Investing Ideas Newsletter

Short: HZO, MPW, PEB, TSLA, RVLV, EPR, ONEW, CPT, STLD, ABR, DE

Long: MLCO, LVS, NEM

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 straight-lined 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 Overview: 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

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.

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 toward the mean in the cards on valuation + estimate reductions, which makes for a challenging combination over the NTM.

Short Thesis Overview: 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.

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.

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.

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.

Short Thesis: Base metals have been deeply cyclical for decades and, most likely, centuries. We think all of the bullish catalysts will fail, once again, in the face of "the cycle." Construction and consumption drive demand, with higher rates and tighter credit an inevitable dampener. Credit tightening, more expensive borrowing, and inflationary/supply pressures limit the upside in total construction spending. It is difficult to build a scenario where the infrastructure package and the war in Ukraine support steel markets. These factors have instead emboldened investors to pay absurd valuations for among the most deeply cyclical companies (albeit often well-run) in a largely no growth industry at all-time highs. We expect greater than 50% downside in the shares of Steel Dynamics (STLD).

Short Thesis: Given that ~20% of ABR's equity capital buffer is preferred stock, it has a HUGE impact on the residual value available to common when using a P/BV framework; assuming our initial estimate of ~$1.4 billion of potential impairments from bridge loan restructurings in present value terms, combined with a 1x P/BV multiple = an equity value of ~$5/share today, or more than ~50% downside from here before dividends and borrowing costs.

Short Thesis: Low rates helped fuel profits at Deere & Company (DE) and other agriculture equipment suppliers. Ethanol-blending mandates, falling/negative real rates and investor interest led to a NASDAQ-like bubble in farmland values. Farmers have been able to tap that value to borrow and supplement spending. Farming is as mature and sub-GDP growth as Industrials get. Consensus expects higher EPS for DE, which we believe is a very unlikely scenario in #Quad4 for a company already trading at peak. We see DE EPS missing substantially over the next several quarters.

Melco Resorts & Entertainment (MLCO) and Las Vegas Sands (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. 

Long Thesis: In addition to GLD and Physical Gold, we remain bullish on Gold Miners (GDX) and Newmont Corporation (NEM), the world's largest gold mining company.  

While the broader commodities complex is a notable underperformer amid Quad 4 environments, tend to be the exception. Gold’s flight-to-safety appeal is most pronounced in Quad 4, an environment that historically corresponds to declining real rates.