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

Monday night Active Short Invitation Homes (INVH) announced that its CFO since 2015, Ernie Freedman, will be stepping down and succeeded by current EVP of Corporate Strategy & Finance, Jonathan Olsen.

We did not speak with the company (obviously), so will not regurgitate what you have already read from other shops. Our thoughts are as follows:

• It is odd to announce a CFO succession roughly ~2 weeks before 4Q results. We have seen this period of time up close and personal at PGRE, and its extremely involved, can be chaotic and sometimes even crazy. You are going through turns of the earnings materials, finalizing the 10-K after innumerable drafts, coordinating between and among accounting/FP&A/asset management/property management, meeting with the auditors, prepping Board materials, preparing for the audit committee meeting, checking and re-checking numbers on your own work and lending an extra set of eyes to others, working on the earnings call script, etc. This strikes us as an odd time to introduce an added layer of complexity with investors, etc.    
• IF in fact this was a planned succession for some time, which is possible / likely, we think it would have made more sense to announce concurrent with 4Q results as one package. Why not wait 2 weeks and keep it "tight?"
• It also gives the potential impression of something being off - what S&P 500 CFO announces or decides on a departure ~14 days before reporting the most important quarter of the year? And why would that occur? 
• Our understanding is that Ernie was well-respected both inside and outside of the company, including by CEO Dallas Tanner. So there is no reason to suspect anything, and obviously he was not fired as he is staying on for a transitionary period. 

So we would describe the decision to announce last night as "sloppy" and not well thought out. All else the same, the decision and the upcoming earnings report should warrant more scrutiny from investors.

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

OneWater Marine (ONEW) reported this week with $0.61 vs the Street of $1.76 and took down guidance for the full year by $1.60. We expected the print to go like this, especially after the MarineMax (HZO) print last week. Another datapoint here where we can see demand in this space is rolling. These retailers are over earnings by 60% to 80% and we think the stocks have 50% downside as the earnings expectations are revised down to appropriate levels. 

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) delayed its 4Q23 earnings report by three weeks to 2/23, which is the first time this happened to the best of our knowledge. Typically 4Q results are released during the first week of February. While this is not and has not been an “earnings story,” we think 4Q23 results will disappoint and that FY23 AFFO numbers need to come down owing primarily to Prime, the required restructuring of Prospect, Pipeline rent deferrals and higher borrowing costs on newly issued debt later in 2023.

It is possible, maybe even likely, that MPW foolishly utilized a significant portion of its ~$500 million buyback authorization during 4Q/1Q, which would offset some AFFO dilution but would at the same time increase net debt-cash EBITDA leverage. We think the company is “stuck in the REIT box” with no way out, and there is no price that anyone should be willing to pay for the equity until Steward and Prospect are restructured. And yet here we are, and the stock is trading at a ~6.1% implied net effective cap rate. We think that number should be AT LEAST +300-400bps higher today, which would literally put the stock into the ground. Let’s watch… 

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.

US RevPAR trends showed some improvement this week, but the industry is starting off much slower this across most of the indicators that we track.  Calendar shifts have disrupted some of the weeks as the heatmap shows but given the 4-wk trend, the values are a lot more analyzable.  The way we see it, until the business proxies improve, especially the urban and business market ones, the industry is going to be in a tough spot.  Led by Urban markets, all business proxies we track continue to light up red on our screens, while leisure carries headline RevPAR.  We continue to see incremental downside in most FS REIT stocks – 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.

While the narrative around Tesla (TSLA) makes it sound like a diverse ‘energy’ company, this income statement looks like a single product company.  Tesla makes the largely indistinguishable Model 3/Y, along with sundry other products accounting for single digit sales. 

Tesla only makes EVs.  Starting a price war with high volume manufacturers, like Ford, that have highly profitable ICE franchises (i.e. F-150 not Lightning) is a potentially disastrous mistake.  Ford can lose money on the Mach Es and make it up elsewhere.  The EV field is increasingly crowded.  Tesla shareholders are accustomed to little competition; better charging infrastructure is an increasingly thin differentiator.

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.

Jeremy McLean was on Hedgeye's The Pitch with our CEO Keith McCullough Tuesday talking about Best Idea Short Revolve Group (RVLV).  Jeremy gives the fundamental short thesis and Keith provides the quantitative and macro view in this 10-minute video. Video Link CLICK 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.

Although Williams-Sonoma (WSM) may not be a direct competitor with BBBY, the William Sonoma brand is the most comparable, it will still be affected by the imminent BBBY bankruptcy. Ultimately it may not be a share winner or loser, but when a major player in an ecosystem goes bankrupt it puts pressure on the whole ecosystem even those on the fringe, like Williams-Sonoma.

The remaining leases and the liquidation of inventories can’t be ignored. Especially when there is already substantial excess inventory in the home space right now as it is. Additional excess inventory will lead to future promotions and discounting just to make a sale and gain a customer. We expect margins to continue to deteriorate and demand continue to slow.

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 18% YTD (down 50% from the 2021 peak), underperforming XLC which is up 20% YTD so far.

Charter remains a structural short for us. This week, we had T-Mobile report their Q4 earnings with an update on their FWA service. Fixed Wireless is one of the threats currently pressuring Charter into another Capex cycle as they attempt to minimize the share loss from customers fleeing to fiber and fixed wireless alternatives.

News on the Charter front was quiet this week. Comcast and AT&T both won grant money in South Carolina to build out their broadband networks there. We also had T-Mobile earnings on Wednesday, where they reported 2 million internet customers in their first full year since launching commercially. They also reported that they had more net adds than AT&T, Verizon, Charter, and Comcast combined – a testament to the rapid adoption of FWA. One takeaway from the T-Mobile earnings call is the emphasis on fiber competition versus cable. When discussing their broadband service, T-Mobile CEO Mike Sievert pointed to Fiber as the main competition, stating:

“When somebody who is a fiber provider, so as you know that product is not as good as our product. It's kind of like the people at Ferrari pointing a finger at the world's best-selling car, Toyota saying, "We're faster. We have the faster car." Yes, but Toyota is the world's best-selling car, and that's because -- and if you look in the case of T-Mobile 5G home broadband, because it's perfectly suited to what people want.”

Another point of call out is a minor change Frontier made on their sales page recently. Frontier just began offering 5-Gig symmetrical speeds across their entire fiber network, and with the new offering they adjusted the prices and benefits of their existing plans. Their 5-Gig plan starts at $154.99/mo, and their flagship 2-Gig plan was reduced to $99.99. The 1-Gig and 500 Mbps plans were both reduced as well to $64.99 and $44.99, respectively.

Frontier is the first provider to roll out 5-Gig symmetrical speeds across their entire network. Frontier’s price increase is significant because it will makes their 2-Gig plan the most attractive at its price point. Frontier had been marketing their 1-Gig plan as the best value up until now. Since Charter can only go up to 1-Gig currently, Frontier's offer of 2-Gig symmetrical internet at a price point similar to Charter's 1-Gig product puts pressure on Charter from a pricing and churn perspective. Since they can't match the 2-Gig offering, they risk losing more customers to fiber.

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.

TripAdvisor (TRIP) continues to face similar cyclical risks to travel in ’23 but its core business secular headwinds that have accelerated through Covid are the bigger concern of ours.  Revenue growth should decelerate materially in ’23 and expectations for ’23 seem much too high still.  Core business (structural issues + softening ADRs in Q2-Q3) and Viator (massive comps) inform our lower revenue estimates.  Given the prevailing macro backdrop, we don’t believe the “SOTP” analysis applies right now.  TRIP remains an active short at Hedgeye.

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.

For a company that missed estimates with EPS down ~40% in a deeply cyclical industry, Knight-Swift Transportation (KNX) management seemed pretty optimistic on their 4Q22 earnings call.  The floor guidance of over $4 was squishier when discussed, leaning on the theory that most trucking downcycles last less than 18months – not exactly a robust framework.  Despite insisting that we were already 13 months past peak, we count more like 9-10 months. The pre-COVID cycle was about 22 months, so the whole rationalization doesn’t hold up.  Rates are likely to fall through 1H22, with TL carrier earnings estimates falling with it.

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.

LESL, another pool retailer, reported this week with comps down 4%. This is a major deceleration from +10% the prior quarter. Came in above consensus on revenues but adjusted EBITDA was a major miss. This print makes us increasingly bearish on Pool Corporation (POOL). Costs are increasing while demand is going the wrong way. Very bearish for POOL, and the outlook for new pool construction, which accounts for over 40% of POOL’s revenue.

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.

AMC is obviously one of Active Short EPR Properties' (EPR) largest tenants at ~15-16% of cash EBITDA. A bull-bear debate is raging under the surface on (1) the severity, likelihood and timing of any AMC BK filing, and (2) what the degree of potential rent reductions could be. If we had to handicap it, "consensus" is currently for a ~10% rent reduction at Regal and perhaps ~15-20% or so at AMC should they need to file. We actually think that is "step 2" in the process. If you begin with our "step 1" we think investors may come to the realizations that (1) the stock's fair value is materially below the current share price, and (2) worsening credit (spreads have not meaningfully widened, believe it or not) can serve as the catalyst towards that FV BEFORE any rent reductions or OpCo conversions.     

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.

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

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) reported a disappointing 4Q23 and released FY23 guidance that was both below expectations and “confusing” to investors, namely around rent amortization “burn off” from a JV acquisition and higher capital costs. While some think the guide may have been too draconian, we are more concerned (for MAA as well) that the upper-ends of SSExp growth and lower-ends of SSRev growth would put FY23 SSNOI below the guided ranges. Said another way, CPT is not incorporating the “left tail” and is, by extension, raising the probability of having to lower SSNOI later in the year. We have no resi-REIT longs, and CPT and NXRT remain our Apartment short ideas.

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.

Lancaster Colony (LANC) reported FQ2 non-GAAP EPS of $1.66 vs. consensus expectations of $1.67. Overall revenues grew 11% with volumes measured in pounds falling 4%, or 2% excluding discontinuations. Gross margins contracted 120bps while we were expecting the first quarter of expansion.

However, the math of price increases matching the cost increases in dollars is a 200bps headwind to margins. Higher egg costs were an additional headwind in the quarter. The company continues to see 20% inflation in raw materials (soybean oil) and packaging. Management has no intention to roll back pricing because inflationary pressures are continuing.

A year ago raw material and packaging inflation looked to be 20% and a year later it still remains at 20% through the remainder of the fiscal year. Future +HSD% pricing plans are higher than where they had been due to forward visibility on costs. The Horse Cave expansion has been brought online and is on plan. Self-manufacturing compared to using co-packers will be a 100-200bps tailwind going forward providing another boost to margins.

Lancaster’s input basket has experienced higher inflationary pressures than the overall consumer staples basket. The inflationary pressures are not going away in the next couple of quarters either, but management now has pricing plans that have caught up to the higher costs.

The company’s underlevered balance sheet is a strategic decision away from creating additional value. We see the pullback in share price as a buying opportunity with the acceleration in sales from the capacity expansion, upside in margins over the next two years from pricing and other initiatives, and the long term visibility from Chick fil A's compounding growth.