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Short: INVH, HZO, MPW, PEB, TSLA, RVLV, WSM, CHTR, TRIP, KNX Long: LANC |
Below are updates on our eleven current high-conviction long and short ideas. We removed Playboy (PLBY) from the long side this week. We added Charter Communications (CHTR), TripAdvisor (TRIP) and Knight-Swift Transportation (KNX) to the short side this week. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
INVH
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Short Thesis Overview:
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Invitation Homes (INVH): Where 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
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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. |
The job cycle looks to be getting worse. This week we got another round of high profile tech companies cutting their headcount. Amazon reported to be cutting more than initial estimates, Salesforce cutting 10% of its headcount, Stitch Fix cutting another 20% of its headcount.
More and more of corporate America will be cutting high paying jobs. The crack in the high income job market will make high income consumers further curb discretionary spending, which will mean lower demand of high ticket luxury items like pleasure boats. Demand and earnings for MarineMax (HZO) still have a long way to fall.
MPW
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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. |
Three weeks ago Steward (and not Medical Properties Trust (MPW) via a press release or 8-K) announced that it had extended its ABL credit facility for one year. Our view has been, and remains, that MPW did something to facilitate that extension, most likely in the form of a loan to provide Steward with enough liquidity to credibly survive 2023. As we expected, we received essentially no crucial details and the sell-side parroted the extension as a successful execution. Now we wait for 4Q22 results and the 10-K filing where we expect to find the details of what actually happened.
Question: now that presumably a completed 2021 audit was transmitted to the lender group, will MPW file the audited financials as an attachment to the 10-K/A? Just given that Steward leased assets represents >20% of MPW’s total gross assets according to its own disclosure. We view MPW as worth no more than $6-7/share BEFORE any tenant rent reductions.
PEB
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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. This is below the trend prior to the Thanksgiving timing and just a weak figure all around. The data is obviously forward looking and a bit ominous for upcoming RevPAR trends considering that stronger performing leisure travel will wane seasonally.
As discussed on The Call this week, 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 Best Idea Short.
TSLA
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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 |
While we don’t accept that Tesla (TSLA) was ever “profitable” on an economic basis, since Musk’s pay package marked to economic costs well exceed any quasi-GAAP income, price cuts certainly undermine the robust demand thesis. Tesla is adding significant capacity, faces brand erosion from Musk’s politicization, and is competing against more robust offerings from other OEMs. Just as critically, Chinese EV subsidies take a major stepdown in 2023. That’s the home of Tesla’s profitable plant in market that has stagnated for the company.
RVLV
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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) big winter clear-out sale ended last week, and we have since seen a major drop off in interest since (via. Google Trends). This is some tangible evidence for our thesis/claim that to get through inventory and meet sales guidance they will have to have major discounts and run promos, which will cause margins to take a big hit.
The consumer will be cutting back on spending now post-holiday, and RVLV doesn’t seem to get that with nearly 400 new arrivals every day this week, while still having over 26,000 items on their sale page. With this stock still trading at massive 25x PE given where the demand is trending. There is plenty of downside left in the equity value here.
WSM
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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. |
Google Trends for Pottery Barn, Williams-Sonoma (WSM), and West Elm aren’t looking promising. There was a slight uptick around the holidays, but interest has since slowed and declined YY. At about 3% below last year, we expect this deceleration and decline to continue as the consumer tightens their wallet post-holiday and home sales continue to slow.
We got incremental negative data points on housing the last couple weeks. Redfin reported week with that the luxury home category is falling to a worst ever -38%. And pending home sales hit the lowest level since 2015. We believe there is plenty of downside from where the stock sits today.
CHTR
We view Charter Communications (CHTR) as a structural short, as threats from FWA and Fiber have forced CHTR into another capital cycle that is unlikely to improve its strategic positioning long-term (on a relative basis). We believe CHTR will struggle to grow internet broadband subscribers with a rising probability of sub-losses over the next 3-years as Fiber penetration increases. We expect operating income and EBITDA to decline on a YoY basis as soon as 1H23.
TRIP
Growth might not be off the charts for the Big 3 OTAs, but it sure is a heck of a lot better than what data implies for TripAdvisor (TRIP). Meta search continues to be a fairly broken business and sits in a part of the travel ecosystem that doesn’t really serve the same need it once did, and that continues to show through TRIP’s app data.
Within TRIP, the “core” Tripadvisor brand app continues to be the source of the problem and if the macro really starts to bleed into the travel economy, it should worsen. Q4 guidance does not look conservative, and we continue to see further downside at current prices. TRIP remains a Hedgeye Best Idea Short.
KNX
Transports & Weather: With the massive winter storm that disrupted flights and another large system set to impact California, investors should expect some short-term strengthening of transport pricing… because bad weather slows speeds, and slow speeds contract capacity. Truck rates improved last week. Congestion in one part of the US can easily spread to other regions.
Unlike the weather in Europe, where gas demand for the season has likely been reduced, transport capacity can swap back quickly when congestion clears. The post-holiday volume drop-off plus the easing of weather conditions into a recessionary macro environment with capacity additions could well make for a difficult back drop for non-utility transport equities. We like Knight-Swift Transportation (KNX) short side.
LANC
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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 expectation. |
Lancaster Colony's (LANC) Foodservice segment sells sauces and dressings to restaurant companies. Its retail segment sells a variety of products including frozen breads and dressings to food retailers. In recent years the company has seen strong growth in selling the sauces and dressings for restaurants to the retail channel. With elevated food inflation, consumers have increasingly turned to the branded sauces they know well to complement their at-home meals.
Lancaster Colony has been limited by its manufacturing capacity to meet the demand. The company completed the expansion at its Kentucky facility in November. Having the additional capacity will enable the innovation pipeline to pick up pace and we are modeling an acceleration in revenue and margin leverage.
