Investing Ideas Newsletter

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

Below are updates on our fifteen current high-conviction long and short ideas. We removed Lancaster Colony (LANC) from Long side and Charter Communications (CHTR) from the Investing Ideas Short side.  We also added New Oriental Education & Tech Group (EDU) to the Investing Ideas Long side. 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

No update this week. Below is last week's Investing Ideas update.

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

MarineMax (HZO) and OneWater Marine (ONEW) both reported ugly quarters and subsequently had an initial sell off, but there is still plenty of downside to both of them. Especially given the macro cycle we’re in, demand will continue to drop. HZO inventories were up nearly 100% and ONEW was up 112%, while these companies like to say inventory was at historically low levels last year to explain away the large inventory growth, inventories are now at historic highs as we go into a major demand slowdown and decline. We see about 50% downside while we wait for more earnings expectations to be revised down appropriately.

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.

REITs analyst Rob Simone provided an update on our numbers on Medical Properties Trust (MPW) during Friday's edition of "The Call @ Hedgeye." Watch this video excerpt from "The Call" here.

Quick notes from the video: We estimate MPW is trading at a ~6-6.5% implied net effective cap rate; in several respects we think we are being generous, including giving the company credit for the book value of its mortgage and operator loans, giving credit for a return earned on MPW's recurring "capex" burden, and in general taking the reported numbers at face value; cannot use GAAP multiples to value this company; MPW remains a short.

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.

Following another weaker than expected RevPAR print this week, urban markets, business markets, weekdays, and even higher end leisure remain softer in the YTD.  When looking at weekly business market RevPAR excluding Thursdays, trends have continued to show core weakness.  RevPAR for this segment remains well below the pre-holiday trend, and we don’t suspect the coming weeks will get much easier here given the seasonality shift away from leisure. 

From our vantage, this seasonality shift sets the stage for more disappointing RevPAR figures as the “true” demand for weekday business travel is unmasked.  We continue to stay short most of the hotel complex – including Pebblebrook Hotel Trust (PEB) which remains a 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.

Tesla (TSLA) Financials Show Demand Issues, Co. Behaving Like Demand is a Concern

Finished inventory accumulation doesn’t fit for an OEM that pre-sells vehicles, with Tesla typically asking customers to wait long intervals between placing an order and receiving the delivery. Global price cuts, not just in the US for tax credits, suggest slack demand in the face of greatly expanding production. Tesla is giving up substantial margin to fill capacity, not a rational choice if competitors weren’t making inroads. Consensus estimates are likely to trend toward zero for 1Q2023, an adjustment already underway.

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.

There is a narrative in the market that inventories for apparel are being cleaned up in 4Q.  Yet the data points so far for the industry in 4Q are reading that inventories got worse, not better.  The average sales/inventory spread (sales growth – inventory growth) has continued to worsen the last four quarters for apparel brands, and three of the last four quarters for apparel retailers. There is still a lot of inventory out there in the channel, and ordering still coming in. And that inventory needs to be sold, at whatever margins various companies are willing to sell it. 

Revolve Group (RVLV) is definitely not an exception to this scenario, it is actually one of the prime examples. Inventory growth outpacing revenue growth, increased promotions, gross margins deteriorating. This company needs a rehaul; but until that happens, short it. The stock sold off this week with the multiple down from 32x last week to 28x, but it still has a long way to go on the downside.

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.

TCS reported this week with revenues ahead, comp was down approx. 4% and GM is seemingly improving. Overall trends are continuing to slow here though from a top line perspective on weakening consumer demand, TCS is holding up margins at least. The same can’t be said for Williams-Sonoma (WSM). While TCS remains relatively controlled and tactical in promos, actually discontinuing a sale from last year, WSM is running ample promos. WSM is already stocked and ready for Easter well in advance. The company did this around fall / Halloween season as well, which helped slightly for the quarter. But what is going to happen when they don’t have a holiday to cater to and when the consumer can’t spend as much or as often?  Sales will take a hit… and margins will rapidly compress, and WSM can see a much a bigger hit than expected as demand slows in the home space.

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.

The market seemed to be enthused by the TripAdvisor (TRIP) upgrade yesterday but we see it differently.  Reading snippets of the report suggests much of the upgrade is predicated on Viator getting a fair valuation and how the core “cash cow” business will be able to fund growth opportunities in Viator and TheFork.  TRIP’s core does churn out solid FCF but its secularly declining FCF, and Viator, despite its rapid growth is far off from sustaining strong FCF production.

Yes, it’s fast growing, but so was BKNG back in the day and ABNB since coming out of Covid, and those businesses printed huge cash flow.  We’re not about to bash Viator, it’s the one part of TRIP we do like.  But we don’t believe the current environment, absent a material acceleration in the core business, will allow for the Viator “part” to get a 2021-type valuation. 

So, for us, it comes back to the core (and TheFork), and that’s where problems continue to reside.  Our earnings preview walked through some data and added thoughts - growth across the TRIP enterprise continues to underperform, and consensus estimates still look too high.  Viator’s growth will remain strong this year and next but seasonally contributes less in Q4 and Q1, and in Q2 and Q3 will be facing massive growth comps.  

So again, there’s more pressure on the core to deliver and we just aren’t ready to bet on that.  We remain bearish on TRIP and see plenty of better opportunities.  Fade the upgrade.

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.

Why do we expect rates to continue to lower?  Beyond our Macro team’s expectation for recessionary US economic conditions, rates correlate with network speeds.  Those have been held up by congestion – labor shortages, bad weather, changing transport lanes, long lines at ports/docks, and other frictions in the system.  That has changed…starting at the end of 2022. From a congestion/asset turn perspective, the downcycle is just starting. Stay 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.

Pool Corporation (POOL) reports next week, and currently is trading at a roughly 16.5x EBITDA multiple when we think it should trade closer to low double digits. After the LESL print, we aren’t expecting much good news from POOL. Demand is slowing and costs are rising. We wouldn’t be surprised with a top or bottom line miss, and think a guide down would be smart move on the company’s part.  We continue to think this company has significant downside risk over the coming quarters.

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.

If you haven't watched REIT analyst Rob Simone's short EPR Properties (EPR) callouts on "The Pitch" we strongly suggest you watch. It's 9-minutes of action-packed insight.

As Rob explains, EPR's 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.

Listen to Industrials analyst Jay Van Sciver discuss Hertz Global Holdings (HTZ) earnings, where he discusses the implications for short Avis Budget Group (CAR) this week on "The Call @ Hedgeye" here.

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.

No update this week. Below is last week's Investing Ideas update.

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.

EDU

We'll have more to say on long New Oriental Education & Tech Group (EDU) in the coming weeks. In the meantime, below is a recap of EDU's most recent quarter from China analyst Felix Wang:

EDU reported another beat + raise quarter vs the Street this morning but didn't beat my expectations on some metrics.  FQ3 revenue guidance of US$711m is higher than my model estimate (US$700m) and substantially above Street (US$663m).  While a big improvement YoY, gross margins were lighter than I modeled given East Buy's gross margins was only 43% (fka Koolearn).  On a comparable basis (normalizing for below-the-line items), EDU's non-GAAP EPS was around US $0.10/share, which beat Street estimate (+US$0.01) but missed my estimate (+US$0.15).  

The overseas segment delivered very robust results.  Overseas revenues exhibited ~30% growth this past quarter in RMB terms - I modeled it in US$ terms at 15% growth which was exactly in-line with reported figures.  For livestreaming, I estimate East Buy revenues in FQ2 was US$172 or 27% of EDU's total revenues - this equates to 35% QoQ growth - below my estimate of $200m.  However, as I will show during Thursday's e-commerce call, Oriental Selection's GMV pace significantly picked up during January, which tells me the best is yet to come this year for the livestreaming segment.

EDU's new non-academic offerings also offer some long-term promise.  Non-academic tutoring enrollment grew 61% QoQ. 

Good expense control, as marketing and G&A expenses were less than expected.  

Deferred revenue balance improved to a 23% decline (30% decline in FQ1 2023).  Pace of share repurchases in million of shares similar to last quarter. 

At FY 2024 1.5x EV/Sales and 13x 2024 P/E, EDU looks cheap but it needs to continue to show improving growth.