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 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 see risk of downside surprises to FY23 number for both Active Short Invitation Homes (INVH) as well as Short Bench AMH, with Street numbers still too high and both same store revenue and opex poised to disappoint. In particular, we see the Street underestimating the potential for higher bad debt expenses and lower occupancy rates which negatively impact rental revenue, and accelerating property tax expenses. The qui tam permitting case remains a tail risk for INVH. INVH is our second favorite short idea.

HZO | ONEW

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. ONEW Short Thesis: 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

In the last few weeks there was an Atlanta and a Nashville Boat Show. Dealers said they had some slowdown in both November and December, which, at least for November, tracks with the decline we’ve seen in boat registrations. Expectations for a more normalized year, with return of seasonality, dealers expect sales to be down a slightly YY.

We continue to expect the slowdown dealers have seen the last two months to continue. On its own, a return to seasonality would mean sales down slightly YY, but add in the recession and high interest rates, sales will be hit more than the Street is expecting. 

OneWater Marine (ONEW) has a lot more downside than MarineMax (HZO) does over a TAIL duration, but we’d still be pressing both shorts today.

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.

Medical Properties Trust (MPW) is REIT analyst Rob Simone's favorite short idea by far. As we have written about frequently over the last 9 months, as a starting point we see the stock as worth no more than a mid-single-digit share price, and that assumes the company has no tenant issues. We believe MPW is about to restructure its Prospect Medical exposure, the PA portion of which is functionally a rent cut (asset for worthless equity swap).  

We believe the rent reduction at Prospect accounts for ~10% of total cash EBITDA and AFFO. In the case of Steward, we believe MPW has attempted to go “all in” on a bluff, and we do not believe the numbers being thrown out are remotely close to being credible.  

Time will tell, but we continue to believe Steward is burning $200+ million of cash per year, cannot cover its rent and has one potential source of liquidity: MPW. We believe there is no price you should be willing to pay for the equity until at least these two tenants are restructured and MPW’s management team is replaced.

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.

Pebblebrook Hotel Trust (PEB) was out this week with some preliminary ranges for its Q4 results, which are better than previously guided toward.  So, should we call it a beat?  We think not. Either way, there are readthroughs from the update that are mostly bearish for its core business.  The final preliminary guidance range suggests that things are “better than expected” but PEB’s stock has also crept back to levels before it materially lowered the Q4 guide.  Thus, we’re not sure this update will be much of a catalyst. 

On the RevPAR side, growth continued to be soft – slowing from +1% in Q3 to -3% in OCT to -12% in NOV to -11% in DEC – a brutal trend comprised of a slowdown in Urban RevPAR (-15% in Q4 vs -10% in Q3) and Resort RevPAR (+39% in Q3 vs +21% in Q4).  Guidance for ’23 looks at risk and numbers look too high on PEB and others for next year – 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

As Hedgeye Industrials analyst Jay Van Sciver explains on "The Call @ Hedgeye" on Friday:

• We're seeing a lot more scrutiny of Elon Musk in the mainstream press; 
• Focus on the fake self-driving video in 2016;
• Don’t often see executives selling billions of dollars of stock right before bad news and
• A bad quarter; 

Tesla (TSLA) remains a short.

Watch this 7-minute video on Tesla.

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.

BooHoo reported a disappointing updated this week which is a bearish read for Revolve Group (RVLV). BooHoo announced a slowdown in top line with gross margins still down. Overall group revenue was down 11%, continuing to decelerate from 1H revenue decline of 9%.

The US had the largest regional decline in the 4-month period of down 17% in c$, although that is an improvement from 1H that was down 28%. BooHoo did say that markdowns would start to lessen, but BooHoo had inventory down 27% and RVLV has inventory up 50%, so let’s not expect the same thing for RVLV. And on the off chance the promotional levels start to moderate, that means they are holding packing away inventory which won’t work out well for them since their business is based on selling “hot” “on trend” items of the moment, not of the moment 7 months prior.

Lets be honest, RVLV management can say the promotional levels will moderate but that’s just not true, they’re running an extra 20% off sale which is already up to 65% off. A gross margin hit is written in the cosmos here. This stock is trading at a 28x multiple in the face of a downward revision cycle when it should be trading in the low teens, so there is a long way to fall. It should be closer to $10 than $24.

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.

After a spike positive last week at West Elm (Placer only has data for West Elm, not the rest of the WSM Brands), YY traffic trends returned negative while Google Interest has actually improved over the last week (for Williams Sonoma, West Elm, and Pottery Barn).

This is probably due to the fact all three companies are heavy on the promos – pushing out emails and promoting big markdowns front and center on the homepage of the sites. All three with more and broader discounts this year than what was offered last year. The “soft” home goods retailers are going to have a difficult time these next few months, falling from peak earnings levels. 

Williams-Sonoma (WSM) is trading too high given demand and the macro environment with the market looking at the wrong earnings power, which we think is below $10 per share compared to the Street near $16.

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 16% YTD (down 51% from the 2021 peak), outperforming XLC which is up 8% YTD so far. Many of the headwinds we flagged late last year (See below) have only grown stronger. However, 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.

One piece of important news to consider when looking at Charter’s cable build is the renewal of the Farm Bill due later this year. Since 2002, appropriations for programs relating to rural broadband have been included in the Farm Bill. In 2018, close to $500M was included for programs like the Rural Broadband Program, Community Connect Grant Program, and Distance Learning and Telemedicine Program.

These appropriations are set to expire on 9/30/2023 if not renewed before then. While this money pales in comparison to the $42.5B BEAD program, it signals the government’s continued commitment to expanding broadband across America and companies receiving grants to build will see sub growth at reduced cost. If additional money is included in the new Farm Bill, Charter will likely see a portion of it given to them to continue building their cable network out to rural areas.

It has become routine for telcos to receive government assistance for their broadband builds regardless of the technology used, but as fiber builds increase and consumer preference shifts in favor of the superior technology, it will be interesting to see how the government determines the allocation of funding. If they decide to prioritize fiber across the country, Charter could face losing a significant part of their business and we could see a rapid acceleration in our thesis.

Source

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.

In our latest data update, app usage, downloads, bookings, and ultimately revenue growth are slowing down for the online travel ecosystem, but TRIP’s setup seems more daunting than for other companies.  Sure, comps are easier for TRIP but share losses are mounting and growth is decelerating. 

Core growth slowed in Q4 which will be offset by Viator’s acceleration, but the latter’s acceleration won’t be enough to slow the bleed on the EBITDA line for at least another few quarters.  Meta search looks like a fairly broken business that sits in a less important part of the travel ecosystem, and with declining meta dynamics clearly showing through in the growth data, we would be fading the stock’s recent strength. TripAdvisor (TRIP) remains a Hedgeye Best Idea Short. 

KNX

Short Thesis: 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.

We are beginning to see rail speeds pick up which is a potential nail in the coffin for the Truckload carriers as exhibited in the chart below.  The transport congestion resulted in the spike in truck rates. Carriers were able to take pricing on top of volume growth. 

In a recession, higher rail network velocity will result in a lot of pain for truckers via increased capacity as both pricing and volume potentially go negative. Meanwhile, Wall Street continues to upgrade truckers extrapolating the past favorable environment into a slowing economy. We remain short Knight-Swift Transportation (KNX).

POOL

Short Thesis: Pool Corporation (POOL) 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.

A slightly positive housing datapoint this week, with the NAHB Index for January up to 35 from the 31 in December. Looking at this on a YY basis, this is still incredibly low, so not all that positive of a datapoint. If the housing market isn’t doing well Pool Corporation (POOL) won’t be doing well either.

If people are not buying new houses or if they don’t want to spend, based on the macro environment we are in, new pool construction will see a big decline. Installing a swimming pool is a big expense and with high interest rates, high inflation, and a weakening employment environment, consumers are going to cut down on unnecessary spending.

Installing a pool will definitely fall into the unnecessary spending category (and accounts for 40%% of POOL’s revenue). We think that at 18x earnings there is both multiple risk and earnings risk to this story.

EPR

Short Thesis: 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 largest tenants include Topgolf, AMC Theaters, Regal Cinemas (whose parent just recently filed for Chapter 11 protection), Cinemark, Vail Resorts, Camelback Mountain and Six Flags. 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.

We see EPR Properties (EPR) downside / fair value in the mid-$20/share range. Effectively ~30% of EPR’s rent (theater tenants Regal and AMC) is either actually or effectively in Chapter 11. In total ~40% of annual EBITDA is generated by movie theaters. Overall underlying tenant credit is poor, leverage is too high for our comfort, and the company is 100% levered to consumer discretionary spending. Short it.

CAR

Short Thesis: 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.

Mid-January wholesale used vehicle prices fell 13.7% year-over-year according to Manheim data. This impacts Avis Budget Group (CAR) two-fold:

1. CAR will be less likely to juice its cash flow through used vehicle sales and
2. Reduce earnings by increasing its depreciation expense in response to lower used vehicle values.

Combined with lower to negative rental pricing, new vehicle price cuts, and lack of corporate travel coming back to pre-covid levels, this could result in an EPS of >50% below consensus for Fiscal Year 2023.

CPT

Short Thesis: 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.

Camden Property Trust (CPT) is a fine platform and company is trapped in the wrong part of the cycle for Sunbelt apartments and residential. The RoC profile is very unattractive in our view, numbers are too high and the development pipeline all else the same is a headwind due to the >$1bn in funding requirements.

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.

Billings Montana opened its first Chick Fil A restaurant this past week with the line in the drive through starting to form just after midnight. Westchester County, New York approved the construction of its first Chick Fil A this past week as well. Westchester County has a population of roughly one million, nearly 8.5x larger than Billings Montana.

Chick Fil A has decades of new store openings ahead of it providing Lancaster Colony as the manufacturer of its sauces visibility in its future revenue growth. Chick Fil A represented 21% of Lancaster Colony’s sales in 2021. The combined growth of Chick Fil A’s restaurant and grocery sales represented half of Lancaster Colony’s overall sales growth.

Margin recovery is another part of our investment thesis for Lancaster Colony (LANC). Gross margins contracted over 500bps due to higher input costs with fats & oils being a significant driver. The PPI for fats & oils accelerated to 13.8% YOY in December from 12.8% in November.  The fats & oils category has seen significant deceleration in cost increases since March, but has bounced in the past two months.