Investing Ideas Newsletter

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

Below are updates on our ten current high-conviction long and short ideas. We removed Best Buy (BBY) 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

On Invitation Homes (INVH), margins have already peaked, FY23 numbers still need to come down and capital costs are going up. 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 4Q.

In our view SFR should trade at a discounted multiple to seasoned, high quality and more efficient multifamily. INVH's early retirement of a securitization ~2.5 years before maturity at a negative yield spread was a poor capital allocation decision, and to us signals concerns beyond the typical "we want to be unsecured borrowers" argument." The non-permitting whistleblower case remains a tail risk, and we expect to know if the case is allowed to continue by February/March 2023.

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.

Bearish datapoints out for MarineMax (HZO) this week. Per SSI, November U.S. boat retail registrations dropped by 14% vs last year.  Demand is rolling in the boat segment, we think the earnings for HZO has significant downside risk as the demand profile rapidly changes.  In addition this week, we saw Carmax (KMX) report earnings.  The used auto market is crashing in real time.  KMX sales down 24% with both retail and wholesale pressured.  Units down low 20s.  Retail gross profit per used unit flay YY, GP per wholesale unit down 15%.  The rising rate environment isn’t helping for used cars.  Other big ticket items like boats (which are much more discretionary) are going to see big demand risk in the coming months.

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.

Ok that was painful, now back to work... 

• Steward, Thursday afternoon, put out a press release announcing a 1-year extension of its credit agreement through December 2023. 
• This sent Medical Properties Trust (MPW) shares up +9% on the day, and was obviously painful for the shorts. Some observations on the release:
  • Stepping back, this is largely consistent with what we thought would happen, if you were listening closely: that MPW and/or Steward would publish a ~3 sentence release (this one was 6, so better than expected!) likely on a Friday (this one came on a Thursday before the holiday weekend, so close enough), and that there would be little useful detail on what actually happened (check).   
  • Unlike last time in September, CEO RDLT was quoted in the release instead of the CFO.
  • Unlike last time, there were no assurances of improving operational or financial performance. 
  • The phrase "re-engineered structure" was used - we would like to know what that means. 

Our view from the beginning was that MPW, in some form, would have to "step in" to break this logjam between the auditor and the lenders. We thought that could likely take the form of either a direct loan to Steward, a guarantee of the ABL debt or some other form of security.

Would CEO Ed Aldag and/or CFO Steve Hamner be willing to come on Hedgeye TV and say to our subs live that MPW had no involvement in the Steward ABL extension process? We would be happy to host them, and also allow them to ask us any questions that they may have of Rob or Hedgeye. 

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.

Our Gaming, Lodging & Leisure team's Best Idea Short, PEB was out this week with its usual monthly operating update and the takeaways are disappointing for the stock and the hotel bulls.  In fairness to PEB, there was always going to be some hair around this quarter given the impacts of hurricane disruption on their FL assets, and that impact was tough to quantify in late October. 

That said, the company also pointed to demand dynamics across the rest of their portfolio that are a lot more troubling.  Business transient shortfalls seem to be the real culprit here, but PEB even called out some softening leisure demand trends heading into and out of Thanksgiving.  RevPAR growth decelerating from +1% in Q3 to -3% in October to -10% in November coupled with rising, but necessary, labor commitments, is a tough setup.  From here we don’t expect another violent deceleration in RevPAR for December, but we do see risks to January and February RevPAR as the industry battles softer business travel demand and a lower (seasonal) contribution from leisure.  PEB remains a HE Best idea Short.

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.

Tesla (TSLA) has one aging product platform: Model 3/Y. And it was very good product…Model 3/Y sales, credits, leasing, and service make up almost all of Tesla’s revenue. The ‘future’ products do not exist, with Cybertruck not expected until the end of next year. Tesla is building factories to expand its dependence on the Model 3 and Y. That isn’t a high multiple business. It is vulnerable to issues with those vehicles. The oldest Model 3s are basically 5 years old….which isn’t old. The average car in the USA is 12 years old.

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.

Google trends for Revolve Group (RVLV) got a slightly bump around Black Friday and Cyber Monday, but they have been trending downward since. This isn’t a major surprise as holiday spending was pulled forward. Sales could come in ‘fine’ for the quarter, but gross margins will take a hit. Once we enter January we expect to see most companies negatively preannouncing the quarter, and in their earnings calls, to provide a negative outlook for the short-term. We don’t expect Revolve to be an exception, and with the stock trading at 27x consensus earnings right now there is plenty of downside people are missing here. 

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.

Placer traffic data shows that for West Elm traffic has been trending up the last couple of weeks but the YY change is still down and has been on a downward trend.  This isn’t promising when the much of the home retail/improvement category was slightly up YY this past week. Regardless, we think there is major downside here, expecting EPS of about $8 vs the Street at $14+.

This Williams-Sonoma (WSM) management team is not macro aware and doesn’t see any issues currently or emerging in the not so distant future, which is really not what we want to see from a management team in a Quad 4 environment. Bottom line here is that the stock and earnings need to come down. 

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) feeling pressure this week.  The combined impact of the rights offering taking place and the CEO selling a good chunk of stock to satisfy tax obligations and Quad4 rearing its ugly head on consumer names once again this week. It’s odd to have the CEO both partaking in the rights offering (ie investing capital) while also selling stock on auto tax sale.  The company was at least proactive this time with a press release giving a heads up on the tax sale happening.  The stock continues to see no bid, the company needs something to change the narrative here and perhaps create renewed interest in the company.

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.

We maintain our long call on Walmart (WMT).

Travel on all roads and streets increased 0.1% YOY in October according to the Federal Highway Administration. Cumulative travel for 2022 was up 1.5% YOY. The strongest growth was seen in the West at up 1% while the Northeast was the weakest at down 1%. While miles driven have recovered, shopping behavior and commuting to the office have not. Weekly grocery shopping trips have returned to 2019’s 1.6 visits per household, but mass retailers and club stores have gained at the expense of supermarkets. 

LANC

Long Thesis Overview: Historically a relative outperformer in Quad 4, Lancaster Colony is a manufacturer of specialty food products for the retail and food service channel. Key products include frozen breads, sauces, and dressings. Lancaster Colony's food service sales benefited from a high mix of QSR customers during the pandemic. Its retail segment is seeing robust demand for restaurant branded flavors bringing the taste home. Demand has exceeded supply and the company is adding capacity. Margins have been under significant pressure with key inputs seeing large increases as price increases lagged. Cost pressures are showing signs of easing which could lead to margins inflecting ahead of expectations.

Chick-fil-A recently launched its salad dressings in the retail channel. The popular QSR will released four of its most popular salad dressings at participating Walmart, Kroger, and Meijer stores in Cincinnati and across Tennessee. The dressings will go national in Spring 2023. Chick-fil-A’s sauces were launched nationally in 2021 in grocery stores and mass retailers. Chick-fil-A sales grew 30% for Lancaster Colony (LANC) last year and represented half of the company’s growth.

Lancaster Colony’s capacity has been constrained, limiting its ability to launch new releases. When the sauces were initially launched Chick-fil-A said the royalties would be donated to fund educational scholarships for team members. The company has not announced anything about the dressings. Lancaster Colony could be the best way for public investors to participate in the growth of Chick-fil-A, as it represents nearly a quarter of the company’s sales.