Investing Ideas Newsletter

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

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.

Luxury retailers Neiman Marcus and Saks Fifth Avenue were out this week with sales and GMV declines. Both companies were saying the luxury shopper is shifting spending habits to be more deliberate and value-focused. If higher-income consumers are getting more cautious about their spending, they aren’t going to be buying a new boat. MarineMax (HZO) will continue to see weak demand over the next few months. Still like this on the short side.

MPW

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.

From a note by REITs analyst Rob Simone on June 5:

A year ago Medical Properties Trust (MPW) pumped up levered returns/spreads in response to our initial short report, owing to a declining cost of capital - Oops!

PEB

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.

For much of the last year, pricing power in the hotel industry has been THE story. The best examples of the pricing power have been exhibited by leisure destinations, weekends and holiday periods, and most of those dynamics have held up despite slowing GDP, consumption and business confidence. However, for those tracking the weekly data, ADR trends aren’t as robust as they were a year ago at this time, at least from a 2nd derivative perspective. Since earlier this year, we had been flagging some warning signs on the pricing power front for late Spring and Summer as weekday (business travel proxies) were stagnating but weekday (leisure) were hanging in there. Leisure rates should continue to be up Y/Y through August, but the Y/Y increases are slowing. On the business travel side, our survey is flagging some improvement into June and July, but August rates seem to be moderating and could wind up lower Y/Y, or at minimum, decelerate from the peaks of the summer.   

Our latest data scans on the rate side now peek through August ’23 and for smoothing purposes, we have the data tracking from early Covid days.  Stagnation is the word that comes to mind, not because rates are going to fall, rather, it’s that they’re not seeing much overall lift from here. Absent a reacceleration, we could see risks of RevPAR declines into 2H for the Full Service segment. Note, this analysis is utilized to map the rate of change (accel/decel) in RevPAR growth and is less relied upon for point estimates. We remain broadly negative on the FS REIT space, including Pebblebrook Hotel Trust (PEB).

 

TSLA

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

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 on the road this week at two conferences. Discussing prioritizing inventory rebalancing, capturing more of the customer’s wallet share, increasing cross-shopping on Revolve and FWRD, and growing internationally. All of these sound like great things that would help strengthen and grow the business, but the market doesn’t seem to buy into it. The stock hasn’t moved much all week despite several segments of consumer squeezing higher. This is a very bearish sign given the company was out talking to investors. With discretionary spend pressured and demand slowing, sales will continue to decline and margins will be hit. We think this is still way overvalued with upwards of 40% to 50% downside risk.

STLD

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).

ABR

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

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

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.

Industrials analyst Jay Van Sciver shared insights on a favorable setup for gold in a conversation with Mark Bunting on RCTV.

In this guest appearance, Van Sciver explained what's driving gold and gold mining ETFs in Quad 4, including Newmont Corporation (NEM). Click here to watch the 20-minute video.

HSY | CLX

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.

ONON

On Holding (ONON) Short Thesis: The valuation of 32x EBITDA is banking on TAM that doesn’t exist. The brand is growing too quickly and recklessly, with inventory up 190%. With too much like-for-like product being pumped into wholesale doors, discounting is inevitable. As the wholesale full-price model breaks down, DTC will ultimately slow as well, so sales will slow, inventories will bloat, GM declines, and the management team deleverages SG&A. None of that is in the stock right now. This reminds us of a few different companies. One of them is Kors, which blew up in 2015 when it oversold into wholesale resulting in discounting and slowdown in high margin DTC sales. Also similar to Under Armour in the early days when it was billed as “the next Nike”… clearly that didn’t work out. But at least UAA was a real brand; we aren’t so sure that’s the case for ONON. ONON is more of a product. The brand awareness is exceptionally low, but the awareness of the Cloud product is 4x higher. We estimate that the main Cloud product accounts for 60-80% of sales. The company hasn’t been tiering product by distribution channel or retailer, and when this +190% inventory flows through the channel this year that will start to be a problem with discounting. We think this cracks in CY23, with 50% downside over a TAIL duration.

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.

Click here to watch the 10-minute video (GOLF discussion begins at 3:30 mark).

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.

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.