Investing Ideas Newsletter

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

Below are updates on our eleven current high-conviction long and short ideas. We have removed Ulta Beauty (ULTA) 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: The Healthcare team moved Exact Sciences (EXAS) shares to its Short Bench following its earnings (below is the explanation on why).

Growth in Exact Sciences (EXAS) utilization broadly continues to accelerate alongside slowing wage inflation in many subcategories.  Claims data for colonoscopy and colon cancer screening are following a similar trend. We expected Screening revenue to be under pressure as patients and doctors in a safer post-COVID environment moved back to an in person screening colonoscopy versus doing Cologuard at home.

The increased guidance and reduced operating expenses which was the additional positive we think is a bad trend to bet against here.  The short has worked well, we are still in Quad 4, but the Quad Factor Score leans long side.  With 3Q22 coming in better than our thesis, fighting against an accelerating US Medical Economy, better revenue guidance, and lower expenses our Healthcare team moved EXAS to its Short Bench from its list of Best Idea Shorts.

BGFV

Short Thesis Overview: Earnings risk is huge in 2022 and beyond for Big 5 Sporting Goods (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 reported earnings this week.  It beat the quarter, as we thought it might given visits trends relative to consensus expectations, but the forward guidance was weak and the stock traded down on it.  

Management is guiding to about 15 cents in 4Q vs doing 89 cents last year noting macro and weather could both drive a surprise up or down.  Comparable store sales are to be down HSD to low DD for 4Q.  Earnings for BGFV are continuing to collapse here. 

We see no driver of growth short term or long term.  Nike is gone as a vendor, rising competition in its core market will pressure market share and margins, the company will see unit consumption reversion core categories in relatively short order. We think earnings are in secular decline heading to zero or close to it.

INVH

Short Thesis Overview:  We added Invitation Homes (INVH) to the Best Idea Short list, as we thought the whistleblower case in San Diego was a much bigger deal potentially than the market is currently discounting. This was a controversial one for sure as INVH is a consensus long trade, but we thought (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.

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 (HZO) 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 straightlined 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.

Another rate hike from the Fed this week and increase in market rates.  The cost of financing a large purchase like a boat is rising and rising fast.  We think that pressures unit demand which will in turn hurt HZO’s sales trends.  In addition the aggregate negative impact of the wealth effect (from falling asset prices) will cause consumers to cancel or push out big ticket luxury orders like that which HZO sells.  We think earnings here continue to head lower and that the cheap stock gets cheaper.

MPW

Short Thesis Overview: Medical Properties Trust (MPW) is not a traditional triple-net REIT, rather an investor in hospital systems ("WholeCos" using the company's own words). In the process MPW removes the arbitrage from a traditional PorpCo-OpCo arbitrage. These investments are structured as loans + equity investments to the operator tenants, which are in many cases distressed and owe significant rent payments back to MPW as landlord. The arrangement is circular and depends on MPW's ability to raise attractively-priced external capital. Assuming all goes perfectly for MPW and there are no tenant issues, and with an updated distressed cost of capital, we estimate the stock is worth no more than $5-$6/share today..

Medical Properties (Dis)Trust remains our favorite name on the short side. We continue to believe, based on the math, that MPW’s equity is more or less worthless.

We expect to know whether we are correct by the end of 2H23, with the next key catalyst being the outside date for Steward Health’s interim ABL facility extension on 12.15. Our view of the situation is that there is a likely stand-off happening: On one side is Citi and the bank group that either does not want go-forward involvement and/or will not fully extend the revolver without a completed 2021 audit and clean bill of health. It would not make sense for any bank to lend into an insolvent situation and imminent bankruptcy, asset-based or not. And think about that: in November 2022 Steward does not have a completed 2021 audit!

On the other side is KPMG as Steward’s auditor, which likely has concerns completing the audit without “going concern” language, given the very high likelihood that Steward defaults within a year anyway. We think at the very least there is reputational risk there for KPMG.

So what breaks the logjam? As we said from the beginning, we think it is MPW in the form of a refinancing, a syndication, or a guarantee of that debt. They could also increase their loans, but that would not make sense as they would likely be legally or structurally subordinated to Citi. If MPW does any of those things, MPW will likely be the de facto owner of an insolvent Steward. At that point the only way to avoid a catastrophic outcome (full Steward consolidation) would be to reduce Steward’s rent to sustainable levels and “resize” its capital structure. That, by the way, likely sends MPW’s equity into the single digits. Needless to say, staying short here. 

TXG

Short Thesis Overview: For 10X Genomics (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.  In this Quad environment, 2023 EBITDA likely remains negative.

The company reported 3Q22 slightly ahead of consensus with upside in the number of systems they placed in the quarter for CytAssist, a newly launched product.  They also maintained their guidance range of 50-520M in revenue which implies a step up in revenue sequentially from 3Q to 4Q inline with their normal seasonality. 

They did say most of the step up in revenue in 4Q occurs in the last weeks of the quarter, which is unsurprising, but it does open up a major risk in our view.  With the back drop of little to no new award activity from NIH for the next several months, Quad 4 pressures hitting their commercial customers, we think the probabilities lean negative for them hitting targets.  

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.

We had flagged that last week’s HLT call could mark somewhat of a near term top with regard to hotel industry related sentiment and judging by the poor results starting with PEB last Friday, that view seems to be coming to fruition.  Similar to XHR’s print on Tuesday night, PK whiffed on their Q3, and despite the benefit of having a much bigger chunk of seasonal leisure mix to drive results.

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.

Revisions following this quarter are mostly negative in our model.  Looking to next year, we expect to see a more pronounced affect from rising unit labor costs layered on top of slowing ADR gains – not a good setup.  We’d be fading any strength in PEB – the rate of change of things will matter A LOT for this levered FS Hotel REIT.

TSLA

Short Thesis Overview: Tesla's (TSLA) numbers are messy with far too much inventory, improbable OpEx containment, and flat to lower margins. But Musk’s salesmanship has become increasingly goofy.  Tesla is just a ‘pandemic liquidity’ driven bubble stock that is likely already in the midst of a downward revaluation.

In listing his skills on the earnings call – engineer, product designer - Musk left out his expertise in sales.  He is a great promotor of his own stock.  He opened the call with a claim that he sees a way for Tesla to be twice the size of Saudi Aramco.  Or an Apple plus a Saudi Aramco.  That’s quite a claim for a company overwhelmingly dependent on a single product – the Model 3 and its related crossover, the Model Y.  Apparently, Tesla is having trouble with inventory. They claim it is logistics difficulties, an odd excuse as networks are mostly improving. We’d imagine AAPL’s share price wouldn’t have responded well to this sort of inventory trend.

RVLV

Short Thesis Overview: Revolve Group (RVLV) has a problem with rising returns and rapidly building inventories.  The company notes 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 reported this week, coming in with numbers above consensus. Revenue growth of 10% vs 6% from the street and EPS of $0.16 vs $0.09 from the street. But with ecommerce stocks, the high frequency credit data tells the fast money crowd how sales look, so the market likely ‘knew’ revs would beat. Management gave 4Q guidance and said that October had only 3% YY growth and the rest of the quarter will moderate from there and 1Q will be the toughest comp.  That slowing rate of change is bearish.

Net new customer additions has slowed the last few quarters and is expected to continue to slow with 1Q 2023 being the worst. Management is focused on keeping up with newness, which would normally be a good thing, but it’s not when inventories are up 50% YY and management said it will continue with promos to work through the excess inventory. This lack of inventory control and control over assortment isn’t a surprise.

Gross margins are going to keep taking a hit and we can see revenue growth going negative in a near future. The fact that this stock is still trading at a 27x PE multiple is mind-blowing. It’s at best worth 15x. Currently trading at approx. $23, there is a lot of downside here over a relatively short time period when margins come down.

BBY 

Short Thesis Overview: Category demand is weak, inventories high, and we think the US consumer will continue to weaken as we face multiple Quad4s.

The electronic stores visits data surprisingly doesn’t look too bad in the latest reported week, but most of retail did have a good week. We’re hearing anecdotes around BBY struggling to move anything home office or home entertainment, even with discounts.

It is also dealing with shrink (i.e. theft) in store in certain urban markets as organized theft is becoming commonplace.  Much like we have seen with other durables companies (SNBR, RCII) the earnings revisions downward will compound on each other. We think BBY has at least one big guidance cut here in 2022. There is still more earnings downside here.

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.

Playboy debuted its new lingerie line this week, and it comes shortly after the first Playboy retail store opened in LA.  This is core to the DTC apparel and intimates product strategy execution around the re-positioning of the brand over the last few years. 

Interestingly, it was announced this week that VSCO is buying Adore Me for $400mm.  VSCO has arguably lost its leading ‘sexy’ brand identity over the last 5 to 10 years, perhaps it’s trying to help fix that with this acquisition. Adore Me is a intimates brand with lingerie for all sizes, styles, and occasions.  The brand is clearly more ‘sexy’ focused, perhaps adding to VSCO what it lost. 

The deal price is hefty, and though we don’t have exact revenue/EBITDA looks to be around 2 to 3x sales based on data points from the web.  VSCO is paying up to try to remain relevant in this market segment while other brand like Playboy and startups are investing to grow organically.  The deal price for Adore Me arguably provides some valuation support for PLBY with its collection of intimates brands in Honey Birdette, Yandy, and Playboy.