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Short: HZO, MPW, PEB, TSLA, RVLV, ONEW, STLD, ABR, DE Long: LVS, NEM, HSY, CLX |
Below are updates on our 13 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 |
April boat registrations were down 15.4%. Demand degradation will continue and the industry will continue to feel pressure. Auto NCOs and delinquencies are rising and some are already above pre-pandemic levels. As the consumer tightens and struggles with necessary car payments, they most likely aren’t going to be going out and buying recreational boats. Now fair enough, the consumers who are struggling with car payments probably weren’t the ones who would have been buying boats in the first place, but it's still a read on the consumer overall worsening. Meanwhile, an Old Wall research firm was out last week noting that the industry will see growth this year. The market isn’t considering that sales could and probably will decline this year. MarineMax (HZO) and OneWater Marine (ONEW) should both get about a 5x PE multiple on TAIL earnings of about $3.00 and $3.50, respectively, which means there’s about 40-50% downside from where the stocks are currently trading.
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) released incremental details after the close Tuesday on the Prospect Medical restructuring; California assets are going to start paying rent again; making a bet that they are going to recover their investments through the sale of Prospect’s managed care business; term of this process is 3 years; MPW claimed this would be solved quicker than this.
REITS analyst Rob Simone discussed MPW on the May 24 edition of The Call @ Hedgeye. Click here to watch the 10-minute video.
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. |
In the latest data update from Kastle’s Back to Work Barometer through the second week of May, utilization trends have barely budged over the past month or so. In the below chart, we’re looking at urban market hotel RevPAR on weekdays (Mon-Wed) to see how the correlation between office utilization, and this important segment continues to show core weakness.
As seen in the black line below, while the start of the year did experience an uptick in office utilization, those trends have been volatile but are essentially FLAT over the past few months. Meanwhile on the RevPAR side, and contrary to management narratives, there’s been little improvement in this core corporate transient proxy. We reiterate our core hotel REIT shorts, including Pebblebrook Hotel Trust (PEB).
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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. |
It's a difficult road for Tesla (TSLA) longs here, especially with competition in the EV space heating up enormously. At its investor day this week, Ford announced a supply agreement with lithium supplier Albemarle, and General Motors announced plans for an electric Escalade.
Industrials analyst Jay Van Sciver discussed Tesla and the EV industry on the May 23 edition of The Call @ Hedgeye. Click here to watch the 6-minute video.
Later in the week, a Tesla data leak included personal information and safety data, including 3,000+ entries from issues with autopilot. This could lead to potential issues and fines for noncompliance with GDPR privacy rules. Tesla sued to prevent the publication of their data.
Van Sciver talked about the lead on the May 26 edition of The Call. Click here to watch the 7-minute video.
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) stock is closing the week at the lowest price in over a year with a multiple of 22x PE nearing one-year lows. The market is slowing and consumers continue to feel more financially stressed. And this company continues to discount and promo to make sales and move through inventory. Slowing demand and sales and margin weakening will continue for the next few quarters and that’s not in expectations. We still see downside here; we think this stock should trade at a high-teens to 20x multiple to get to about $10 per share.
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 MP Materials (MP) as an attractive long vs. mature metals alternatives, like Steel producers Steel Dynamics (STLD) and NUE, where a domestic production narrative has led to significant capacity increases.
- NUE, STLD perform poorly in Quad 4 (not shockingly)
- These are more cyclically “normal” metals & mining names
- As inflation rolls over, correlation a “factor exposure”
- Steel names are among the most straightforward correlations to CPI, which is likely to slow markedly; we are literally long CARR, LII and short CF, NUE, STLD on best ideas.
- Betting on inflation to re-accelerate here seems low probability.
Jay Van Sciver recorded a Best Ideas Roundup on May 22, MP Back To Best Ideas, Easy Pair vs. Mature Metals (STLD, X, NUE). Click here to view the slides and presentation.
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. |
Arbor Realty Trust (ABR) remains a really interesting short amidst the ongoing “credit event” that is unfolding. We think a majority of the loan book rolls over the next two quarters, necessitating either book losses via impairments or “economic” losses via increasing the size of the balance sheet to paper over losses. Extending mezz and preferred equity slices to sponsors is damaging to the multiple. The next 9 months represent the period of maximum risk.
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. |
LVS
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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. |
As of today, we have Las Vegas Sands (LVS), WYNN and MLCO sitting on our Long Bias list, and it’s time for a deeper analysis. It’s been a while since we presented on Macau in our typical deep dive formats so we’re looking forward to our GLL Black Book at 2 p.m. ET June 1, which will unpack a variety of key topics and questions facing the industry.
In our upcoming presentation we’ll address, among many other things, the near- and long-term runways of growth. The analysis will be even-handed as we’ll also address the risks and hurdles, both short- and long-term. Covid brought about a lot of changes in the industry and as a result, market shares have shifted. What if these share shifts are permanent? We’ll assess potential winners and losers.
Click here for the link to this presentation.
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. |
HSY | CLX
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The Hershey Company (HSY) and Clorox (CLX) Long Thesis: Consumer Staples historically outperform in Quad 4. As Keith McCullough said in his May 23 Coaching Notes, CLX and HSY aren't sexy like YOLO weekly TSLA Call Options, but they are part of playing our game, our way. |
In its 1Q earnings call last month, Hershey (HSY) reported EPS of $2.96 vs. $2.67. Revenue was in line (excluding a pull forward) with organic growth of 12.2%, accelerating from 10.7% sequentially. The total company price increased by 8.9% while volume/mix increased by 3.3% compared to Q1 price increase of 8.5% and volume/mix grew by 2.2%. Earlier summer shipments added 1.5% points of growth to Q1. Price elasticity in Q1 was similar to the 2H.
Adjusted gross margins expanded 80bps after excluding derivative mark-to-market losses, improving sequentially from 20bps of expansion. Gross margins are now expected to expand 70-80bps for the year despite sugar and coca prices continuing to go higher due to lower freight costs. Advertising expenses grew by 9%. Operating margins expanded 120bps, improving from 40bps of expansion in Q4.
Management raised EPS growth guidance from 9-11% to 11%. Revenue growth guidance was raised from 6-8% to 8%. Management only went to the high end of the range after Q1 due to Q2 having the most difficult comparisons combined with the earlier shipments. Our estimates continue to be above consensus expectations. Management appears conservative on gross margins in the 2H based on current trends. Hershey stands out in CPG in 2023 with volume growth visibility as well as new price increases still being added.
