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Short: INVH, HZO, MPW, PEB, TSLA, RVLV, EPR, ONEW, CPT Long: MLCO, LVS, CARR |
Below are updates on our 12 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
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Short Thesis Overview:
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Virtually every excuse the company gave last year to explain away the qui tam lawsuit has been proven incorrect. The case is moving forward. There is c-suite turnover and now the SEC requested documentation on Invitation Homes (INVH) permitting policies as per the 10-K. We see “tail risk” from INVH’s securitizations, which expose INVH to added liability IF there is fraud.
HZO | ONEW
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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 |
Over the past few weeks, we have seen insider sales at MarineMax (HZO) and OneWater Marine (ONEW), but this week there was an insider buy at ONEW by the COO. The purchase was on the day the stock traded at its nearly 2.5-year low. While good for him that he bought low, we don’t really see any upside here. Especially with continued uncertainty from the banking and financial system as some large European banks look to be in trouble. Consumers will be reducing their big-ticket discretionary spending. We expect demand comps for both HZO and ONEW to be negative Y/Y. Still plenty of downside from where these stocks are trading today as earnings continue to revert low.
MPW
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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) remains one of our favorite short names, and the math continues to dictate the stock is worth no more than about $3 per share under a best-case scenario assuming no further tenant issues. Even after the cratering of the equity, the stock price currently implies a ~7% net effective cap rate, while several of the series of unsecured bonds are yielding north of ~12%. The math makes no sense. The next visible catalyst is 1Q22 results, and we continue to be on watch for a dividend cut.
PEB
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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. |
The trend in US hotel RevPAR might appear to be improving but the devil is truly in the details. We’re just a few weeks away from transitioning more exclusively to Y/Y analysis, but for now, we’re looking at the vs. 2019 comp, which has been more calendar noise of late. RevPAR growth on clean, uninterrupted weeks in the YTD has come in around the HSD growth mark, but for this past week, and holiday weeks, growth has surged. From our vantage, there’s little improvement in the areas that matter for the hotel industry – business RevPAR proxies generally remain sluggish, and leisure might not be enough to support the trend later this year when comps get really tough. No changes to our negative views on the hotel REIT complex. Pebblebrook Hotel Trust (PEB) remains a Best Idea Short.
TSLA
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Short Thesis Overview: We will get 1Q23 Deliveries and Production around April 2 for Tesla (TSLA). There is some daily delivery data out there for specific countries, but it's so noisy that it's hard to really derive a coherent analysis of it. 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. |
RVLV
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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 first of three product drops from the JLO capsule collection arrived last week. This collection is a Revolve exclusive. Price range of the shoes are $145-275. While the partnership may bring more customers to Revolve, it adds more inventory, and even selling a whole lot of shoes won’t fix the real problem – shifting from the original influencer-led model to becoming like an online department store. The JLO brand was a Kohl’s exclusive for a long time, not exactly premium in terms of brand distribution. The product can also be found at DSW. Revolve Group (RVLV) stock consistently trades around 30x PE on too-high Street estimates. Final sale items are hitting new highs as apparel inventory remains elevated throughout the industry. Growth has been slowing and margins have been weakening over the past couple of quarters. We expect that to continue and get incrementally worse. There is still downside here, and we expect it to play out over the next few quarters.
EPR
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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): 100% levered to consumer discretionary via its tenant exposure (AMC, Regal, Six Flags, etc.), we see downside to the mid-$20/share range as credit continues to worsen in a deepening Quad 4. The Regal plan to exit BK was pushed to end of June, and we await the results of AMC's shareholder vote on APE unit conversions.
CPT
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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. |
One of our two preferred apartment shorts, Camden Property Trust (CPT) is undergoing a rate of change deceleration typical to this part of the cycle and driven by both a decelerating top line and accelerating OpEx growth on a lag. We think the company has lost some of its reputation as a best-in-class capital allocator after paying a full price last year for the ERS JV with a fair amount of deferred CapEx. We cannot recommend going long until we lap more of the most difficult base effects.
MLCO | LVS
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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). |
Positive momentum continues to build in the SAR as confirmed by recent visitation figures in Macau. The Macau government is now projecting that 60,000 daily visitors to Macau would be the next step function higher, which would still fall about 40% to 50% of pre-Covid levels, but an acceleration from current levels. Layer on the elevated win per visitor trends, which remain up LDD, and the GGR path should continue to climb from current levels. The market has a LONG way left to go but continues to trend in the right direction. Higher-quality visitation plus overall visitation growth will continue to drive results for Macau. Melco Resorts & Entertainment (MLCO) and Las Vegas Sands (LVS) remain on our Long Bias list.
CARR
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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. |
Industry HVAC shipment data comes out the second Friday of every month, so we will have more info then on Carrier Global Corp (CARR).
Keep in mind, Carrier is a strong Quad 4 performer and should benefit from supply chain challenges easing with inputs like copper down about15% Y/Y. So they should see unit costs go down as volumes begin to receive a tailwind from IRA tax credits throughout 2023 as residential construction spending normalizes.
