Investing Ideas Newsletter

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 will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.

INVH

Short Thesis Overview:  We added Invitation Homes (INVH) to the REITs 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.

Invitation Homes (INVH) Street numbers are being revised lower as we speak on lower FY23 occupancy, higher bad debt and accelerating opex led by property taxes. We think they have farther to go and that management will likely continue to talk them down heading into 4Q23. We expect a decision on the MTD by Feb/March. This remains our second favorite short in REITs. 

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. 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.

The FTX collapse this week could have some implications for some core markets of MarineMax (HZO).  Miami, where FTX had invested a lot of money, and other parts of the Caribbean where crypto companies operate are places where HZO and its newly acquired IGY Marina’s have both retail and marina exposure.  We think the loss of crypto wealth seen in the last year and accelerating in the most recent week will continue to pressure demand for high priced boats, particularly in the markets noted.  HZO is operating at peak, buying expensive companies at peak operating results.  We think there remains significant earnings reversion for HZO that will pull the stock lower.

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.

Commentary coming out of NAREIT was predictably ridiculous. Medical Properties Trust (MPW) is now backing off its assertions that Steward Utah is close to being sold, is now talking about the ~$150mm loan to Steward (which was supposed to be a short-term bridge) as a 5-year "investment," and referring to itself as an investor/lender to hospital systems. I.e., implicitly agreeing with our thesis that they are not actually a REIT, rather a rural hospital development bank. And a shoddy one at that. Next catalyst is the pending extension of Steward's ABL.

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.

There has been some institutional interest recently which had us updating the NIH series  which now runs though 10/28/2022.  Since the calendar fourth quarter is the slowest for NIH activity, we’re not surprised to see a total of 1 new investigators since September.  After the bounce from $25 back to $40 we’re feeling better about the short.  During our calls we did pick up a new competitor in single cell with a low cost and high throughput solution that sounds like it is making inroads.  We’ll be picking up the phone in the coming weeks touching base with users to gauge market trends into quarter end and how closely trends are tracking to our expectation of a weak 1H23.

PEB

Short Thesis Overview: Pebblebrook Hotel Trust (PEB) has a 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.

Corporate airline ticket sales have become part of our weekly data scans in recent months and the latest update shows that there has been another shift lower in the underlying trend for forward demand. Weekday RevPAR had shown a little bit of improvement in recent months but given the lack of forward visibility, we think proxies like urban weekday and business market weekday RevPAR will continue to slow into year end.  We remain bearish on a variety of hotel stocks and see more downside – with Pebblebrook Hotel Trust (PEB) making the list. 

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.

We expect investors to refocus on the competitive changes within EVs. While auto markets have been, and remain, undersupplied, new entrants in EVs have accelerated. Our survey data suggests that once highly differentiated brands are devolving into a cacophony of reasonably competitive EV offerings. The emerging differentiation, brand positioning, and target markets should increasingly define ‘success’ in a market characterized by excessive optimism and poorly anchored valuations. A robust auto demand backdrop interacts awkwardly with genuine consumer interest in EVs. With so many buyers in the market and so many EV introductions in the pipeline, we continue to maintain Tesla (TSLA) on the Industrials Best Idea Short list.

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.

Trends at Revolve Group (RVLV) are not good. With the slowdown in retail over the past few weeks (that the market is looking right through) it’s highly likely that the company is comping negative and losing share – the opposite of what the Street is pricing as a secular grower. POD 1 and POD 2 are both going the wrong way, which does nothing for a name trading at 30x earnings and 18x EBITDA. The Street is underwriting $1.15 per share over a TAIL duration, while we think the real earnings are permanently stuck closer to $0.50-$0.60. This stock carries a serious multiple, it’s comping negative and we should see multiple earnings revisions and multiple erosion as 2023 progresses.   

BBY 

Short Thesis Overview: Category demand is weak, inventories high, and we think the US consumer will continue to weaken as we face multiple Quad4.

Retail sales for October were reported this week. Most of retail saw slowing trends in the month, but electronics and appliance stores were a standout on the bear side with a slowdown to -12.1% in October, the worst rate seen all year. Best Buy (BBY) reports earnings next week and with recent retail reports from TGT and KSS suggesting the middle income consumer is slowing significantly, we remain bearish BBY as earnings estimates and margins are likely to continue to head lower.

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 had a detailed conversation with Playboy (PLBY) management earlier this week, and walked away with that both liquidity is ample, the brand is healthy, and the company is focused on far fewer, but more lucrative and commercial initiatives – which is exactly what we want to see. You’ve got to be patient with this one given its low price, unfavorable Quad4 style factors, and near term volatility in the business. But sentiment appears to be at the end of a bottoming process, and the sheer disconnect between the equity value (30-50% below liquidation value), leaves us big upside on the name from its current $3.50 stock price. Zero growth is currently being baked in to the stock price.