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Short: HZO, MPW, PEB, TSLA, RVLV, STLD, ABR, DE, KNX, DLR, ONON, GOLF Long: NEM, HSY, CLX |
Below are updates on our 15 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
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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. |
MarineMax (HZO) announced a new acquisition this week. It is buying C&C Boat Works but the deal terms were not disclosed. C&C is in Minnesota, with 1,000 feet of lakeshore. It is a full-service boat dealer in the region on Whitefish Chain of lakes. The deal is a continuation of the HZO rollup strategy, one that we think is creating a lot of risk to equity value. The company already has $938 million in debt, and now it's using some cash to buy yet another dealer without giving the multiple or economics. We think boat demand will surprise to the downside, and earnings at HZO will remain under pressure, taking the stock lower given the financial leverage on the model.
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. |
GenesisCare, a tenant of Medical Properties Trust (MPW), defaulted and went into bankruptcy; MPW now has 2 tenants in the span of 6 months that have gone into bankruptcy; this is remarkable; REITs analyst Rob Simone said he doesn’t have an ounce of trust in the management team. MPW remains a short.
Simone discussed MPW on the June 1 edition of The Call @ Hedgeye. Click here to watch the 7-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. |
Business travel has been a topic of discussion more frequently in meetings with clients these days, perhaps on the back of some stability in the STR data and positive management commentary following earnings. Of late, some of the analyzable weekly data showed a bit of improvement but finalized monthlies have been less convincing. Either way, we’re not ready to change our tune on white collar transient travel and we don’t think investors should either. On a trending basis, business market RevPAR growth on Monday-Wednesday is off the lows, and on the back of some favorable calendar gyrations has moved above the LTM trend. It’s important to flag that this past week and the prior week were a lot softer for these segments so the trend should continue to normalize back to the HSD – LDD decline range.
Group demand has been a nice offset to the softer transient business, but the below chart reflects markets most that are known for business travel (mostly urban centers), and in those markets, group demand has more challenges. We don’t see much improvement from here given the weakening macro (Hedgeye predicts more softness through early summer), but structural issues didn’t just go away either. We’d be fading any meaningful strength in most hotel stocks – especially our top shorts that are most exposed to these soft trends, which includes 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. |
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) saw new lows this week before a little bounce into week end. We occasionally get questions around downside risk for this name. For our earnings power estimates over the next few years at RVLV we see around 50 to 60 cents in EPS. This could easily get down to a low to mid-teens multiple, which would suggest downside to the high single digits. And even then, the short might not be done depending on where the business is tracking.
This week, Costco reported monthly sales for May and non-food was down low single digits, same as April, and this Q flagged the same outperformers (Auto, Beauty, Health) with one addition: Apparel. With warm weather hitting and the feel of summer upon us, consumers are buying some new apparel, though seeing it happen at Costco isn’t really bullish, as Costco is a clearance channel for other brands. A pickup in apparel demand here suggests the channel is still putting quality product into discount channels, risking demand at full price. The shopper overlap for Costco apparel and Revolve is low, but with the issues facing the apparel space around excess inventory and slowing full price demand will definitely have an impact on RVLV’s P&L.
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). |
Steel rebar prices in China hit their lowest in three years this week, underscoring weakness in the property market. The spot price of HRB400 20mm steel rebar – Mysteel showed. That's the lowest since April 2020, when the start of the COVID-19 pandemic in China had curbed most industrial activity.
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. |
We heard some feedback from subscribers who attended meetings with the Arbor Realty Trust (ABR) management team on June 1. Here are a few takeaways:
- At least one sub came away from the meetings with the view that "what management is saying makes no sense, and there is no way to make heads or tails of what they are doing / claiming. Something is off..."
- Management intimated that they may have to convert ~15% of their loan book to preferred or mezzanine stakes, aka this is the roughly the % of which ABR's loan book is "underwater" relative to current asset values as loans mature.
- At the same time ABR management claimed that they would be "repaid" roughly ~$250 million per month, or ~$750 million per quarter, this year, with many of the maturing loans channeled into the GSE permanent financing conduit pipeline. However, given Fannie and Freddie's strict leverage tests and required minimum ~1.25x DSCR coverage, it is not at all clear how this can be done while making ABR whole.
This makes no sense, and it is not clear at all to us how ABR could avoid taking book impairments/higher credit loss provisions if this scenario plays out. We continue to view a high probability of significant downside in the stock and/or a dividend reduction, stemming solely from the asset side of the balance sheet generating impairments to ABR's book value. The funding side of the balance sheet is what could really accelerate things to the downside, but that is much more difficult to handicap.
The feedback we heard is largely consistent with our view of the condition, underwriting standards and potential losses across ABR's loan book.
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. |
Backlog orders are substantially overpriced; Caterpillar Inc. and Deere & Company (DE) are reporting highest margins ever; not a cyclical set up in which alpha is made. "This is true cyclical history right now," says Van Sciver.
Van Sciver discussed DE in the June 2 edition of The Call @ Hedgeye. Click here to watch the 18-minute video.
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.
KNX
Knight-Swift Transportation (KNX) was added to the Investing Ideas short list on May 30. We'll have more on KNX in the coming weeks. Here are Coaching Notes from Keith McCullough on May 31, when he covered his KNX short:
I guess the Macro Tourists (who were buying Truckers and Airline Stocks on Down Oil yesterday), just got schooled by the pros. The Global Cycle (China, Europe and USA) is slowing at a faster rate right now, and Industrials/Cyclicals are pricing that reality.
DLR
Digital Realty Trust (DLR) was added to the Investing Ideas short list on May 30. Simone will discuss DLR in-depth during a Black Book webcast on June 15. Here's what he said about the company during the May 30 edition of The Call @ Hedgeye:
AI narrative REIT; bought some big platforms; did some other deals at low-cap rates; model requires them to invest a ton of capital to maintain returns; has become a narrative stock; DLR remains a short.
Click here to watch the 4-minute video.
ONON
On Holding (ONON) was added to the Investing Ideas short list on May 30. We'll have more about ONON in the coming weeks. In a Best Ideas Roundup in April, the Retail team said the shoe retailer is growing too quickly, and is riding the strength of one product, rather than building a brand as a whole.
Click here to watch the 15-minute video.
GOLF
Acushnet Holdings Corp (GOLF) was added to the Investing Ideas short list on June 1. Retail analyst Jeremy McLean discussed GOLF in the June 2 edition of The Call @ Hedgeye:
We think we’ll see a tempering of how core golfers are spending on new equipment; build up of used equipment; had some insider sales; CFO is planning to leave next year; GOLF remains a short.
