Investing Ideas Newsletter

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

Below are updates on our eleven current high-conviction long and short ideas. We added Walmart (WMT) to the long side and Williams-Sonoma (WSM) to the short side this week. 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.

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 Invitation Homes (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.

MarineMax (HZO) announced it entered into a definitive agreement this week to acquire a 75% stake in Boatzon Holdings LLC Inc. The amount was undisclosed. With this acquisition, the company will be able to grow product capabilities and expand service offerings (not necessarily sell more boats – its core business). While this may help the company in the long-term, and we stress MAYBE, the short-term is still weak. Bottom line here is that this company sells big ticket product, and big ticket items are seeing a big drop off in demand YY, and we expect that to continue over a TREND duration at a minimum. 

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.

A major portion of Medical Properties Trust's (MPW) 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) restructure Steward + Prospect + other distressed 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 two weeks ago. 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.

Lastly and despite laughable claims to the contrary, MPW is not "cheap" - it currently trades at a ~6% implied cash cap rate inclusive of G&A and capex. Compare this to higher quality triple-net REITs with fewer tenant issues, and it becomes clear that shareholders are nowhere close to being appropriately compensated for the serious tenant credit risk. 

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.

US RevPAR was generally sluggish this past week as it often is in the week following Thanksgiving, but even the YoY and vs ’19 read looked real soft.  We’re not sure FLAT to negative prints are in the cards for the rest of the year, but we do expect to see incremental weakness vs the current headline RevPAR run rate. 

As always, we’re a lot more focused on the broader trend and the components of RevPAR growth, and the way we see it, until the business proxies improve, especially the urban and business market ones, the industry is going to be in a tough spot.  We continue to see incremental downside in most FS REIT stocks.  Pebblebrook Hotel Trust (PEB) remains a Best Idea Short at Hedgeye.

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.

On a recent edition of "The Call @ Hedgeye," Industrials analyst Jay Van Sciver broke down recent bearish developments at Tesla (TSLA). Among them:

• China Tesla facility is cutting shifts
• Subsidies going away next year in China
• China is only profitable facility that matters for Tesla
• Adding two new facilities in Germany and Texas to make more Model Ts and Ys
• Adding CapEx into a downcycle
• Report that Musk is taking new margin loans to replace high-cost Twitter debt

Watch the entire 8-minute video breaking down TSLA.

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.

At an Old Wall conference this week, Revolve Group (RVLV) management said that they have more inventory than they would like, but they will take a few quarters to clear through it. Mind you, this is a trend-based fashion company. Especially in apparel, something can be hot one minute and out the next, so holding onto inventory just to not take a massive hit in gross margins will probably end up worse for them.

Management made it clear that they will keep up the breadth and newness on the site. They said that their initial product buys are shallow and then they reorder, but the excess inventory and abundance of discounted items implies that something there isn’t working – whether it’s the initial buys are of the wrong products or the reorders are for too large of quantities, whatever it is their seemingly magic formula isn’t working. We still think gross margins will come down over a TREND duration with sales also decelerating and declining y/y, the extent to which it happens and the length of time this decline goes for depends on if management will actually sit on inventory rather than big markdowns.

A big round of discounts to get rid of excess product will expedite the decline, but if they sit on inventory and take their time flushing the channel, revenue decline and GM erosion will be prolonged. Not worth the 30x its trading at today.

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.

Two bearish notes for Best Buy (BBY) this week. Adobe reported online price changes this week and electronics is down over 13% YY and down 4.5% MM. This is a worsening from October, which was down 13% YY and 2.4% MM. Traffic trends to electronic stores is still negative and worsening from last week’s positive bump from Black Friday. The pricing data indicates promotions are up and we expect that to continue, especially in order to help out traffic. There is still downside here. 

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.

Amerco (UHAL) is a great model, with a horrible RoC profile at the worst part of the cycle; "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. We think earnings fall peak-to-trough by ~35%, and that process is just getting started. 

WSM

We’re of the view with all Home-related names that the fastest collapse in housing demand in history will mean an intense and compressed decline in comps and margins, as opposed to a 2-3 year slow-bleed downward comp cycle that we saw in the GFC.

Restoration Hardware (RH) is telling you the former is happening, but no one else is, which is why we’re short Williams-Sonoma (WSM). So much room for earnings to decline – at peak margins. 

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 Group (PLBY) this week announced a rights offering, debt paydown, and amended credit agreement to enhance its balance sheet flexibility as it relates to debt covenants.  The company expects gross proceeds of $50mm from the offering if fully subscribed.  With a prepayment of debt, the credit agreement will be amended to give the company the ability to waive applicable net leverage ratio covenants up through the second quarter of 2024. 

This will give the company the capital flexibility to invest as needed around growth initiatives without having to constantly have a back and forth with lenders.  It reduces the bankruptcy concerns around the stock over the near term, perhaps giving equity investors more confidence to step in and start buying.  We think the company is trading below a liquidation value of all of its assets. 

We think the consumer gets worse, and our Macro teams GDP outlook suggest market liquidity conditions for companies with leverage in 1H23 could get ugly, therefore it’s smart to do these deals to improve cash and reduce leverage while you can, rather than being forced to sell assets to appease lenders next year.

WMT

After two negative guidance revisions, Walmart's (WMT) estimates appear to be inflecting positively. The consensus EPS estimates for Q3 reflect a more significant deceleration in sales trends and headwinds from markdowns than our model. Below are the three core thesis points for why be long WMT:

• It's Quad 4 for four more quarters: The Fed is hiking into an economic slowdown, real income growth for households is negative, inflation is at generational highs, real spending growth is decelerating, excess savings is negative, and financial asset value destruction is set to reverse wealth effect spending. The broader market’s margins are at all-time highs, demand and inventory are moving rapidly in opposite directions, and the strong U.S. dollar is a headwind. In comparison, Consumer Staples, with top-line tailwinds and improving margins, looks to be the best house on the block. Walmart historically is a Quad 4 relative outperformer and absolute performer.
• The consumer has not seen this level of inflation in a generation: Inflation is top of mind in the stock market as well as for Consumer Staples. Inflation is said to be a tailwind for the grocers which benefit from the nominal top line growth. Consumers are consolidating trips and trading down to stretch their budgets. Walmart is gaining share in food through its omni-channel offerings. Walmart is gaining higher income shoppers who are seeking out value. As the largest retailer of food in the U.S., Walmart’s competitive dynamics can set the pace for the industry. The industry is about to awaken from an uncharacteristically long competitive lull for the past two years, but it will not be led by Walmart.
• We are modeling an inflection in EPS revisions: Walmart was caught “offsides” with too much general merchandise inventory when household budgets came under pressure from inflationary headwinds. Clearing excess inventory has led to two negative guidance revisions. Walmart’s estimates appear to be inflecting positively in the 2H. The consensus EPS estimates for the 2H reflect a more significant deceleration in sales trends and headwinds from markdowns than our model.