Investing Ideas Newsletter

Short: EXAS, BGFV, INVH, HZO, MPW, TXG, PEB, TSLA, RVLV, BBY, ULTA Long: PLBY

Below are updates on our twelve current high-conviction long and short ideas. We have removed Advance Auto Parts (AAP) from 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.

EXAS is a worse short than TXG.  Negative margins, a low EV/Sales ratio, and negative estimate momentum are balanced by large enterprise value and estimate acceleration.   The slash line is 0.530/.0072/0.003 for batting average, average performance, and frequency.

The EXAS set up has been a rare occurrence in prior Quad 4s.  GH will post data for their Cologuard look alike test, although it will be some time before it will be a competitive threat.  With a strong flu season emerging, there may be a tailwind for their COVID testing revenue.  Heading into the 3Q22 earnings, we just need to update the claims trend to know what do, which we will have Monday morning.

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

BGFV reports earnings next week on Tuesday. Expectations are relatively low, with EPS expected to be down 75% yy and comps down 10%, so the company could hit the street number.  The risk on this event we think is around forward commentary and QTD trends as we have seen visits indicators get worse in recent weeks. 

We also think the industry is going to be under pressure from a promotional perspective as Nike, Adidas, and Skechers have all highlighted elevated inventories that need to be reduced.  That will pressure margins at retail.  BGFV earnings expectations should continue to fall. 

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.

We are going to start off with our high level thoughts on this unmitigated disaster of a quarter for INVH, with the numbers/variances to follow below. 

First, we do not think it's a stretch to call this the worst quarter in recent memory for a "blue chip" REIT. This one is really bad, and is going to bury a lot of people. We did what we could to warn the market of what we thought was coming, specifically peak NOI margins amidst a decelerating top line and property tax-driven SSExp acceleration, and then of course the non-permitting lawsuit which remains ongoing. For those who are losing money but engaged with us in good faith, as we tried to do, we are sorry that you are taking losses here and will continue doing the work. For those who stayed away, we hope the work was helpful and will continue doing the same where we think it is warranted. For those who questioned our credibility, motives and independence... well, sometimes you're the dog, other times you're the hydrant. 

Second, the below quote on the front of the earnings press release is flat out ridiculous. You just slashed your SSNOI outlook below the low-end of the prior range in late-October with two months remaining in the year. When this happens it signals to investors that you do not know how to model your own business, and/or the operating environment deteriorated so fast that you could not keep up. Either way it's bad, but someone (us) saw it coming. We don't even work there.   

"Included within this release is our updated full year guidance for 2022. While these updates are generally consistent with our previous expectations for our overall business, our expected property taxes have been impacted more quickly than we had anticipated due to rising home price appreciation, and our reserve for bad debt is expected to remain elevated compared to pre-COVID averages, as it continues to take longer to address residents who are not current with their rent." 

What are you talking about?

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 reported earnings this week.  In total the results were better than we and the market expected. It was a headline beat, putting up $9 in adj EPS for the year, likely still benefitting from its backlog. 

The company citing still ‘strong demand’ and generally sounds positive around demand, at least at the high end of the market.  Though it is also talking about some margin pressures from mix shift in the business.  It guided to about a 10% earnings decline in 2023 moderately ahead of consensus, and that is with a contribution of the IGY acquisition of likely at least 10 cents. 

The acquisition may give HZO some EPS wiggle room with accounting, but we think organic earnings are still at risk, Boat demand and pricing are coming off of epic peaks.  We think the Marina acquisition presents its own risks as the core markets served being ones that rode the crypto wealth boom, that segment of the ‘Caribbean’ economy is clearly under pressure. 

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.

Medical Properties Trust (MPW) reported 3Q22 results on Thursday, 10.27.22 in what, despite the stock reaction that day, we viewed as a non-event.

The report contained nothing that changed our fundamental view on the name, and largely repeated past statements / narratives that we view as either not true or not supported by the facts or math. We will be reviewing the earnings call in depth this weekend, but think that a thorough read of the 10-Q report filed next week will hold far more informational value than anything presented this past week.

We would ascribe a 0% probability to Steward generating $350 million of EBITDA in 2023 (implying ~$860 million of EBITDAR), and have very strong conviction the actual number will be less than half that figure.

The next catalyst is 12.15.22, which is the deadline to fully extend Steward’s ABL facility. We expect MPW to have to syndicate, fund or guarantee that debt.  Beyond that, Prospect is a likely bankruptcy candidate in 1H23 barring external support from MPW. We continue to view the equity as worthless.  

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.

This Thursday on The Call @ Hedgeye, Industrials analyst Jay Van Sciver and Hedgeye CEO Keith McCullough discussed a report from Reuters that states that Tesla is under criminal investigation for self-driving claims.

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 finally ripped the band-aid off and cleaned up our Position Monitor that had been anchored to securely to fundamental shores.  We’ve launched and riding the Quad 4 storm with a Quad-Factor sails.

We have to worry less about what we might be missing and focus on what we know which is NIH activity is slowing and will continue to slow through 1H23.  2023 consensus estimates are too high and growth has a decent chance of turning negative.  TXG had a Quad-Factor slash line of 0.480/.0078/.038 for Quad 4 batting average, average performance, and frequency. 

Each week TXG holds this factor pattern we have a better than 50% chance of being right on the short side.  Given what we know about fundamentals, we’ll take those odds.

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.

PEB’s Q3 beat the Street on what looks to be the last “strong” quarter for the hotel REIT industry for a while we think.  RevPAR and room revs were fairly in-line with the company’s recent guidance updates but out of room spend was stronger than expected from the “other” line which includes a variety of items (resort fees, rental fees, A/V fees, etc.).  Accelerating RevPAR growth and strong non-room revenues should have driven a larger beat on the quarter, but margins suffered as unit costs (mostly labor) soared in the quarter and were above our expectations, particularly on the rooms side of things. 

F&B margins were also a touch lighter but another culprit for the quarter came by way of higher departmental costs.  Net-net, total adj. EBITDA margins fell ~100bps light of consensus so we’d expect some negative revisions from that in addition to what’s implied in their guidance. 

As for the guide, PEB faces the Hurricane Ian impact which will hurt Q4 results as PEB guided to last week Friday.  However, even adjusting for the incremental impact from Hurricane Ian, the current guidance range of $64-$72MM of Q4 adj. EBITDA is well below the adjusted consensus figured of ~$77MM prior to the quarter.  Additionally, guidance for the quarter also implies decelerating SS RevPAR growth, which is what we have been calling for since the summer. 

PEB’s -3% to FLAT RevPAR guide could ultimately prove a little aggressive as the company will be lapping very steep ADR comps in its core Resort portfolio, and we see its Urban portfolio putting up softer numbers in November / early December.

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 Google trends may still be above last year, but they are slowing and likely to continue rolling over as apparel demand weakens. The 5-week average is now at 29%, compared to just 2 months ago it was at 52%.

While interest in Revolve is still up compared to last year, it is waning. Not surprising given the macro environment.  It is also not surprising that its “Surprise Sale” that started over 2 weeks ago at this point is still going on.

Not sure about you, but when we think “Surprise Sale” we tend to think of a flash sale with limited products, not one that lasts multiple weeks with increasing discounts and an abundance of items to pick from. This doesn’t look good for sales or margins as we go into Q4 this year and Q1 next year, yet somehow this is still trading at a nearly 27x PE multiple.

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.

Electronics stores visits data continues to look worse and worse and is the weakest looking category in retail.  We saw SNBR guide down big this week for the 4^th quarter in a row as demand continues to weaken. 

We think BBY has similar risk.  It has guided down a couple of times already, but it hasn’t guided to recessionary demand and earnings levels yet, while there is little incentive for customers to buy electronics after how much we over consumed during the pandemic. 

Demand can continue to get worse in BBY categories, and we think there is further earnings downside to come. 

ULTA

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.

Contrary to popular belief, things are not looking good for the beauty industry in terms of rate of change. The placer traffic data for beauty stores has been trending down over the last month and a half. A data point from NPD came out this week that unit sales of prestige make-up from January to August has declined 20% compared to 2019, and the market for these products has declined 25% over the same time period.  

Ulta is currently running a similar promo to last year,  “Early Black Friday Deals”, where every Thursday through Saturday there will be new deals and customers can save up to 50% off the products. This year the promo is starting a week earlier.

We’re not sure exactly how many products were included last year, but this year, just today, there are 335 products included. Ulta has been clear that it will do whatever it takes to maintain and gain market share, so we can expect continued and more frequent promotions, which will take a hit to gross margins.

Even still, if people aren’t shopping the category as much, no level of promotions will mask a decline in end demand. Currently trading at a nearly 20x PE multiple, when it should be at a low to mid teens multiple and priced in the $200’s. Bottom-line is its earnings aren’t sustainable. 

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.

This week it was announced that WEBR has an agreement to be bought.  We’ve now seen PRPL and WEBR with agreements to be bought by large shareholders that had connections to taking the companies public. 

PLBY is another company where a large holder (Rizvi) brought it public and the stock has performed poorly.  Its entirely possible that PLBY could go private again if it continues to get no bid in the public markets. 

PLBY is less likely to go private than some other businesses, just because coming public was part of the strategy to attract talent and fund new growth initiatives, but when an asset is trading so far below underlying asset/liquidation value, anything is on the table. 

We think shareholders probably fair better on long term returns assuming the growth initiatives can be executed, but we have to note the possibility of a takeout given how PLBY is trading.