 4 weeks.
The company invested in inventory to try to keep up with demand as it ran out of product last year due to supply chain disruptions. PLBY is heavy on apparel inventory, like most companies, but hopefully it is well stocked for the products that will be in high demand in the couple weeks.
If demand remains strong its good for both the P&L and the balance sheet to get a bit leaner on inventory and flow in some cash from working capital near term.
