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Short: EXAS, BGFV, INVH, HZO, MPW, TXG, PEB, TSLA, RVLV, BBY, AAP, ULTA Long: PLBY |
Below are updates on our thirteen current high-conviction long and short ideas. We have removed Avis Budget Group (CAR) from the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
EXAS
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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 reports November 3rd after the close and has their earnings call at 5PM ET. Estimates dropped following 2Q22 earnings, but have been flat for the last several weeks. Short interest has been rising, bottoming at 9.5M shares in August, and rising to close to 12M shares currently, even as the share price has declined.
The commentary on a colon cancer screening data out of Guardant has been picking up even as it has been expected for over a year. Quad 4 factors remain challenging, a recession remains likely with the negative impact to Cologuard higher than most diagnostics.
DGX reported a good 3Q22 and commented that their core business has been accelerating since mid 2022. The factor exposure is better for Quad 4 and estimate momentum is likely to turn they finally comp out COVID-comp.
Its worth noting the EV/Sales at DGX at 2.2 is below EXAS at 3.5X, although what’s remarkable is there is less than a 1 point differential between the two. Could EXAS trade at a discount at some point?
BGFV
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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 |
Adidas preannounced this week, releasins one of its worst earnings results of the last decade. Net income for 3Q if €179mm vs €482mm expected. Full year operating margin is now being forecasted to 4% vs prior 7%.
So a full year net income guide down of 60%, with only 2 quarters that hadn’t been known. The company cited “deteriorating traffic trend in Greater China, higher clearance activity to reduce elevated inventory levels (up 63% on a currency-neutral basis at the end of Q3) as well as total one-off costs of around € 500 million”. China doesn’t matter for BGFV, but the inventory and demand risk in the US is going to be a problem.
BGFV doesn’t get to carry Nike anymore, and Adidas is going to take a big margin hit as it and Nike are clearing product at the same time. That is going to mean pricing and margin pressure for the remaining apparel/footwear brands left at BGFV.
INVH
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Short Thesis Overview:
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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
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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 again this week. Rates keep marching up and the cost of financing a nice new boat continues to risk. The company reports earnings next week and we expect to see some real cracks in the demand outlook for the company. More to come after the event.
MPW
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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 (Dis)Trust remains our favorite short idea, and our conviction has not been higher at any point since March that the equity is essentially worthless. We believe that Steward Health, MPW’s largest tenant comprising ~25-30% of annual cash rent, is insolvent and on the verge of bankruptcy.
Understanding that a filing by Steward is a completely unacceptable outcome, MPW will most likely do one of two things: (1) extend additional loan support to Steward to repay its expiring ABL facility and/or (2) reduce the current ~$500 million annual cash rent burden by up to ~60-70% to make the arrangement sustainable. Given how far MPW has pushed this, number one seems most likely at first, but at that point MPW will own 100% of Steward’s debt stack and effectively control the operator. At that point the game is up and the only other step to fix this broken structure is to then cut the rent.
The story ends with a rent reduction, in our view, which will essentially wipe out MPW’s equity value. There are additional distressed tenants behind Steward, most notably Prospect. The company will report 3Q22 results on 10.27, but candidly at this point it makes sense to discount essentially everything the company says about its business as non-credible.
A more relevant real-time indicator of what is happening can be found in THC’s earnings, where “same store” hospital EBITDA just declined -30% by our math on much higher labor costs.
TSLA
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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. |
This Thursday on The Call @ Hedgeye, Industrials analyst Jay Van Sciver and Hedgeye CEO Keith McCullough discussed the bizarre claims from Tesla’s (TSLA) earnings report and Elon Musk.
“This has gotten to the point of assuming gullibility and stupidity that is painful,” notes Van Sciver. “You’re telling everyone that the value of Tesla (TSLA) stock is going to be two Saudi Aramco’s. I think this is just a pandemic liquidity bubble.”
“This guy is a salesperson for his own stock. That’s it,” explains McCullough. “It’s a cyclical consumer stock that sells a couple cars. That’s not where you want to be in three straight #Quad4’s.”
TXG
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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 reports on November 2 after the close and hosts their earnings call at 4:30PM. As we’ve previously said, the lull in academic funding over the next 3 to 6 months make the odds of a positive inflection point very low in the near term.
As Quad 4 rolls on its less likely they’ll find big new buyers among Biotech and Pharma customers either. There have been some minor adjustments to 2023 revenue estimates lower, but 2024 is still expected to be a big growth year. At 4X EV/Sales one could think the bear case is priced in.
But in Quad 4 waiting through a period where bad news is more likely than good news, cheap can certainly get cheaper. As we’ve shown, high short interest is a negative performance factor and for TXG short interest is now 5% and rising.
PEB
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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. |
RVLV
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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. |
More sales and more inventory at RVLV this week. We’re waiting for the print for this to just blow up, the promo cadence we are seeing at retail does not look to be in expectations. Revenues won’t be growing like they used to and gross margin is going to tank.
Not sure what investors are missing here to want to keep this stock at such a high multiple, it’s just not worth a 24x multiple when earnings are too high, it should be around mid-teens at the max after a reset.
BBY
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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. |
Retail sales for September were reported about a week back, and trends for electronics stores were not good down 8.6% for the month slowing from -6.5% last in August. The latest visit trends indicate weakening demand since the end of September as well with trends slowing in the last weeks.
Demand in this retail segment can evaporate quickly and even though the company guided down already, we think margins and earnings are likely to see another big guide down before the year is out.
AAP
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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. " |
GPC(owner of Napa Auto Parts) reported this week. Earnings beat and the automotive segment saw comps accelerate 80bps to 9.2%. It’s a positive read for the auto parts space, industry trends have improved some recently as headwinds on miles driven (like gas prices) have moderated.
Still, we think AAP (short) is going to lose share as the consumer sees more pressure and the segment gets a bit more competitive. The visit trends recently have indicated AAP is losing relative to competitors.
The margin expansion story for AAP looked good in ramping demand we saw in 2021, that story is less likely to work so as consumers come under pressure.
ULTA
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Short Thesis Overview: ULTA stock was down Tuesday on a big up market day and we had a couple people asking why. We didn’t see anything fundamental to explain away the weakness. Rather we think it highlights one of the risks to ULTA, which is it’s considered a safe haven around near term demand trends, so it’s over owned and under shorted. Hedgeye CEO Keith McCullough added the color on our morning call that as heavily shorted names rip, funds have to sell some of the longs for capital on the short exposure… and everyone owns ULTA. We think the risk the ULTA P&L and multiple is high as demand reverts, competition ramps to pressure margins, and the company has to re-add employees and SG&A to get the store experience back to ‘normal’ levels. Meanwhile, as the market realizes this is going from a 15% to 20% EBIT grower to a no EBIT growth model, the multiple will rerate towards low double digits instead the ~20x it has seen historically. |
A couple negative data points that read through to ULTA this week. An article came out about consumers beauty fatigue, citing social media impact substantially down YY. If consumers are starting to show signs of weakening interest in beauty, now is not the time to double down on being bullish.
OLPX blew up this week – stock down about 50% in one day and major guide downs. In the earnings call, management citied increased competition and increasing levels of promotion.
ULTA has not been shy in the past about saying it will do whatever it has to to keep customers, which will mean additional promos in the upcoming months. This week’s news just only just beginning to show the cracks in the beauty industry, which most people are incredibly bullish on right now. We aren’t; we expected this and
PLBY
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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 is featuring a lot of sales on its site and through licensing partners. This is the nature of the apparel environment right now. There is too much inventory, everybody is clearing product and doing sales.
It’s not unique to PLBY and not a clean read on brand demand, though the consumer is certainly slowing in aggregate. Freeing up some cash held in inventory makes sense for PLBY as well. Earnings trends near term will be under pressure given the promotional environment and weakening consumer demand.
