Investing Ideas Newsletter

Short: HZO, MPW, PEB, TSLA, RVLV, STLD, DE, KNX, DLR, ULTA, SBUX, ODFL, REXR, CF Long: NEM, DKNG, DDOG, MTCH, BCO, ATVI, CCL, COCO, LFST

Below are updates on our 23 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.

With this week’s labor number coming in below expectations, we’re highlighting what our Macro team put out a couple months ago in a 2Q Mid-Quarter Update. With Y/Y Continuing Claims reaching higher highs, it has never been this high without a subsequent recession. The slide below shows the data to back this up. With Continuing Claims up and the imminent recession, demand for pleasure boats will surely fall as consumers watch and tighten their spending. MarineMax (HZO) has revenue risk for the remainder of the year due to the consumer slowdown coming down the pike.

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.

A summary of REITs analyst Rob Simone's July 5 note on Medical Properties Trust (MPW):

Alecto bankruptcy illuminates another case of "more of the same" with Medical Properties Trust (MPW)

• Two weeks ago, on 6.22.23 Alecto Health Services filed a voluntary position for Chapter 11 bankruptcy protection. A few initial observations:
• As of 4.27.23, Alecto Health Services was listed as the operator of Wilson N. Jones Regional Medical Center in Sherman, TX, on the company's property list Excel sheet.
  
• As of 7.4.23, Alecto has been removed from the company's website as a listed manager in the dropdown menu. Alecto was listed in the dropdown menu two weeks ago, we checked upon the BK filing. We attempted to use the Wayback Machine to verify this, but the dropdown menus are not available on the Wayback. It lists the last website update as 6.17.23. 
• As of 7.4.23, American Healthcare Systems (AHS) is listed as the new operator of Wilson Jones. 
• These observations are really a sideshow, as much more interesting info came to light via the filings. 

• In summary:
• In the case of M/C Healthcare/McLeod, MPW management reluctantly told the Street that no significant rent reductions would occur in the re-tenanting of the properties at lease expiration.
• Not only was a >75% rent reduction taken, but one of the two assets sits vacant and MPW never updated investors on the outcome.
• MPW did not disclose that it had lent ~$5.2 million in exchange for a promissory note to M/C Healthcare, which acquired the OpCos of the two hospitals from CYH for ~$4 million and became MPW's new tenant. Once again, as we have seen over and over again, MPW invested not just in the real estate but also capitalized the operator. i.e. similar to Steward, Ernest, Capella, Watsonville, Priory, Prospect, Shasta, etc., MPW invested in the entire system, which in-turn owed MPW back contractual rent. The difference between the purchase price for the OpCo and the loan amount equaled one year of rent owed back to MPW.  
• Our contention from the beginning is that MPW is not actually a REIT, rather a hybrid that should be valued closer to a hospital system multiple.
• Around the time of these transactions, MPW executed follow-on stock sales, and the CEO sold stock in the open market.
• This case also serves as a rare view into what happens upon lease expiration when the tenant does not re-acquire the properties back from MPW.  

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.

Hotels – Corporate Air Bookings – Trend Lower 

Another soft week of RevPAR data was published last week, and at the same time, there’s been little improvement on one of the more important drivers of the hotel industry: corporate transient related demand. We’d like to reiterate our cautiousness on the hotel sector and the corporate customer. Corporate hotel bookings aren’t necessarily down as much as the chart below (in fact, we know they’re not), but directionally, the chart provides some perspective on the broader trajectory of the U.S. corporate customer.

Our weekly scan of corporate airline ticket sales for this week shows a week-to-week pullback. As of the latest data, bookings are still trending down around ~27% vs. ’19 levels.  On a Y/Y basis, sales volumes are now flattish and we’d note that the trend really hasn’t shown much of a pickup over the last 6-9 months. Our bearish bias is unchanged on the white-collar corporate travel exposed hotel names like Pebblebrook Hotel Trust (PEB), XHR, PK and MAR.

TSLA

Short Thesis Overview: Tesla (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.

We got production and delivery numbers for Tesla (TSLA) last weekend. Delivery numbers came in ahead than expectations, but we don’t think this matters a whole lot due to large price cuts. Tesla is overproduced, and saw a meaningful increase in inventory; negative margin impact from overproduction. Tesla remains a short.

Industrials analyst Jay Van Sciver discussed TSLA on the July 3 edition of The Call @ Hedgeye. Click here to watch the 9-minute video. 

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.

Over the past few weeks, Revolve Group (RVLV) has been running big promotions, with items up to 65% off and also offering additional discounts on top of that. Despite sale items trending down over the past few months, it still seems like the company is over- and incorrectly-inventoried as it uses high levels of discounting to clear the merchandise. While this may drive some additional sales, it won’t produce a high-value, returning customer, and it will pressure Q2 margins. There will be growth and margin pressure here for the next few quarters, which will take a hit to earnings and the stock price, especially at 23x PE. We still would be short it.

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).

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.

DE Posting Highest Margins Ever – Bearish for Deep Cyclicals

The trough-to-peak in this cycle for machinery names is exceptional. Supply chain difficulties, a narrowing of the competitive geography from high shipping costs, and robust economic stimulus drove demand and mismatched pricing gains for equipment makers. Soaring used equipment prices help finance subsidiaries amid low rates and easy credit, a trend that may now reverse. As the pricing and volume of incoming orders deteriorate going forward relative to the orders accumulated during supply constraints, the stocks may look "cheap" on trailing metrics (i.e., a value trap). That ag equipment stands in the way of one of the most powerful investing narratives – the penetration of electric vehicles – is not a great setup for investors to plow in if the shares underperform and revisions turn negative.

KNX | ODFL

Short Thesis: While earnings at truckload carriers in 2H22 declined more than for the average Industrial sector constituent, the share prices remained firm and often near all-time highs. Transportation data have deteriorated into 2023; there is little cause for optimism either in Macro or micro trends. Rails are the most out-of-favor group in the sector on some definitions; we expect them to be among the best performing industrial transports, we chose to fade hysteria from non-chemists who do not understand railroad operation and regulation. That matters to KNX since a 10% increase in Rail speeds takes ~5pts of margin from KNX.

On Wednesday, Knight-Swift Transportation (KNX) noted persistently soft demand, which is causing volumes and pricing to be under greater pressure than anticipated; now saying their guidance will be below their initial guidance. There's a weakness in truckload markets, and we're seeing a contraction in the Logistics Managers’ Index. KNX remains a short.

Industrials analyst Jay Van Sciver discussed KNX in the July 6 edition of The Call. Click here to watch the 5-minute video.

DLR

Short Thesis: We found an "AI REIT" (within the Data Center subcategory) to fade, and it remains a fundamental short. Our view, and it's less a view and more guaranteed by simple math, is that (1) leverage will continue to increase secularly through at least mid-2024 amidst a large funding need and mismatch in cash NOI recognition on a lag, (2) a follow-on equity offering may be needed, and (3) the economics of the DC business do not warrant DLR's multiple (we will go into that later).

Pricing of joint venture transaction related to Digital Realty Trust (DLR). Trying to sell a piece of their Chicago portfolio; this would be dilutive to cash flow. They're in a position where they need capital; taking proceeds and deploying them for new development activity. DLR remains a short.

Simone discussed DLR in the July 7 edition of The Call. Click here to watch the 4-minute video.

ULTA

ULTA’s Summer beauty sale started June 25 and runs through July 15, front running Amazon Prime Day. The sale has tons of popular and higher-ticket items with various levels of discounts. Last year, Ulta Beauty (ULTA) ran a similar sale, but it was a week shorter and ended before Prime Day. This year, the last week of the sale overlaps with Prime Day sales. ULTA has not been shy about saying it will do what it takes to compete in the market and maintain and grow market share, including upping discounts and promotions. A good move on ULTA's part to run this sale prior to Prime Day to attract purchases before consumers have already been tapped by Prime deals. Ultimately, even with sales growth, margins are due to come down. They have increased to unsustainable levels, especially with an increase in promotional levels. In the chart below, you can see ULTA got about 200bps in margins from "other Cost of Sales," otherwise known as elevated prices relative to costs of goods due to a rapidly ramping demand environment in 2021. That abnormal lift presents margin risk going forward.

SBUX

Workers at dozens of U.S. Starbucks (SBUX) locations held strikes June 25 to express their outrage over the company's policy of not being allowed to wear or display Pride month decor. The Workers United Union has also organized the strike due to claims that Starbucks is acting slowly to negotiate labor contracts.

For its part, SBUX said it had not revised its store decorations guidelines, including hanging flags and decorations.

"There has been no change to any policy on this matter, and we continue to encourage our store leaders to celebrate with their communities, including for U.S. Pride month in June," stated a company spokesperson.

The unionization efforts at Starbucks have been playing out slowly and have not been a significant financial consideration so far. While more than 300 stores in the U.S. have voted to unionize, none of the employee groups from those stores have been able to negotiate a bargaining contract with the company. 

REXR

Potentially vicious reflexive share price move for a ~3.5% cap rate asset likely beginning a RoC slowdown right now. Uniquely vulnerable in a decelerating and historically macro-sensitive subsector. 

Keith McCullough was selling REXR on July 5. From the CEO's Coaching Notes in Real-Time Alerts:

So the latest short-term Factor Squeeze is in Real Estate Shorts, eh?

1. Cool, because we need short-term squeezes to lower-Cycle-highs to send you more re-load signals on the Short Side 

2. Adding back Rexford Industrial (REXR) for The REIT Rob Simone

CF

The fertilizer names are among the most correlated to inflation in our coverage. As disinflation bites, it is reasonable to expect these names to lag the broader market. We expect oversupply from nitrogen fertilizer industry capacity additions and the H2 subsidies in the Inflation Reduction Act. Nitrogen was down Y/Y, but other nutrients showed a weaker margin progression.

As the "bubble" in farmland prices deflates and disinflation impacts prices/incomes, we expect Ag exposed names to underperform. 

Van Sciver shared the chart below on CF Industries (CF) in a June 28 Agriculture Black Book presentation. 

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.

Gold has never been higher, Newmont Corporation (NEM) valuation diverged from product. While not technically "cyclicals" in the standard sense, gold miner profits are driven by product prices – a dynamic that leads to high multiples at low product prices. 

For now, we aren’t pairing off gold miners … the exercises around individual mine evaluation, cost comparisons, and the like doesn’t drive market-relative performance/alpha. Getting the Gold Price, factors exposures, and a reasonable handle on the operations will.

NEM has the Newcrest deal, a transaction that vaults NEM into a different scale category … and the company has had some success with earlier integrations. We see ~30% relative upside as NEM revalues to reflect the current gold price dynamics … without as much downside risk as other metals and mining names.

DKNG

Hold percentage (the amount the casino wins off what's gambled) continues to go higher, which is particularly important for DraftKings Inc. (DKNG). DKNG should continue to play catch up and remains a long.  

Gaming, Leisure & Lodging analyst Todd Jordan discussed DKNG on the July 7 edition of The Call. Click here to watch the 2-minute video.

DDOG

The bull case on Datadog (DDOG) is that Datadog has exhibited great vision through the years, including evolving into APM, and then fully shaping the Observability opportunity, in part via acquisition. The company continues to be at or near the top of its core market, catering to a DevOps centric audience, and justifying its high priced business model with a move into adjacent product markets in DevOps. We like the DevOps market which continues to exhibit growth in usage and key adoption metrics notwithstanding current macroeconomics.

We think Datadog has a chance to grow into what Gitlab so far is not, and we like innovative companies in fast growth markets that are engineering led, whose innovation can open up additional revenue markets.

MTCH

Long Thesis: Management has taken actions to turn Tinder's growth around, particularly through pricing actions the past two quarters. Hinge's growth has accelerated due to new country launches and the recent launch of a new premium subscription tier, HingeX. If we're right directionally, we expect to see the Match Group (MTCH) EBITDA multiple rerate back to the low-end of its historical range (15-20x) whereas it is currently trading around 12x FY 2024 EBITDA (up from 9x in May when the stock was around $30).

Since our black book, Match Group (MTCH) and NBCUniversal struck a deal to offer users of Match's portfolio of apps (Tinder, Hinge, Plenty of Fish, etc.) a free 3-month subscription to Peacock. The deal is also expected to editorial content and experimental events centered around big-name content like the Women's World Cup in the near future. This is not the first time the two companies have partnered to promote each other's businesses – last Halloween, they put on a sponsored date night on Tinder to promote Bel-Air and The Best Man: Final Chapters. While this partnership shouldn't drive long-term user acquisition, it should provide Match's portfolio with a short-term uptick in sign-ups coinciding with the roll-out of dynamic pricing actions we mentioned previously.

BCO

The Brinks Company (BCO) | That’s The Idea For Business Services Longs In Quad 4

Brinks reported its highest first quarter operating margin that we have seen in 1Q23. It hasn’t been the biggest winner, perhaps, but shares of BCO have provided a total return of ~24% in the last year vs. ~15% for the S&P 500. 

Investors are concerned that cash is going away. But Brinks is much more of a penetration story with products that make cash management vastly more efficient in a clear value proposition for outsourcing (see Brinks intelligent safe offerings). Organic growth has remained decent. Margins have expanded. Penetration can continue. We think the conflation of cash usage trends with the outsourcing opportunity for BCO is what has created the alpha opportunity for shares of BCO.

ATVI

We expect a federal court decision very soon in the FTC’s case to prohibit closure of Microsoft's merger with Activision Blizzard (ATVI). Under the existing merger agreement, Microsoft would pay $95 cash for each share of ATVI, roughly 14% above the ATVI closing price on July 6.

Testimony in the FTC's federal court antitrust challenge concluded June 29. Judge Jacqueline Scott Corley will likely issue an opinion before mid-July. We continue to believe she will reject the FTC's request for a preliminary injunction. Absent appellate court intervention, federal antitrust obstacles will be resolved.

The decision of the UK's Competition and Markets Authority to block the transaction would be the remaining obstacle to deal closure. As we've noted, we believe the companies have a solid case to overturn the CMA's decision on appeal despite deferential review standards accorded the CMA before the Competition Appeal Tribunal. Arguments are scheduled for late July but an FTC defeat in federal court could increase pressure on the CMA to revisit its order imposing a global block on the transaction. In the aftermath of EU regulatory approval and the anticipated FTC defeat, the CMA's decision to block the deal worldwide over cloud gaming concerns will appear unreasonable and disproportionate.

CCL

Gaming, Leisure & Lodging stocks didn't have a great day Wednesday. One of the stocks that led the way, however, was Carnival (CCL). Cruise lines are still playing catch up to the rest of leisure, and CCL is doing well in the face of macro headwinds due to wallet share shift going towards cruise lines. CCL remains a long.

Jordan discussed CCL on the July 6 edition of The Call. Click here to watch the 3-minute video.

COCO

Vita Coco (COCO) is a name we're long in the Functional Beverages space. Non-alcoholic drinks that fall under the category of functional beverages are those that aim to offer more health advantages than just hydration. To assist particular health functions, such as boosting energy, enhancing digestion, or lowering stress, these drinks frequently have additional substances like vitamins, minerals, probiotics or other supplements.

COCO was a busted IPO in 2021 that is getting its footing back. The company priced its IPO on Oct. 20, 2021, at $15 or $3 below the bottom of its $18-to-$21 price range and hit a low of $7. COCO is seeing strong volume growth accelerating in 2023 with 1Q23 volume growth accelerating from 5.5% in 4Q22 to 8.3% and revenue per case accelerated from 0.7% to 5.1%. This performance was achieved against a very strong 1Q22, where Vita Coco Coconut Water net sales grew 38%. In the Americas 1Q23, Vita Coco Coconut Water net sales grew 17%, including 15% volume growth and single-digit contribution from price.

LFST

Health Care analyst Tom Tobin discussed Lifestance Health Group (LFST) on The Call July 5 and 7.

• Medical Claims: Ambulatory surgical center claims continue to move up and to the right, very strong volumes; 60-minute psychotherapy volumes and physical therapy claims are both strong.
• Employment: LFST has been showing strong new provider adds; JOLTS out tomorrow; comps ease into back half for healthcare macro.