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Short: HZO, MPW, PEB, TSLA, RVLV, ONEW, STLD, ABR, DE Long: MLCO, LVS, NEM |
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.
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 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 |
Big insider sale at OneWater Marine (ONEW) this week. A director sold 60,353 shares at a little over $28 per share. Doesn’t look good when an insider sells that much share at once. On the macro front, the Hedgeye Macro team had its mid-quarter update this week. The presentation was very bearish. The consumer is an increasingly worse position as they have levered up at high interest rates. Delinquencies are spiking and credit standards are tightening. Not to mention the labor market is going to turn soon with corporate profits going negative and layoffs will accelerate. This coupled with household expectations of financial conditions at new lows, will pressure discretionary consumption. Between the consumer’s discretionary bucket of funds dwindling and credit standards tightening, the demand and ability to purchase pleasure boats will continue to decline throughout the year. Y/Y revenues will be more negative than the companies and the market are guiding to or expecting. We remain bearish both names here.
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. |
Guggenheim Securities was hired by Steward to refinance its debt. Steward is the largest hospital operator in the U.S. This is called a financial restructuring. Medical Properties Trust (MPW) remains a short.
REITS analyst Rob Simone discussed MPW on the April 15 edition of The Call @ Hedgeye. Click here to watch the 3-minute video.
Simone presented a cash flow forecast for MPW last week, and the situation looks grim. Click here to see Simone's slide deck.
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 toward the mean in the cards on valuation + estimate reductions, which makes for a challenging combination over the NTM. |
Hotels vs. online travel agencies: We’ve contrasted hotel owners with OTAs; we are more positive on the OTAs. Outbound travel vs. inbound travel benefits OTAs. Outbound travel has ticked up; this is a net positive for OTAs and a negative for hotels. Pebblebrook Hotel Trust (PEB) remains a short.
Gaming, Lodging & Leisure analyst Todd Jordan discussed Hotel REITS, including PEB, on the May 16 edition of The Call @ Hedgeye. Click here to watch the 5-minute video.
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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. |
From Keith McCullough's Coaching Notes on May 19:
There's #MOAB, then there's outright madness...
1. There were more than 369K Tesla (TSLA) $180 Call Options, leading the Most Actives Board this morning (close to the SPY highs) ... TSLA weeklies are usually in the top 10-20, but never #1!
2. What is the catalyst to own this #Quad4 Short after these manipulated and chased options expire in T-minus 4-hours?
3. Is it AI? LOL
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. |
Revolve Group (RVLV) was at a conference this week. The company talked about inventory rebalancing near term. It also noted how it expects positive customer growth, but potentially slowing in late 2023 as inventory rebalances. The punchline there is that new customers are only coming in because of the massive promos the company has to run to get inventory in line. Meanwhile, we are actually seeing a spike the past few weeks in items on sale and final sale on the site. We still expect sales to be down and demand declining with spend and markdown pressure. What’s gonna happen when core customers have to make federal student loan payments again come mid-summer? The stock is finally starting to crack, yet this is still trading at 23x consensus numbers that are falling and remain too high. We would say you are reaching a fair price until this is in the low double digits, still 30%+ downside risk.
STLD
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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). |
We see electrification as driving a long upcycle in demand for lithium and rare earths. Recent spot price declines have shaken investor confidence in the long-term prospects for these producers. We think that is an opportunity. Many of the same forces that drove steel prices up from early 2020 to early 2022 are the same as those that underpinned the move in NdPr and LiOH prices. That those are now reversing should not come as a surprise as many inflationary pressures and frictions are coming out of these markets.
We expect shares of steel companies to underperform for the duration of Quad 4, as excess capacity and slowing demand undermine reshoring and infrastructure narratives. We’ll update our short view on the steel/industrial metals names in a Best Ideas Roundup video for Macro Pro subscribers at 2 p.m. ET on May 22. Click here for more information.
ABR
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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. |
DE
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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. |
Deere & Company (DE) reported earnings May 19 and headlines are very positive. EPS and revenue beat, increased pricing. We think there is a lot under the hood. They have a charge for their finance accounting. This was a stock that was weak into numbers. We see a notable deceleration in pricing, and margins are going to peak out. This is no longer a supply-constrained market. The print was not as good as the headlines suggest. DE remains a short.
Industrials analyst Jay Van Sciver discussed DE in the May 19 edition of The Call @ Hedgeye. Click here to watch the 5-minute video.
MLCO | LVS
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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. |
There’s been some choppy trading for the Macau stocks over the last week or so, perhaps in response to some of the less favorable macro readthroughs, but data from Macau over the past week should instill some confidence for investors. Final visitation for the May Day holiday period improved to -38% vs the ’19 base, up substantially Y/Y and also up vs Chinese New Year. For the CNY comparison, this past week in Macau saw peak daily visitor volumes top out at 134K, which dwarfed the CNY peak of 90K for the biggest day of the holiday. On an average daily basis, Golden Week did 98K vs CNY at 65K. There’s still room for plenty of improvement and as more hotel supply comes back online, the government should continue to let more visitors in, so we’d expect the positive trajectory to continue.
On the GGR side, word out of Macau suggests trends have been solid for the first week of the month, building on a better than expected April. To us, the trade looks higher for Macau stocks, led by continued sequential improvement on the GGR and visitation front. MGM remains our top Macau-exposed idea (due to the Vegas exposure mostly), but we hold WYNN, Melco Resorts & Entertainment (MLCO) and Las Vegas Sands (LVS) on our Long Bias list as well.
NEM
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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. |
In the 2Q 2023 Macro Themes Mid-Quarter Update, Keith McCullough spoke about large scale M&A in the gold miners space being a bullish indicator.
Newmont Corporation (NEM), the largest gold miner, bought Newcrest, the 7th-largest. Financials analyst Josh Steiner discussed the acquisition in the May 15 edition of The Call @ Hedgeye. Click here to watch the 4-minute video.
