Investing Ideas Newsletter

Short: INVH, HZO, MPW, PEB, TSLA, RVLV, EPR, ONEW, CPT Long: EDU, MLCO, LVS, CARR

Below are updates on our thirteen current high-conviction long and short ideas. We removed Williams-Sonoma (WSM) and TripAdvisor (TRIP) from the Investing Ideas Short List. We added Melco Resorts & Entertainment (MLCO), Las Vegas Sands (LVS) and Carrier Global Corp (CARR) to the Investing Ideas Long List. 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

Invitation Homes (INVH) / AMH: INVH is our second favorite short, and we think AMH will likely disappoint on well-above consensus property tax expense growth. INVH is a litigation magnet, and three weeks ago was hit with a class action lawsuit in CA on top of the permitting whistleblower complaint from a year ago. This plaintiff is already requesting a jury trial.

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

PCE data out this week shows continued deceleration and significant decline YY in pleasure boat spending. January was down 23%. This is bearish for MarineMax (HZO) and OneWater Marine (ONEW). Two companies that over earned during the pandemic and now have demand majorly slowing and will continue to slow. These companies and the market aren’t prepared for nor do they realize just how bad the situation can get. As demand continues to roll, earnings for both of these companies will revert lower and fast. The “cheap” stocks will get cheaper, especially with the financial leverage that has been added to the businesses. 

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.

First, Medical Properties Trust's (MPW) equity is worthless. We define "worthless" for a REIT as having de-minimis equity value. We are of the view that MPW is worth no more than ~$3/share today, assuming no additional tenant issues. Prospect, Steward & Pipeline clearly remain problem tenants. The stock STILL trades at an implied ~6.3% net effective cash cap rate.

This calculation includes the impact of cash G&A and "capex," but is also generous in that it gives MPW credit for a ~7% return on that incremental capital investment. We believe MPW should reasonably trade several hundred basis points outside of that number, reflecting the inherent risk of its underlying tenant credit. MPW's cap rate "spread" to the BBB yield has actually narrowed in recent quarters. This clearly makes no sense.  

Second, we care less about the wreck that was 4Q22 results and more about the pending 10-K filing. There are nearly always more meaningful and at times undisclosed data points in the quarterly and annual filings that help us piece together what is REALLY happening with this company.

Next, on the dividend. We continue to view the dividend payout as very much at risk. The current $1.16/share annual payout is completely unsustainable and should be reduced immediately to preserve cash flow and de-lever the entity. MPW's cheapest source of capital right now is internally generated funds. 

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): Q4’22 is mostly irrelevant given the pre-announced results in early January.  As a reminder, PEB’s $57MM EBITDA compares to the original consensus figure of $76MM.  Yes, the company battled hurricane issues, but weaker than expected results across the rest of their portfolio, a ramp in hotel OpEx, and other factors are clear contributors here. 

Under the hood, PEB’s Q4 revealed a troubling trend for the company and the industry as hotel OpEx growth (on a “POR” basis) accelerated, while hotel revenue growth (on a “POR” basis) decelerated, and for the second quarter in a row, OpEx growth > revenue growth.  PEB’s Q1 outlook is pretty ugly and suggests that numbers need to come down again.  RevPAR guidance implies no incremental improvement from Q4’s run rate and at the low end implies deceleration, though given Jan’s prelim growth of -13% (vs ’19) the guide does bake in some improvement for Feb-Mar. 

Initial EBITDA guide of $47-52MM is well below the Street at $67MM and was below our initial estimate as well.  On the guide, PEB is baking in up to $6.5MM of renovation impact at the high end but that’s offset by $7.2MM worth of BI payments from Q4, so the guide really is ~27% below Street.   No annual guidance was provided, but Q1’s reset should spur full year estimate reductions

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): Capital Dependent/Profitless Growth Names Crushed, Likely Continues

After being tremendous shorts in 2022, ‘profitless growth companies’ that depend on share issuance have bounced very sharply. We’ve had TSLA, LCID, NKLA, PLUG & FSR on the short-side, and 6 weeks performance is noise…sorry. There is reason to expect ongoing weakness given restrictive monetary policy into contracting growth/credit. Markets are entering a period when regulators prosecute bad actors/companies, and attempt to sort out the mess…not a quick or easy process. Hoards of disenchanted retail investors in ‘bubble’ stocks and crypto have plausible complaints. The DOJ has gone after a few obvious cases, like Trevor Milton, but large losses imply further activity is likely throughout 2023…perhaps rhyming with 2001-2003.

We’d taken off long Auto OEM exposure EXCEPT VW/Porsche SE – an idiosyncratic exposure. Pent-up demand, inventory restocking, and higher margins to evolve into a ‘software’ and ‘EV’ narrative may emerge analogous to airline ‘capacity discipline. TSLA, LCID, FSR are just profitless growth bubbles, in our view.

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.

Revolve Group (RVLV) reported this week with revenue of $259.2mm vs the Street of $240.8mm. Revenue was +8% YY, above the “moderating from +3%” guidance the company had given at the beginning of the quarter, but slowing from Q3 +10%. Gross margin continues to decline YY, this quarter down 339bps, weakening from Q3 down 211bps. We expected this to happen, sales would come in fine but margins would be declining. And we expect that to continue while margin degradation like this is contrary to how the business model is supposed to work.

Management guided to LSD to MSD increase in revenue for the quarter with gross margins down to 49-50%. We think revenues can actually get negative and margins could be worse. The company is not growing its customer base like it used to, and noted that the sales and promotions it has been having have been adding new customers…. Not the kind of customer you want – price sensitive and looking for a deal. We get to about a $0.60 EPS in perpetuity, and at best about $10 per share. A lot of downside from the mid $20s per share today at 29.5x PE on street numbers that are too high. 

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.

EPR Properties (EPR) | Right move on guidance, but incremental uncertainty: Active Short EPR "beat" on 4Q22 results, but declined to provide initial FY23 earnings guidance due to uncertainty around Regal's BK proceedings. On the one hand we think it makes a ton of sense to hold off, as setting a range only to be wrong and having to dial back expectations would be an obvious negative for management credibility. If it were us, we would do exactly what EPR is doing. On the other hand, the reality is neglecting to provide an earnings outlook sets EPR apart from other companies who typically provide a range with 4Q results, and also increases the amount of uncertainty all else the same. Irrespective of what the stock does today, we take it as an incremental negative from a fundamental perspective. 

We continue to think the stock is "worth" $25-30/share and that rent reductions from Regal (and potentially AMC) + a Quad 4 credit event serve as potential downside catalysts. 

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.

Select Apartments - Still bearish on this corner of the Apartment/Residential sector, particularly the Sunbelt including Active Shorts Camden Property Trust (CPT) & IRT. We continue to think top-line expectations remain too high, with investors serially underestimating the potential drag from lower occupancy / higher-bad debt and related higher turnover costs. The RoC on all the key metrics remains negative for these names through at least 3Q23.

EDU

Education stocks, including New Oriental Education & Tech Group (EDU) had a strong week on a string of positive news. Chinese Vice Premier Sun Chunlan urged efforts to introduce more high-quality digital education services and products.  He said China is willing to deepen international cooperation in digital education and strengthen the alignment of education policies and standards so as to make the fruits of digital education benefit more people of all countries. 

China’s 31 provincial-level jurisdictions will recruit more than 190,000 new staff in 2023, an increase of more than 16% YoY, as stabilizing employment is a priority for authorities. This will drive demand for civil/vocational education. Kids in Beijing can finally experience normal campus life, since exiting zero COVID policy -in other words, offline education can finally be normal. There was also chatter on introducing new technology with ChatGPT and prospects of interactive learning which boosted interest in education stocks.

MLCO | LVS

Below is a thesis overview on why we added Melco Resorts & Entertainment (MLCO) and Las Vegas Sands (LVS) to Investing Ideas:

MACAU | HIGHER QUALITY VISITATION (FOR NOW)

We expect positive momentum and generally positive catalysts for the Macau market and the Macau stocks for the coming months as visitation and GGR trends continue to recover.  Visitation data for the full month of January came out yesterday so we’re updating our charts to assess trends.  GGR Per Visitor trends are ticking higher again on a government reported basis but are perhaps understated if we could control for casino specific visitation. 

The below charts reflect total visitation, not casino visitation, so there’s probably some excess non-tourist related visitation in that figure.  We suspect that post-CNY and the initial reopening, Win/Spend per visitor trends should move higher.  Either way, visitation for the January relative to Jan/Feb pre-Covid was up ~10-15%, which is a strong figure.  Higher quality visitation + overall visitation growth will continue to drive results for the SAR. 

CARR

Below is the thesis overview on Carrier Global Corp (CARR):

1. Decent Industry Structure, IRA Subsidies, Below Replacement Decade: HVAC meets our process in that the fleet is comparatively old and going through a long-term replacement cycle. HVAC penetration can increase, particularly ex-US, with regulation/price driving >GDP long-term growth. Near-term adjustments to substantially increased subsidies, new regulations, and old refrigerant phase-outs look likely to drive an acceleration in replacement demand, potentially more than offsetting new construction headwinds. We suspect that investors are underestimating the scale of the IRA tailwinds and the demand/pricing dynamic of the R22/R410A phaseouts.
2. High Energy Costs, Demographics, IAQ, Climate, Regulation Drive Demand: Beyond fleet demographics and IRA subsidies, soaring electricity costs make replacement of older, less efficient HVAC units more economic. While higher mortgage rates may depress home values/turnover, rates do not impact the service life of installed equipment, the inefficiencies of operating older units, or the repair costs of broken equipment. The climate has been hotter, likely due in part to climate change, increasing the demand for HVAC. Millennials are entering their homeownership years, facing a market that was undersupplied in the post-GFC decade. Building codes, worker safety regulations, and ventilation expectations likely add to commercial demand that faced challenges in 2020-2022.
3. Adding LII & CARR To Best Ideas, Growth Expectations Reset Higher: Supply chain challenges and rising costs likely restrained volume growth for CARR, with little to suggest cyclically inflated demand. The group tends to be a strong Quad 4 performer. The factors above, particularly the IRA, portend a potential acceleration to double-digit organic growth once new residential construction normalizes. Concerns on digitization are likely misplaced on the asset heavy HVAC equipment/OEMs side. We expect a structural reappraisal of the growth and margin prospects for the HVAC names. We’re adding CARR & LII as a Best Ideas Longs, looking for 40% relative outperformance as these subsidized, broadly thematic names become an ‘industry to own’ into 2024.