Investing Ideas Newsletter

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

Below are updates on our nine current high-conviction long and short ideas. We removed WalMart (WMT) from the long side this week. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.

INVH | MPW

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

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.

REITs analyst Rob Simone provided an excellent recap of his short calls on both Invitation Homes (INVH) and Medical Properties Trust (MPW). Listen to Rob's comments in this 7 minute video clip here.

A quick summary of those comments below:

• REITs Top Longs & Shorts for 2023: Two names that are setting up for largest upside surprises in 2023 are STAG Industrial, Inc. (STAG) & Iron Mountain Incorporated (IRM); both bullish TRADE & TREND; on the flip side, two REITs set up to miss are probably Americold Realty Trust, Inc. (COLD) & Invitation Homes Inc. (INVH); guidance doesn’t matter for Medical Properties Trust, Inc. (MPW); they’ll pull a ridiculous number out of the air; next catalyst here is earnings; we fully expect they will have done something about the expiring ABL credit facility; STAG & IRM remain longs & COLD, INVH & MPW remain shorts

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.

PCE for November was reported this week, and the trend in boats consumption is bearish.  Pleasure Boats in the latest month slowed to +1.8% from +2.5% last month, and +15% in late summer.  Keep in mind that is with prices up significantly, so units are in decline. The boat category is reverting, and we think has a long way to go on the downside which will continue to pressure revenue and earnings across the MarineMax (HZO) business.

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 volumes (bookings) continue to come in soft and as of the latest week, are tracking down 38% vs ’19 levels, which is below the trend prior to the Thanksgiving timing issue and a deceleration vs the prior week.  Given that there is just one more hotel data point for this year and much of the demand at hotels is leisure based right now, these bookings are likely to impact the business travel demand in the new year and we’ll be watching our usual proxies to assess that impact.  We remain confident that the corporate demand vector will disappoint in the coming months and as such are staying bearish on a variety of hotel stocks and see more downside - Pebblebrook Hotel Trust (PEB) remains a Hedgeye 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.

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.

Revolve Group (RVLV) ramping its sales. No surprise here, this week as we see even steeper discount and promotional level at Revolve. Its what we’ve been saying, they will push discounts which will help sales numbers and comps some but it will destroy margins. This company needs an inventory reset and SKU rationalization to have any real potential for healthy profitable growth. Clearly the narrow initial inventory orders have not helped avoid excess inventory with nearly 28,000 items on sale right now. Trading at still a massive 26x consensus PE there is ample downside here, but the street is just missing it.

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.

Despite the November rates breather, pending home sales slowed down again in the month, down 38% YY.  Housing demand data continues to be ugly.  We remain bearish home retail, especially a company like Williams-Sonoma (WSM) with subpar management and elevated promos in its brands (i.e. William Sonoma, West Elm, and Pottery Barn). We think there is sits till meaningful downside from where the stock is trading today given the huge EPS reversion risk, even at its 8x consensus P/E multiple.

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) is sitting slightly off its lows from another volatile week.  The stock is currently below the right offering price of $3.50.  Perhaps the company will have to adjust the terms of the offering if the stock doesn’t see some recovery near term.  Like every retailer, PLBY has some end of year promotions going on to help manage inventory levels.  There continues to be no bid on the stock and a need for something to change the narrative on the equity that has been left for dead. 

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

The November PPI for fats & oils reaccelerated to 14.1% YOY 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 that are used in its sauces and dressings in 2021 and 2022. 2023 will see margin recovery from accelerating price increases while input cost increases slow.