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Short: INVH, HZO, MPW, TXG, PEB, TSLA, RVLV, BBY Long: PLBY |
Below are updates on our nine current high-conviction long and short ideas. We have removed Exact Sciences (EXAS) and Big Five Sporting Goods (BGFV) from the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
INVH
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Short Thesis Overview:
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When we first started making the short call we thought the whistleblower case in San Diego was not being discounted by the buyside and sellside. We continue to think that case is serious.
But what's really interesting about the Invitation Homes (INVH) short since then, is that the fundamental backdrop has weakened for this non-cycle tested business. The SFR industry was born out the Great Financial Crisis. It's been a big beneficiary of an extremely tight housing market over the last decade but also low interest rates. You could probably put this into a bucket among REITs that might not work under a new cost of capital framework.
This company is going to grow Same Store Revenue in the low double digit this year, call it 12-13%. So there's a huge deceleration coming next year. And while people acknowledge there will be a deceleration they don't understand the magnitude.
BOTTOM LINE: We think revenue growth comes in at 3.5% to 4% versus the Street at 7%. Estimate are simply too high for this business.
HZO
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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. 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 |
MarineMax (HZO) reported a solid fiscal 4Q, putting up $9 in adj EPS for the year, likely still benefitting from its backlog. The company citing still ‘strong demand’ in the press release with no specifics around order trends and earnings guided to decline in 2023 despite the IGY Acquisition contribution. We think organic earnings are still at risk, its hard to say exactly what the acquisition contribution will be. 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 economy is clearly under pressure. We remain short HZO.
MPW
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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. |
Steward just "soft" defaulted, Pipeline entered Chapter 11 a few weeks back, Prospect looks like a disaster, and the Healthscope sale will likely be executed at a loss. So there ARE tenant issues.
We think that there are two ways for Medical Properties Trust (MPW) to "kick the can down the road:" (1) restructuring Steward + Prospect + other tenant rent obligations to more sustainable (and lower) levels, and/or (2) executing a large follow-on offering to de-lever MPW's own balance sheet and provide capital for additional loan support to tenants. Both are destructive to MPW's share price, and the second likely makes things worse longer-term.
We think the only way to fix the company is to do all of the above minus the operator loans, and begin investing in other non-hospital healthcare property types. Disclosure is terrible and management has lost all credibility with investors. December 15 is the next important catalyst date, as it is the end of the "interim extension" for Steward's ABL facility. We expect to know if we are right on the short by the end of 2H23.
TXG
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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. |
10X Genomics (TXG) beat on their lowered 3Q22 guide and maintained 2022. That's not enough to cover the short. Part of the success in 3Q22 was the success they had in the from the delayed launch of CytAssist, placing 100 boxes in the quarter, and robust rebound from depressed levels in their APAC region after the COVID lockdowns in China. Despite reiterating their 2022 guidance it was interesting to hear them state that they are dependent on a normal seasonal uptick in 4Q22 that is largely weighted to December. We guess that's why the range remains so wide even with 2 months remaining in the year.
Inline is fine, but the consensus still expects a massive reacceleration in revenue from 3% and $510M in 2022 to 22% and $626M in 2023. A key ingredient will be academic funding focused on single cell research that turns negative in Q422 and remains negative through 2Q22 (slide below). Based on our data, there is little chance growth reaccelerates to hit 2023 expectations.
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. |
In the latest data update from Kastle’s Back to Work Barometer, office attendance remains severely impaired, tracking -52% below pre-pandemic levels and showing no signs of improvement since the post-LDW pop. In the below chart we’re looking at Urban market hotel RevPAR on weekdays (Mon-Wed) to see how the correlation between office utilization and this important segment still looks to be holding, despite the recent uptick in Urban RevPAR. Most of the Urban strength has been driven by pricing power, but with occupancy flailing and city-wide weekday throughput not improving, we suspect that trends won’t get a whole lot better from here.
The return to work and office utilization is a catalyst that many C-Corps and REITs have walked back over the last quarter, or at least it was not mentioned like it had been in previous quarters. We think the below shows why. With the industry now in the thick of a historically heavier seasonal mix toward business travel, the next several weeks should reveal how soft Q4 might end up for several hotel companies. We continue to lean negative on the hotel complex and reiterate our short on Pebblebrook Hotel Trust (PEB).
TSLA
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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. |
Here's a note from Hedgeye CEO Keith McCullough on Tesla (TSLA) this week:
How about Elon? As I’ve said, multiple times, he sits at the center of the concentric circles that made up The Mother of All Bubbles. And yes, I may be blocked by Twitter for saying so (again) today. That would be a great Life/Career Cycle moment for me too.
MANY of the “Retail Investors” (who are really just BagHODLers now) who own Crypto own TSLA.
And, as my Partner, Jay Van Sciver (who covers Tesla (TSLA) for us and remains short of it in TSLA terms) likes to say: “Elon is in the business of selling stories, a few models of cars, and selling stock”:
A) Elon just sold another $4 BILLION (19.5 MILLION shares) of stock right in Retail BagHODLer’s face
B) TSLA’s #BubbleCap stock has crashed -40% since SEPTEMBER alone
C) Since peaking in #Quad2 (NOV 5th, 2021), TSLA will have crashed -55% if/when its gets to the low-end of my range
RVLV
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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. |
Over a TAIL duration, we think that Revolve Group (RVLV) begins to run out of outsized customer additions – but are giving the company credit for $300+ avg order value as it shifts mix toward its higher priced FORWARD brand.
But margins here are the problem. As the company gets even more over-assorted than it is today, we think that a 50% gross margin will be tough to hold – and keep in mind that it carries an astonishingly high 50% return rate. Ultimately, we build to TAIL earnings of $0.69 – less than half of the consensus, and a far cry from what the company printed in its first full year as a public company -- $1.34. We think that lower margin structure and earnings stream is worth 15x at best (and that’s being generous), which gets us to about a $10 stock vs $22 after hours.
We’ve been short this name since $66.22, so it’s been a big win for us so far. But the trajectory of earnings and the change in the narrative (overassorting to chase growth that’s not there) here is almost reminiscent of SFIX. Punchline is that this stock is headed a lot lower. This is a Best Idea Short and we’d be pressing it here.
BBY
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Short Thesis Overview: Category demand is weak, inventories high, and we think the US consumer will continue to weaken as we face multiple Quad4s |
Watch this video on the Retail team's Best Buy (BBY) short call.
The trends we continue to see in Retail for Electronics stores is among the worst on both an absolute and rate of change basis. It's negative year-over-year and slowing in the last three weeks. The sellside and buyside thinks this company is done guiding down but the demand trends we're seeing just keep getting worse. We think there's still earnings downside here for Best Buy. This is a company that everyone we talk to in Retail says is, "Cheap, cheap, cheap." It'll remain cheap until earnings hit a bottom and we're not at the bottom.
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 |
The Playboy (PLBY) quarter wasn’t great, revenue up 9% slowing from +31% as we lap Honey Birdette closing and see organic rev decline. The headline was marred by a $301mm non-cash write down of goodwill. EBITDA missed by $2mm, but at least inflected to positive this Q. So trends still look weak given macro and other operational challenges, but liquidity looks good, the company is putting capital towards growth initiatives, and we are seeing some good incremental reads that we want to across the business. The new initiatives won’t have an benefit on the P&L anytime soon, but the directional reads are net positive.
We think this stock is trading 30-50% below a liquidation value as the market is (quite reasonably) focused on the slowing fundamental trends. As long as liquidity looks good and the brands remain relevant we struggle to see how the TAIL doesn’t bring a much higher stock price. This licensing JV could be a game changer from a cash flow and margin perspective, and again, is critical to our Long positioning on this name.
