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 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

An update on Invitation Homes (INVH):

• On Tuesday evening, 3.7.23, Active Short INVH filed what is called a counter "impleader" lawsuit against four of its GCs (SMS Assist LLC, Pintar Investment LLC, BDR Inc. & Bassett Construction Inc). Consistent with prior legal filings and arguments made by the company, INVH asserted once again that (1) it is not a construction company, (2) responsibility to obtain the necessary permitting resides with those GC firms, and (3) INVH would, therefore, not liable.
• We think there are two interpretations that need to occur here, both legal & then practical from an investment standpoint.
• Legally, INVH is NOT admitting or implying "guilt" here. Rather they are effectively saying "IF there is wrongdoing, claims, damages, liability etc., THEN it is not our fault, rather LOOK OVER THERE at the GCs who handled the work and indemnified us." Said another way, "if there is something wrong, and we are not saying that there is, it is not our responsibility because we hired those guys to handle it." All fair points in a defense. The key question from a legal standpoint and where INVH may be liable, as we understand it and from talking to lawyers over the past year, is: "If there is liability, is it reasonable for the largest publicly-traded SFR landlord to knowingly or unknowingly leave its rented homes out-of-code over potentially several years?" Our conversations with GCs across the country have also alluded to reciprocal clauses in contracts where INVH and other SFR landlords do not disclaim their responsibility (in a kind of oversight role) to make sure that the work performed on their behalf was properly permitted and performed. We suppose those questions will be ironed out in the coming months. We do believe the case will stretch out far longer than we initially expected and will remain a question / overhang on the stock. 
• Practically and from an investment standpoint, we think this looks bad. We started from a place one year ago where the company was arguing vociferously that nothing was wrong and that all the claims being made by the plaintiff (and surfaced by us) were non-factual and overstated. This included, to our understanding, questioning the independence / objectivity of the Relator and claiming that all the CA municipalities had decided to not participate in the suit. We then moved on to a motion to dismiss which was denied by the court + several of the municipalities requesting updates / taking a more active role and one appointing an attorney. And now, at least optically and not legally, this gives at least the appearance of admission that something is wrong and casts blame elsewhere. We do not know how that fact pattern can be construed as a positive. 

We continue to view this case as a "tail risk" for INVH, which became a fundamental RoC short along the way, and think there is a high likelihood that similar complaints may be filed in other states outside of CA. The timing of the latter is uncertain, if at all.

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: OneWater Marine (ONEW) 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

After we saw insider sales at MarineMax (HZO) over the last couple weeks, we got a sale from a director at OneWater Marine (ONEW) this week. Perhaps the insiders are aware of what recessionary consumption levels will do to its earnings base, while the companies have levered up in advance of the slowdown with deals at peak earnings and elevated multiples.  With the collapse of SIVB and SI, we’ve entered the credit event stage of the Quad4 cycle risk.  We’re sure the first thing most consumers think when they see systemic financial risk is “im going to buy a big expensive boat”.  Sarcasm of course, we’re credit events that typical models suggest aren’t supposed to happen, we haven’t seen them since 2008, and they are the type of events that drive high income consumers to shut down discretionary spending.  Demand in this space will revert hard and fast.

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.

This past week was very eventful - on Friday S&P downgraded Medical Properties Trust's (MPW) issuer credit rating to BB from BB+ citing significant operator issues at Steward and Prospect, we think MPW AGAIN selectively disclosed details around the ongoing restructuring of Prospect that were worse than we had expected, we had ANOTHER executive departure at Steward, and the stock cratered -16.5% on the week. We continue to think the equity is worth no more than ~$3/share BEFORE and additional tenant issues, and is effectively worthless. There is still time to get off this sinking ship..

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 weekly RevPAR on a headline basis has been +4%, +13%, +20%, and +8% in the latest week of data as compared to the ’19 base.  Definitely volatile, but only the +8% growth rate is truly comparable and clean as it did not include any calendar headwinds or tailwinds unlike the prior weeks, which begs the question, is that the true run rate for growth?  Performance earlier in the year would have certainly suggested as much, but we’ll see as more data rolls in each week.  Either way, as our heatmap indicates, there’s been a clear slow of trends since 2H of last year and that remains the negative catalyst for much of the hotel complex. Pebblebrook Hotel Trust (PEB) remains an active short at Hedgeye.

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.

Check out this edition of "The Call @ Hedgeye from this week. Industrials analyst Jay Van Sciver breaks down the breaking news on Tesla (TSLA):

Tesla is cutting prices again; seeing a deterioration of the Tesla brand and margins; TSLA remains a short.

Watch this 9-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.

OTEXA data came out this week and average import cost is still up 17% for January, while CPI is up approx. 3.3% yy and apparel brands have sales to Inventory growth spreads of -57%, with retailers still at -10% (too much inventory). Although Revolve Group's (RVLV) inventory position improved from last quarter, it is still up 23% yy. These industry metrics don’t look good, there is still an inventory problem in the supply chain and a cost problem as demand is likely to get worse with the consumer wallet becoming increasingly stressed. There is no reason why RVLV would be an exception to the weakening macro environment. In the last print we see gross margins are sequentially worse and revenue growth is slowing. We expect this trend to continue for the rest of the year, and RVLV should get a revaluation. It shouldn’t be trading at 30x PE on elevated (wrong) consensus expectations.

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.

Quick notes from EPR Properties (EPR) 4Q 2022 Earnings:

• 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.

Quick notes on Camden Property Trust (CPT):

Page 8 of Active Short CPT's deck show three key observations for February leasing spreads:

1. New leases remain below renewal spreads
2. Signed rates are trending below those going effective, and 
3. Nearly every forward-looking top-line metric continues to decelerate. 

Page 9 shows the trend on a quarterly basis. While absolute levels continue to look pretty good, the RoC does not and that is what tends to drive stock performance. 

EDU

Long Thesis: New Oriental Education & Tech Group (EDU)... EDU's new non-academic offerings also offer some long-term promise.  The overseas segment has delivered very robust results.  Good expense control, as marketing and G&A expenses have come in less than expected.   Pace of share repurchases in million of shares similar to last quarter.  In the most recent quarter, gross margins were lighter than China Felix Wang modeled (worth paying attention to going forward) BOTTOM LINE: At FY 2024 1.5x EV/Sales and 13x 2024 P/E, EDU looks cheap but it needs to continue to show improving growth.

TVB (511.HK) disruption overdone - new livestreaming companies e.g. 1797.HK, New Oriental Education & Tech Group (EDU) took a beating this past week given the surge in a small HK broadcasting company called TVB (511.HK).  TVB generated 23.5m RMB in sales in the first six hours of its first live-streaming show on Taobao Live (BABA).  TVB is known for HK drama actors and earlier this month announced that its stars would be in live-streaming rooms across at least 48 shows this year.  Many retail traders sold 1797.HK to buy TVB (511.HK), propelling the stock up by ~200% in only 10 days, as some speculated this could be the next Oriental Selection.  I'm skeptical and would buy 1797.HK/EDU on weakness.

MLCO | LVS

Long Thesis: Our Macro team sees China accelerating as the lone #Quad1 economy in a sea of #Quad4 red. Meanwhile, our Gaming, Lodging & Leisure team has been eyeing accelerating growth in Macau. "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," the GLL team wrote recently. And there's the long thesis on Melco Resorts & Entertainment (MLCO) and Las Vegas Sands (LVS).

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.  GGR Per Visitor trends have been strong in post-CNY, and the initial reopening & Win/Spend per visitor trends should continue to move higher.  Higher quality visitation + overall visitation growth will continue to drive results for the SAR.  With many areas across the consumer sector facing slowing growth and steep comps, the Macau stocks remain in a unique situation as the reopening continues to fuel additional growth. Las Vegas Sands (LVS) and Melco Resorts & Entertainment (MLCO) both remain on our long bias list.

CARR

Long Thesis: Supply chain challenges and rising costs likely restrained volume growth for Carrier Global Corp (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.

Quick notes on our Carrier Global Corp (CARR) long idea:

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 Best Idea Longs, looking for 40% relative outperformance as the subsidized, broadly thematic names become an ‘industry to own’ into 2024.

Macro Backdrop favors CARR, LII outperformance

• The HE macro team forecasts recessionary macro conditions in 1H23; introduction of new subsidies for LII, CARR is a good work around on the long side.
• Disinflation mostly a tailwind for HVAC
• The correlation to copper is notable, with significant pressure to COGS and supply chains
• HVAC names are typically good Quad 4 performers

Watch this 11-minute video with Jay Van Sciver.