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.

MarineMax (HZO) missed on the print this week, which is a bearish read for OneWater Marine (ONEW). Revenues grew 7.5% with a -1% comp, decelerating from 4Q22, which had 16% growth and an 11% comp. It also had a sizable EPS miss, coming in at $1.24 vs the Street’s expectation of $1.53. And the company took down full year EPS by $1.

On the conference call management said there was slight softening in the “little higher segment than in the low end”, but they attributed that to being seasonally related and said that “underlying demand remains healthy”. We don’t buy it. While inventories are up 53%, on the call management said that they are still under inventoried in certain models and certain brands and they aren’t sure when that will be replenished. Regardless, 53% inventory growth is bearish – it means that they have too much supply of the wrong product.

We still think earnings have 50% downside over a TAIL duration.  We expect there to be further guide downs out of HZO and ONEW, and we would be pressing the shorts here.

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.

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 The Call @ Hedgeye, Industrials Jay Van Sciver discusses his short thesis on Tesla (TSLA) (among other things):

Video Notes:

• Textron Inc. (TXT): Took up guidance; higher sales; protest period for V-280 award ends first week of April; this will be a positive for them; backlog for aircraft segment is very long; TXT remains a long
• Rockwell Automation, Inc. (ROK): Reported $2.46 vs. $1.88 consensus; doing quite well; trend toward reshoring and more factory investment; taking up 2023 numbers; orders were up; positive outlook on forward demand; ROK remains a long
• Tesla, Inc. (TSLA): Wild earnings call, complete disconnect from reality; Tesla just cut prices in January by up to 20%; adding two new sizable factories in Texas and Berlin which will be high-cost facilities; very little discussion of China and what is really going on in terms of demand; TSLA remains a short

Watch this entire 14-minute video clip.

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.

The Revolve Group (RVLV) stock and PE multiple are climbing this week, the stock has been making lower highs and the PE multiple is reaching the 5-month high (34x vs the 32x right now). On Monday Keith signaled it was a good time to short RVLV through his quantitative process.

RVLV reports Q4 in a month, so we’ll see where it comes in, we’re expecting sales to be relatively okay but margins to be hit along with a guide down for 2023. We believe this stock has a long way to fall, especially from the new highs it’s been making lately.  Stay short this. We think it can and will get cut in half from 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.

Ethan Allen (ETD), a Williams-Sonoma (WSM) competitor, reported this week.  Its earnings numbers were good, but that was from high pricing and SG&A cuts.  Revenues missed, and orders were down 16.3% YY while the company noted it was helped in the quarter by its order backlog.  That suggests end demand is under real pressure which puts risk on forward orders and pricing across the space. 

We’ve seen WSM promoting a lot recently, so it’s more likely to have decent revenues, but relative earnings pressure when compared to ETD.  Housing demand indicators continue to look weak, and we think the home retail space, like WSM have a long way to go in terms of demand and margin reversion.

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.

We had Charter Communications (CHTR) out this week, and as expected subs were fine – actually better – but it is coming at the cost of declining unit economics with EPS declining 14% YoY in 4Q22 versus consensus flat – and this is despite them buying back 12% of diluted shares for $11.7B in 2022. FCF was down a whopping 50% YoY, after it was down 40% last quarter on higher capex and cash taxes and lower operating cash flow. Adjusted EBITDA was up 2% YoY, but if you adjust advertising revenue for political it was down about 40bps YoY… and I think will be down at least LSD in 1H23 where street is still modeling up LSD.

On the earnings call, Charter executives outlined their expectations for 2023. They’re expecting $6.5-$6.8B in CapEx spending as they continue to expand their network. Included in those expansion plans is a goal of

300,000 subsidized rural passings in 2023 at a cost of $3,000 per passing. Charter completed 200,000 rural passings in 2022, but they expect an increase in government subsidies at the $42.5B BEAD program kicks off in May. When looking at their internet base, Charter called out fixed wireless as one of the causes of low gross additions. They claimed DSL customers that would have typically upgraded to cable are instead going to fixed wireless. Charter then claimed that “given the issues with fixed wireless, product reliability and scalability, we expect those customers to find their way to us over the long term”.

It’s our view that fixed wireless will continue to grow and acquire customers at the cost of legacy cable providers as fixed wireless offers a cheaper and more convenient product compared to cable. Speaking of customer margins, Charter also provided a gem of a quote regarding their wireless margins: “we wouldn't be willing to do the Spectrum One offer if we didn't have some space in margin. And so our margins in that business, if you exclude the subscriber acquisition costs, continue to be quite good.”

Essentially, Charter increased their promotional offers in 2022 to acquire more wireless subscribers through Spectrum One – excluding the costs they spent to market and promote Spectrum One and the discounts (like free lines) given to acquire customers, Charter says the margins are quite good! A big aspect of Charter’s business and customer acquisition plan is bundling internet and wireless together, so a lot of their success in growing that customer base through 2023 relies on their rural builds and the synergies they can produce with Spectrum One.

Charter commented on the call, “with a bigger base of rural passings behind us and constructed increasing during the course of the year, I think the early -- small but early success of Spectrum One in driving Internet is only going to grow as that product takes hold.” We expect churn levels to increase as promotional offers for Spectrum One expire through the course of the year, which will adversely affect the pipeline of wireless to internet.

We also remain firm in our thesis that Charter’s cable internet product is inferior to fiber. These two factors, taken together, point to what we see as the weakness in Charter’s business plan.

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 few weeks 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 TripAdvisor (TRIP) posted another weak month, decelerating from November’s -45% vs ’19 levels, down to -46% in December. 

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  From our vantage, TRIP’s core continues to look weaker and as a result, 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 remain short of Knight-Swift Transportation (KNX). Below is an excerpt from The Call @ Hedgeye in which Industrials analyst Jay Van Sciver dissects the KNX short case:

Video Notes:

• Albemarle Corporation (ALB): Hosted an investor day; expected to earn $6 in 2022, going to come in around $22; there is nowhere near enough lithium supply to meet growing demand; growing quite rapidly in a rapidly growing market; gave long-term guidance; ALB remains a long
• Knight-Swift Transportation Holdings Inc. (KNX): Operating income down ~40% YoY which is alarming; missed on EPS; Quad 4 recessionary environment; all internal metrics look bad; KNX remains a short

Watch this entire 5-minute video excerpt.

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.

Pool Corporation (POOL) stock has ripped up recently in the greater market squeeze.  Perhaps helping this week was an old wall price target raise.  So the stock is moving up, but we are seeing some data points suggesting high end consumers (ones that install and maintain pools) are starting to see some pressure. 

HZO reported this week giving comments around weakening high end demand in boats. People spent up during COVID on expensive recreational items (i.e. boats and pools), and the cycle is starting to roll on spending. The majority of higher margin discretionary part of the business we’re expecting to comp down at least 20%. There’s about a 40% downside here.

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.

We see the vast majority of Avis Budget Group's (CAR) EPS as derived from the gains and lower costs associated with inflated used car values.  While that takes time to roll off, the declines in corporate travel indicators are a more immediate threat to the thesis. Deteriorating operating metrics make clear the dependence on used car gains, directly threatening the bull thesis of a travel recovery….particularly corporate travel. There is no plausible bull case for CAR without hope for improving car rental fundamentals.

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.

CPG companies experienced a number of cost headwinds in 2021 and 2022 as commodity prices surged, the supply chain broke down, labor became scarce, and costs for everything from packaging to transportation inflated. As a result Lancaster Colony's (LANC) gross margins have contracted for ten quarters. We are modeling expansion in FQ2 gross margins as price increases catch up to cost increases. Consensus expectations for F2023 are for gross margins to expand a modest 120bps. Not only do we model gross margins expanding over 400bps over the next two years to return to pre-pandemic levels, but the new capacity expansion should lead to higher than historical levels. Our estimates for Lancaster Colony are higher than consensus expectations on a trade, trend, and tail duration.