Investing Ideas Newsletter

Short: INVH, HZO, MPW, PEB, TSLA, RVLV, WSM, CHTR, TRIP, KNX, POOL, EPR, CAR, ONEW, CPT Long: LANC

Below are updates on our sixteen current high-conviction long and short ideas. We added Pool Corporation (POOL), EPR Properties (EPR), Avis Budget Group (CAR), OneWater Marine (ONEW) and Camden Property Trust (CPT) 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.

We think more property tax pain forthcoming; Adding AMH to Short Bench. Following Active Short Invitation Homes' (INVH) negative surprise w/ 3Q22 earnings on higher property taxes in Florida and Georgia, followed up shortly by a similar update from AMH in Texas (both of which really should not have been surprises, by the way), we have been digging in to try to find similar potential issues lurking in the portfolios. North Carolina stands out to us. We raised our property tax expense growth estimates accordingly, and are below the Street on FY23 Core FFO estimates for both INVH and AMH. We will continue updating numbers if and when we find potential landmines, but in general our sense is that expectations for FY23 property tax expense growth are STILL too low. 

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.

Management was at ICR this week and maintained guidance for the fiscal year from the earnings call in October; sales guidnance of down MSD. The last few months of boat registrations have been down, and we don’t expect that to revert positive any time soon. At ICR management did say that inventories across the industry are down and will remain down. We expect it to be worse than management and the Street is expecting it to be. Demand will continue to be hit and therefore so will earnings. We remain bearish MarineMax (HZO) after the recent rally.

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.

It is 1.13.23, and Active Short Medical Properties Trust (MPW) is overvalued by approximately... whatever the current share price is. Again, until the relationships with Steward & Prospect are restructured and more transparent, our view is that there is no price you should be willing to pay for the equity. That is the genesis of "the equity is worthless" and "it is overvalued by x" comments, which are obviously different than the question "what will the stock do?"

As we see it, deteriorating credit conditions in deepening Quad 4 should, at the very least, theoretically impact MPW's share price in an outsized negative way given poor cash economics, a poor RoC profile, poor earnings quality and excessive leverage at MPW, irrespective of any tenant defaults or rent cuts. The cash economics of the business dictate a mid-single-digit stock price assuming MPW can continue spinning all of its plates at once without dropping any. At the same time, the stock is NOT "cheap" and remains bearish TRADE, TREND & TAIL.

The next catalyst that we can see is 4Q22 earnings, along with any Prospect resolution on Crozer (exchange the RE for worthless equity stake? Sure!). We want to read the 10-K, as there are always things to uncover. By the way, now that Steward's 2021 audited financials are available and Steward RE is >20% assets by MPW's own disclosure, lets see 'em! Otherwise, its purely an exercise in trust. Would you trust MPW?  

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.

Contrary to the strong finish to ’22, our forward-looking room rate data continues to flash some signs of caution in the new year.  Our latest data scans on the rate side, which now peeks out through March ’23, indicates that softness is to be expected.

Our business demand proxy of weekday room rates in top hotel markets in the US looking out 3-mths, suggests that January – March is slated to retreat when it comes to ADRs, certainly relative to recent performance.  Weekday ADRs have mostly been up vs ’19 across the US, but not in urban markets and business markets.  Either way, we’re just looking for a directional trend here and the trend looks softer.

Hedgeye remains negative on the FS REIT backdrop - Pebblebrook Hotel Trust (PEB) remain a Hedgeye Best Idea Short list. 

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.

In this excerpt from Friday's edition of The Call @ Hedgeye, Industrials analyst Jay Van Sciver explains recent bearish developments for Tesla (TSLA).

Tesla is cutting prices up to 20% on Model Ys; cutting prices globally; relates to EV competition; Tesla is no longer the obvious winner; brand is weaker, not just Musk’s antics on Twitter but other negative brand events; questions whether these price cuts are even going to work; TSLA remains a short.

WATCH THE 5-MINUTE VIDEO HERE

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

Looks like Revolve Group (RVLV) could only last a week without running a promo.  Consumers are fatigued and their wallets are tapped out. These are the early signs of what we’ve been saying for months; consumer will be constrained post-holiday and not be able to and not want to spend. Companies are going to need to elevate promos to make a sale and Revolve is no different. We can just add that they have elevated inventory that needs to be right-sized as well, which will increase promo and discount levels. Supporting this outlook is the recent apparel inflation data which saw pricing slow again in December.  Meanwhile US import costs continue to rise.  Gross margins will take a hit in the up coming few quarters. Trading at over 27x, we’re still short this name.

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

BBBY reported earnings this week, and numbers were ugly. It now looks like we are weeks from the Bed Bath and Beyond bankruptcy, which will likely end up in liquidation.  While this could be viewed as good for other home retailers like Williams-Sonoma (WSM), we think the BBBY issues couldn’t come at a worse moment for home retail… there will be share up for grabs over the long term, but not before BBBY liquidates a ton of inventory for dimes on the dollar. .  That while the category is weak and slowing and the consumer continues to deteriorate.  It will be an ugly few months for ‘soft’ home with names just starting to fall off of peak earnings levels. The stock is trading too high given demand and the macro environment with the market looking at the wrong earnings power.

CHTR

Short Thesis: 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.

Charter Communications (CHTR) shares are up 13% YTD (after being down -48% in 2022, and down 52% from the 2021 peak), outperforming XLC which is up 7% YTD so far. Despite very recent outperformance, many of the headwinds we flagged late last year (See below) have only grown stronger and we believe the fundamental deterioration is only getting started.

We view 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.

There hasn’t been much fundamental news we can attribute the YTD move higher in Charter (CHTR) too. Charter (along with Comcast) received ARPA funding to build their broadband network out in Georgia, with Charter receiving $49.5M to pass 18,800 locations in the state at a cost to pass of $2,633 per passing. However, with Charter having ~50M total passings, the 18,800 locations isn’t a meaningful development. We expect Charter will continue to win grants associated with the Biden administration’s efforts to expand broadband across the United States. However, we do think that fiber is favored technology for these same programs.

Our short call on Charter is based on structural issues. They can build out their cable internet network with government money, but as consumers are given access to more options like fiber and FWA, we expect Charter’s market share to continue to fall. Charter is also continuing to experience the pains of secular trends in their industry with regards to pay-tv distribution. DirecTV announced this week that they’ll be laying off 10% of their managerial workforce, as cord-cutting trends have forced them to cut costs across the business. While many view Pay-Tv declines as a non-issue or positive for Charter, we remind investors that video distribution is a positive contribution margin (video revenue less programming costs) business and therefore rising disconnects and higher programming costs does weigh on margins. With broadband subs stagnating, pay-tv customers continuing their exodus to streaming, Charter is losing ground on which they can differentiate themselves from their peers. Charter is looking to offset these headwinds by entering the mobile market, which will be difficult to leverage without owners’ economics. Short term market momentum might be on Charter’s side right now, but we expect our thesis of structural weakness to play out through the remainder of 1H23 and beyond.

TRIP

Short Thesis: We’ve viewed the core TripAdvisor (TRIP) business as a melting ice cube and alas, the company’s implied guidance and outlook in Q3 was ugly, anchoring even below our Street low estimate.  The conference call was informative but didn’t provide enough insight or detail to assuage our concerns on the broader health of the core business and the trajectory of the total company looking into ’23. There are certainly problems in the core business, growth is lagging, and the guide reflects those issues in addition to other timing factors for its higher growth businesses.  TRIP issued revenue guidance that was merely in-line with current Street expectations but given the implied color, we think the total revenue guidance of LSD growth is not even conservative.

With finalized data to ’22, and a read into the first week of January, app data trends continue to be somewhat mixed for the accommodation industry. New app downloads for the OTAs held steady off the trough in late August / September but TRIP posted another weak month, decelerating from November’s -45% vs ’19 levels, down to -46% in December.  From our vantage, TripAdvisor's (TRIP) core continues to look weaker and as a result, remains a Hedgeye Best Idea Short.

KNX

Truckers Knight-Swift Transportation (KNX), SNDR etc., which have been stubbornly resilient, are our top 2023 shorts. We’ll be looking for additional cyclical short exposure into 1Q23 earnings, most likely in the base/industrial metals & materials names…many of which are also at all-time highs heading into a likely recession.

POOL

We added Pool Corporation (POOL) to the short side of Investing Ideas this week. In the coming weeks we'll break down the thesis in more detail but the core thesis is this: This name fits right in with our bearish view on retail in 1H, and the precipitous decline we expect to see in spending around the Home. For those of you unfamiliar with POOL, it operates in the wholesale market for pool supplies, to both consumers and installers, and saw a massive boom in profitability around the pandemic. We think there’s 40-60% downside in this stock. 

EPR

New Short EPR Properties (EPR) highlights the current oversight of potential rent cuts at large operators that suggest -30-35% downside risk from current levels. EPR is a unique, ~$2.8Bn equity market cap "experiential" triple-net REIT with exposure to theaters, eat/play, ski resorts and other out-of-home attractions that is highly levered to the U.S. consumer and levels of/changes in discretionary spending.

Investors by this point should be very familiar with Hedgeye's Macro call for a deepening, consumer-led Quad4 recession heading into FY23, and it is difficult to find a REIT more specialized or directly exposed to the downside in such a Macro regime. 

EPR's largest tenants include Topgolf, AMC Theaters (which will be a big focus of our deck), Regal Cinemas (whose parent just recently filed for Chapter 11 protection), Cinemark, Vail Resorts, Camelback Mountain and Six Flags. Theaters collectively represent over >40% of EPR's adj. EBITDA exposure and >30% of total revenue. A major advantage here is that several of EPR's tenants are publicly traded and therefore offer opportunities for un-obfuscated analysis. Rob thinks that the stock is STILL mispricing the potential for and degree of likely rent reductions at certain tenants, which when combined with warranted double-digit cap rates gets us to a -30% to -35% reduction in the stock price from where we added on Dec. 22^nd.

CAR

Avis Budget Group (CAR) has to replace sold units, which provided the used vehicle gains, with more expensive new units. The income statement tailwind should fade well ahead of a bottoming in used car prices.

ONEW

We added OneWater Marine (ONEW) to the short side of Investing Ideas this week. We'll have more details in the coming weeks but the core thesis is this: This story is similar to our MarineMax (HZO) Best Idea Short – but potentially better. Much like HZO, ONEW is a roll-up of boat retailers in the US. The company went from 37 dealerships in 2017 to 96 today – almost entirely through acquisitions. During that time of free money, the company levered up to over 3x EBITDA while it also benefitted from the boom in outdoor sports, including boating. We value this stock over a tail duration at $10-$15 – or 60% below where the stock is trading today. 

CPT

For Camden Property Trust (CPT) the RoC of growth is peaking and very likely slowing heading into FY23. We see a combination of RoC slowdown on all the key metrics + numbers that are too high and need to come down. 

CPT has a relatively strong balance sheet to be clear, but paying a full price at the cycle top for stabilized assets with likely deferred capex is not a wise capital allocation decision in our view. Different subsector, but it reminds us of CUBE's fully stabilized deal in late-2021 which the market hated and does not typically work well heading into a Quad 4 and overall RoC slowdown. 

The pushback will no doubt be that the recent correction in Apartment REIT equities has more than compensated for this and the stock is "cheap" on a relative basis, but we would not want to own anything on the long side right now that is staring at a downward estimate revision cycle while currently at peak RoC. 

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 expectation.

Historically a relative outperformer in Quad 4. Lancaster Colony (LANC)  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.