Investing Ideas Newsletter

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

Below are updates on our eleven current high-conviction long and short ideas. We added Lancaster Colony (LANC) to the long side and removed Amerco (UHAL) from 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.

Headline: Invitation Homes (INVH) taking out 2018-1 securitization with remaining capacity under delayed draw term loan

• First, we think the transaction is mildly dilutive (perhaps ~30-50bps on the principal amount?) when incorporating the cost of the credit adjustment SOFR term, so less than a penny per share. We want to focus here on the "why?" for doing this, weighing the trade-offs. 
• The primary "for" arguments are the traditional "REITs like to be unsecured borrowers" and "removing the secured debt improves the BS," and then obviously if there was a need to take out a higher-cost, near-term secured debt maturity. There is some truth in there, however the last argument (removing a maturity) does not apply here given that the 2018-1 securitization does not mature for ~2.5 years and is already relatively low cost at L+88bps as of 3Q22. We would add the following potential reasons: (1) by unencumbering assets it makes them easier to trade via removal of the "release" process, and (2) it would remove any potential liability at the property-level from "bad boy" acts. Time will tell on that front. 
• The "against" arguments in our view are: (1) this transfers risk to the corporate level (to be clear, INVH is not a "zero" in our view obviously), (2) INVH is already effectively issuing unsecured akin to other investment-grade issuers (issued 4.15% bonds in late-March), so pulling this trigger saps liquidity unnecessarily if that is the goal, and perhaps the strongest in our view (3) if in fact there are external growth opportunities forthcoming, why not draw the expiring facility down and use that low-cost capital to grow externally/accretively?  Especially given that, at least theoretically, there should be no rush to retire the 2018-1 issue? Something in there does not make sense from a capital allocation standpoint, in our view. 
• Stepping back, numbers all else the same should not move that much on this transaction specifically, but despite the recent estimate cuts we still see consensus Core FFO numbers as ~5% too high for FY23. Consensus for AFFO is probably even more off the mark, given what we expect to be a ramp in maintenance capex. 

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.

One of MarineMax's (HZO) competitors in the boat retail space – OneWater Marine (ONEW) announced that it is delaying the filing of its 10K this week. That’s a bad look for the company, and we think, the industry. Both of these companies have been on an acquisition binge – buying assets while the boat/yacht retail industry is operating at peak demand. We think that earnings for both companies are currently overstated by a factor of 3x. When the boat cycle rolls, it should be fast and violent.

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.

• Whatever the reasons, Medical Properties Trust (MPW) management's narrative has not been accurate and demonstrably proven to be false. Along the way investors made their capital allocation decisions predicated, at least in part, on that narrative. And our job is to parse the situation and advise clients accordingly. Here are the facts and timeline as we see them:
  • We called out the 9.29 Steward ABL maturity in April as a material risk (just one of many) to the "mutually assured destruction" setup between MPW and Steward.
  • MPW wrote off our analysis rather than engaging with us, including such direct statements as "we encourage investors to recognize that not all market commentators or reporters are equal or write objectively without agendas...," and "... some of this may seem like real estate 101." 
  • MPW, a ~9.9% equity owner in Steward presumably with access to reporting (or lack thereof, in this case) of its largest and ~25-30% tenant, did not alert investors until recently that Steward's 2021 audit was not completed. We would assume, based on their ownership in the venture, that they knew this, as MPW would not have received completed and audited 2021 financials under the usual timeline.
  • Throughout the Summer and Fall 2022, in addition to calling out Steward's likely insolvency and audit issues, we highlighted a multitude of risks surrounding MPW company including governance, nepotism, leverage, valuation (which STILL is not cheap), credit, management, etc.
  • During 2Q22 (we think in April and before the 1Q22 earnings call), MPW made a ~$150 million loan to Steward to address liquidity issues, which was not disclosed until ~3 months later on the 2Q22 earnings call. 
  • On 9.30, Steward released a cryptic press release highlighting an "interim extension," which we called out as a "soft" or "technical" default. 
  • On the 3Q22 earnings call, CFO Steve Hamner cited text and terms of that extension press release that were not there. CEO Ed Aldag did the same in a bizarre interview. 
  • In Mid-November multiple investors told us essentially the same thing emerging from NAREIT, that MPW management assertively and aggressively claimed that "pending completion of necessary documentation" stemming from a "resolution of a technical accounting issue," the ABL extension would be completed "imminently" and "well before 12.15."
  • Our read, based in part from the evolution of the CMAX deal, was that this was impossible and that (1) the required timeframe was likely much longer and (2) the reasons for the hold up were likely much more complex and indicative of deeper issues at Steward. 
  • Last week, MPW began walking back its commentary.
  • On Monday, MPW told analysts that the ABL extension would be done by the end of this week.
  • Yesterday 12.15, to our understanding, MPW emailed the following open-ended timeline to sell-side analysts: "Wanted to give you an update per our prior discussion. Steward has told us they are continuing to work on the documentation for their ABL and that it may extend beyond the end of this week."
• At this juncture, if it were our money, we "wouldn't care," as MPW has done little to gain and maintain investors' trust throughout this process.

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 stronger relative to the soft prior week though the components we like to hone in on didn’t show too much of a shift in trend.  The way we see it, until the business proxies improve, especially the urban and business market ones, the industry will be in a tough spot.  From a timing perspective, the rest of the year will probably see a mix benefit of more leisure as the holiday season kicks into gear, but the setup looks a lot more challenging into Q1’23 if these business travel trends do not improve.  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.

With Musk’s ownership of Twitter, our tweets regarding Tesla (TSLA) will need to be…restrained.  If not, the Eye of Sauron may identify the offending account and delete it.

But it is worth noting that Netflix was an innovative streaming company, taking something old (movies, shows) and distributing them in in a new way.  Then the traditional players got their streaming together and Netflix is far less novel. Our colleague, Andrew Freedman, covers Netflix brilliantly. But we’ll have a survey back shortly on electric vehicles. 

Tesla was early in the field with high market share and a differentiated brand.  There are so many EVs on the market now, it is hard to keep track.  EQS, Rivians, Ioniqs, Lucids, ID4s, Recharge etc – it is busy in EVs out there.  Tesla has an aging Model 3 and Y platform.  Musk’s personal brand with “the left” has been eroded. 

If we had to guess, he will shortly disappoint “the right”.  Most importantly, Musk and Tesla are losing the top EV crown in public perception…or at least that is our take.  With costlier facilities ramping in Texas in Germany, evident trouble with demand in China given pricing changes, and higher rates in the US heading into a difficult macroeconomic environment, we continue to like the short side in Tesla and its EV followers like LCID.

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.

This week we heard from Inditex, the owner of Zara, one of Revolve Group's (RVLV) competitors, that sales results came in marginally ahead for the quarter, but gross margins missed. In apparel, we think this will mark the start of a worsening trend for the industry as a whole. Sales are likely to show up, as there’s so much inventory that needs to be sold. Those people using ‘credit card data’ as their primary research process are in for a world of hurt this holiday. Aside from the fact that holiday spending was pulled forward by 4-6 weeks this year, we need to keep in mind that what the credit card data does not capture is gross margin rate, which should disappoint meaningfully leading to more negative preannouncements in January than we’ve seen in years. We think Revolve will be one of them.

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) caught an upgrade to Buy from #OldWall this past week, one that we flat-out disagree with. Electronics should be one of the most challenged categories this holiday, with further demand destruction in 2023 due to a weak consumer and the hangover of Covid pull-forward. Excluding the benefit of extended warranties and credit card income, we think that the company’s operating margin will test Zero, which is definitely not in the consensus.

WSM

Short Thesis Overview: 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.

We think Williams-Sonoma (WSM) WSM is one of the companies that the is egregiously earning this year, with consensus expectations for next year way too high. Anyone listening to the RH conference call should be bracing themselves for -20-30% demand comps in the first half of next year. The Street’s numbers have come down from $15.75 in ’23 to $14.34 – which is directionally right. But we think this company will be lucky to earn $10 a share, with a bear-case number coming in closer to $8. Remember that this company doesn’t have RH’s idiosyncratic growth drivers that should materially ramp 2H23 (Europe opening and Contemporary roll out) something that for RH, should lead to a HUGE 2024. We’re seeing WSM discount product meaningfully – something RH absolutely will not do – as it cheapens the brand experience and hurts margins to win near-term market share. Ultimately, we think both numbers and the stock need too come down materially. 

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 meeting this week with Playboy Group (PLBY) CEO Ben Kohn, and the tone was ‘guardedly’ upbeat (with any caution in line with concerns about Macro factors mentioned on the last conference call). The number one priority for the company is increasing cash flow – which we think will be in large part due to a JV with a Chinese/Asian licensing firm (someone like Li & Fung) that has the clout to renegotiate, relocate, and most importantly, police the activities on the part of the manufacturers that are outright robbing PLBY of royalties on the real underlying value of the ~$1.5bn in sales in China. Kohn is hyperfocused on lowering the company’s debt level – and though he didn’t say it, we wouldn’t rule out a sale of Honey Birdette – something that would make the company debt free even if it sold at 2/3 the price it paid. A debt free PLBY would change the narrative around this story dramatically to the upside.

WMT

Long Thesis Overview: 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.

Online grocery sales in the U.S. decreased 10% YOY in November according to Brick Meets Click/Mercatus. The pickup channel MAU mix was flat YOY while ship to home fell from 44.6% last November to 41.8%. The mix of home delivery also decreased from 44.6% of sales to 41.8%. The decrease was driven by fewer households, lower order frequency, and a smaller basket. Households ordering online decreased 7%. Compared to last year grocery MAUs decreased 5% while the mass market MAUs increased 6%. The average number of monthly online orders decreased 3.4% YOY. Grocers have invested significant sums in online grocery since the pandemic, but the mass retailers are winning online. Walmart's (WMT) large offerings and low prices has been a winning formula for online grocery shopping, especially for in-store pickup.

LANC

The PPI for fats & oils reaccelerated to 14.1% YOY in November from 11.1% in October. Fats & oils, a key input in a variety of food products, have decelerated rapidly since March. Lancaster Colony (LANC) has seen significant margin pressure from higher input costs including from cooking oils. 2023 will see margin recovery from price increases and falling input costs.