Investing Ideas Newsletter

Short: INVH, HZO, MPW, PEB, TSLA, RVLV, BBY, UHAL Long: PLBY

Below are updates on our nine current high-conviction long and short ideas. This week we removed 10X Genomics (TXG) from the short side and added Amerco (UHAL) to the short side. 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) is REITs analyst Rob Simone's second favorite short. The SFRs just let the world know that we were correct on our call that property taxes, as well as opex generally, will be growing well-above a decelerating top-line in FY23. Margins have already peaked and FY23 numbers need to come down. We do not think that INVH has the "pricing power" the company claims, otherwise there would be no need for discounting to maintain occupancy. In our view SFR should trade at a discounted multiple to seasoned, high quality and more efficient multifamily. The non-permitting whistleblower case remains a tail risk, and we expect to know if the case is allowed to continue by February/March.

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.

October RV shipments were reported this week. Boats aren’t the exact same product category, but we think the end demand behaviors were similar around the pandemic ramp and risk around forward impact from the wealth effect.  October RV Shipments were down 44%, driven by towables down 48% and motorhomes up 4%... that is actually an acceleration vs September where shipments were down 49%.  Still we are seeing significant demand drop-offs YoY for these big ticket items.  We think the end demand for boats is no different.  MarineMax (HZO) will continue to see sales and earnings pressure as demand slows over the coming quarters. 

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 Trust (MPW) is REITs analyst Rob Simone's favorite short idea.

The reality is that MPW is not a traditional triple-net REIT, but rather effectively or intentionally an investor in hospital systems ("WholeCos" using the company's own words) which calls into question whether it is appropriate to be a REIT at all. We would actually classify the company as more of a "development bank" for hospitals that will make any investment that boosts GAAP FFO, which begs the question if it is an investable vehicle. We think not.

In the process MPW removes the arbitrage from a traditional PorpCo-OpCo structure. A major portion of MPW's 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 in the case of the insolvent tenants and depends on MPW's ability to raise attractively-priced external capital. Assuming all goes perfectly for MPW and there are no tenant issues (there are), and with an updated distressed cost of capital, we estimate the stock is "worth" no more than $6-$7/share today.

We think that there are two ways for 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. Disclosure is terrible and management has lost all credibility with investors. We added potential AFFO earnings manipulation to the list of concerns this week. December 15th 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. 

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.

Hotels – Corporate Bookings (Air) – More Deceleration

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.  Relative to ’19, ticket sales to the corporate demand channel had been stuck in a range of -20% to -30% since late spring and after a slight pop post-Labor Day, but even more retrenchment has occurred as of 11/14, with bookings mow tracking down ~33% vs ’19, a big deceleration from prior week.  Hotel C-Corp companies have positioned themselves in a more optimistic camp regarding business travel while the REITs have seemed at least somewhat more realistic but few have visibility on the corporate transient customer. 

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.

Why is Tesla (TSLA) stock collapsing? Bears point to problems at Twitter, Tesla's 19th recall this year and Chinese demand issues. But yet another issue, and the "elephant in the room" for Tesla, according to Hedgeye Industrials analyst Jay Van Sciver is the Federal Reserve. 

In other words, the rising cost of capital.

"This is another liquidity withdrawal name that's going to get hit as Fed policy becomes less accommodative," Van Sciver explains in the video below on The Call @ Hedgeye this week.

"Tesla rallied very sharply on policy accommodation in 2020," he adds. "That's where you saw the bubble in EV, new energy and 'planet saving names' hit. Now we're on the withdrawal side."

"I don't know if calling it 'The Mother of All Bubbles' gives due credit to what's happening at Tesla," explains CEO Keith McCullough.

Below is a chart from Van Sciver.

WATCH VIDEO HERE

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.

Basically every retailer under the sun started black Friday sales early and came in strong, so there’s no reason Revolve Group (RVLV) would be any different. The sale is up to 70% off and includes nearly 28,000 items…. 28,000!!

The days of the small assortment, influencer-led marketing and sales strategy they once had are long gone. And that’s not a good thing. These promos will help keep top line stable for Q4, but it will kill margins.

Revolve can’t keep this level of promos going for forever, so when they stop and when the consumer is just tapped out on spending we’ll see top line growth come to a screeching halt. Currently trading at a nearly 30x multiple, there is plenty of downside risk here still as the model continues to slow and show margin cracks.

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.

Best Buy (BBY) reported earnings this week.  The result was better than expected.  Comps were ahead, though still down 10.4%, slight acceleration vs last Q.  Gross margin missed by 20bps, down 150bps YY, and SG&A drove the majority of the beat as it came in about 80bps lower. 

The company is basically adjusting the full year by the 3Q beat, so holding 4Q outlook, which implies generally steady trends.  This outlook is in stark contrast to TGT’s discretionary outlook, meaning not much directional slowdown from 3Q discretionary trend while TGT was explicit about a slowdown in discretionary categories like electronics in recent weeks. 

Inventories are down similarly to sales, so relatively in check, as BBY has been controlling inventories all year having faced slowing demand and higher promos earlier than most.  The market liked the beat and hold of 4Q. 

We don’t think this short is done yet though.  We’ll take the under on 4Q coming in ahead of expectations.  Holiday will be highly promotional and the expectation is for improvement in 1H 2023 that we don’t think we’ll see.

UHAL

Amerco (UHAL) is a great company, with a horrible RoC profile at the worst part of the cycle. It's a "value trap" that only appears cheap on peak earnings. We do not like the recent stock split with a new series of non-voting stock + a name change (finally!) at an inflection point in the cycle. This is another "over-earner" amidst COVID that needs to revert past the mean and return to "normal" earnings power.

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.

Honey Birdette is running a Black Friday Sale with items up to 50% off.  No surprise here as Honey Birdette is like pretty much every other retailer. The sale breadth here is much more controlled than other retailers or competitors. It’s in select targeted styles or clearance items, not across the board like many other apparel retailers are running.  Limited promos help get people in the door, or in this case on the website and looking through the product offering.

This is where management is hoping to see strong growth to help drive the overall brand. Playboy (PLBY) management is focused on key initiatives to really grow the brand. With a little bit of time, this will pay off big, especially with the stock trading at about $3.75 right now and seems like market sentiment has reached a floor.