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Short: MPW, PEB, TSLA, RVLV, STLD, DE, KNX, DLR, ULTA, SBUX, ODFL, REXR, CF, CHH, CFG Long: DKNG, DDOG, MTCH, ATVI, CCL, LFST, HCA |
We added Choice Hotels International (CHH) and Citizens Financial Group (CFG) to the Short side, and HCA Healthcare (HCA) to the Long side of Investing Ideas this week.
Below are updates on our 22 current high-conviction long and short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
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. |
REITs analyst Rob Simone delivered a full, 50-slide presentation on Medical Properties Trust (MPW), which is available to Institutional and REIT Pro product subscribers. Here is a one-slide summary of Simone's concerns with MPW.
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: Downward trending Business RevPAR continues to be a real problem, as other segments aren’t picking up the slack. We think forecasts need to come down. It will be a difficult earnings season for hotel REITs like Pebblebrook Hotel Trust (PEB), which remains a short.
Gaming, Lodging & Leisure analyst Todd Jordan discussed PEB on the July 21 edition of The Call @ Hedgeye. Click here to watch the 3-minute video.
TSLA
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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. |
Tesla (TSLA) is selling a lot more cars for less revenue. The company had its lowest gross margin since the pandemic. Auto production is up 86%, revenues are up ~45% Y/Y and average selling prices down ~20%. Operating income is down 2.6% Y/Y, which doesn't sound bad, but it's down ~40% since 4Q despite more factories and production. This company is supposed to be ramping production but they are making less money and talking about further price cuts.
Industrials analyst Jay Van Sciver discussed TSLA on the July 21 edition of The Call @ Hedgeye. Click here to watch the 5-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. |
Since about mid-May, sale and final sale items listed on the Revolve Group (RVLV) website had been trending down, but they saw a material uptick this week. The uptick is most likely due to the company working to clean out some excess summer inventory in advance of fall selling season. We expect to see the sale and final sale items remain elevated. The company has excess summer inventory, due to both a decline in demand from a tough macro environment and also excess inventory buys/improper inventory buys vs. what was in demand. Margins will continue to weaken as consumers need very compelling value to convert on listed items and the company tries to improve the inventory mismatch vs trending demand. A company with this continued demand and margin risk (i.e., earnings risk) should not be trading at nearly a 28x PE multiple.
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 Dynamics (STLD) reported earnings, and shipments are decelerating notably despite production continuing to grow 6%; seeing some pressure here.
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. |
Used equipment inventory data for June is out, and production of new automobiles is normalizing. This relieves some pressure from the used market. Inventories of used equipment are no longer declining and are going up a bit. The biggest rate of change is in Ag equipment. Large Ag tractors are soaring, with inventories up more than 50% YTD after bottoming out in early to mid-2022. Deere & Company (DE) is an active participant in the used market and remains a short.
KNX | ODFL
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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. |
Keith McCullough discussed the KNX earnings report June 21 on The Macro Show:
Knight-Swift Transportation (KNX) shareholders were assured earlier this year that earnings wouldn’t drop below $4 (even in a recession). Well, over the past two quarters, the trucking company’s floor has been nearly halved, dropping to $2.30 per share this week.
It’s another case of a cyclical company being exposed during truth-telling season.
“If you want to tell me that’s better than expected, I’ll say you’re unequivocally full of shit,” McCullough explains. “Moreover, this is a good company. You should be very concerned about the cyclicality of peak cycle earnings on inflation in the second half of last year, which is what Knight-Swift is actually comparing against.”
Hedgeye's CEO adds: "Inflation accelerating in Quad 2 is uber bullish. That’s why we were bullish in 2021. Now it’s uber bearish and the fallout is monstrous. So you either get it, and you got it right on KNX, or you don’t."
Click here to watch the full clip.
DLR
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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. |
On June 17, Digital Realty Trust (DLR) announced a long-awaited partnership with GI Partners to establish a joint venture for the sale of a 65% interest in two stabilized hyperscale data center buildings and their associated equipment in the Chicago metro area. Digital Realty will receive approximately $743 million of gross proceeds related to the joint venture and the associated financing, and will maintain a 35% interest in the joint venture while continuing to manage the day-to-day operations of the assets, providing a seamless customer experience. DLR also granted GI an option to purchase the third asset on the same campus. Proceeds will be used for debt paydown.
- Giving credit to SLNC, the deal implies a ~6.5% cap rate or ~$13mm/MW. We estimate a ~5.5% on in-place NOI before further lease commencements. Note these yields exclude capex.
- As a reference point, we had assumed ~$800 million of gross proceeds at a ~6.5% nominal cash cap rate in our model, so roughly in-line with what the company announced.
- On the comparable metric we have DLR trading at a ~5.9% cap rate adjusting for CIP and land held for development, but would note that we again consider these assets being sold to be in the "upper-third" in terms of quality across DLR's portfolio.
- If the upper-third is worth 6.5% stabilized, what is the balance of the portfolio worth on a SOTP basis?
ULTA
With the Barbie moving coming out this week and all the hype around it, tons of brands are launching collabs with the Barbie brand. While the Ulta Beauty (ULTA) private label beauty brand doesn’t have a relationship, Ulta has a whole section with all the beauty products that are running collaborations with Barbie. It appears so far consumers are eating up the Barbie collabs across all categories, so this may be driving some incremental beauty demand near term, but the degree of the bump is negligible since the product offering is only about 20 items. The beauty category is running around peak, and as growth slows, ULTA will need to continue to run promotions and spend more to maintain and gain market share in this tough consumer environment, and management has said that it will do what it takes to protect market share. Margins will revert lower while the company spends up, but that isn’t accounted for in consensus estimates. The Street isn’t considering the risks around the business when the category growth slows and competitive intensity rises in the coming quarters/years.
SBUX
Starbucks Continues to Face Backlash on Labor Front
Howard Schultz did not solve the Union issue, and some might argue made it worse. The latest setback for the company was a ruling from NLRB judge Arthur Amchan that the shutdown of a store near Cornell University's campus was primarily done to discourage unionization efforts in Ithaca and elsewhere.
The judge said Starbucks failed to prove that it would close the store "absent its animus toward the pro-union employees who worked there." Of note, all three stores in Ithaca voted last year to unionize. Subsequently, the company announced it would shut down the College Avenue store in Ithaca, and this year, it said it would close the other two as well. The company issued a statement indicating that it plans to appeal the ruling.
"We strongly disagree with administrative law judge's recommendations," the company said in an email. Starbucks has said the Ithaca stores had experienced numerous absences and high worker turnover.
Separately, the NLRB sued SBUX last Thursday over an alleged refusal by the company to rehire 33 workers as it reorganized three stores in Seattle, including the well-known location in Pike Place Market. In a petition filed in Seattle federal court, the NLRB called Starbucks' plan to reorganize the stores an illegal response to unionization efforts at another store in the region. The company defended the actions and noted workers could seek to unionize through an NLRB-supervised election.
On July 10, Reuters ran a story saying "Pro-union baristas at Starbucks are taking their campaign on the road on Monday and trying a new tactic along the way: asking the coffee chain's customers to organize pickets at non-unionized U.S. cafes."
REXR
Rexford Industrial (REXR) is very over-owned. They were 100% exposed to what was the hottest industrial market in the country. These trends are now decelerating. REXR remains a short.
2Q23 Results:
- Reported Core FFO of 54 cents per share, the second lowest earnings growth quarter on Y/Y RoC since 1Q21. We find it hard to see things re-accelerating again until perhaps the second half of 2024 (unless REXR picks up the acquisition pace).
- We are of the view that just a +70bs raise at the midpoint of FY23 Core FFO guidance (excl. acquisitions beyond the ~$210 million pending) + no change in the same store view at midyear is probably bordering on the edge of "disappointment." Especially for a name trading at a ~4% nominal cash cap rate, or just under ~3.6% including cash overhead and capex.
CF
Notable news out in the Ag suppliers’ space: FMC Corporation (FMC) cut guidance, noting a reduction in inventories in Europe, North America and Latin America. This is a negative sign on Ag product demand. We're seeing a down cycle in Ag, and think weakness in CF Industries Holdings, Inc. (CF) will continue.
DKNG
June sports betting & iCasino data → growth accelerated to +54% Y/Y. The stock has done well for the right reasons; profits inflecting and DraftKings Inc. (DKNG) has solidified itself as a top 3 operator.
Gaming, Lodging & Leisure analyst Sean Jenkins discussed DKNG on the July 20 edition of The Call. Click here to watch (discussion begins at 3-minute mark).
DDOG
Datadog (DDOG) will report 2Q earnings on Aug. 8.
The bull case on 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
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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). |
Communications analyst Andrew Freedman discussed Match Group (MTCH) in a 3Q Themes presentation this week.
A few things Freedman noted he's keeping an eye on:
• Benefits from reopening (bars, restaurants, etc.)
• Pickup in subscriber growth + a-la-carte purchases (Positive for MTCH, BMBL)
• Slowdown in live streaming, digitally native usecases
ATVI
The FTC withdrew its administrative case and is throwing in the towel in its attempt to prevent closure of the Microsoft merger with Activision Blizzard (ATVI). Expect the whole thing to wrap up in one month, just as Telecom & Media Policy analyst Paul Glenchur anticipated.
CCL
Cruisers – Digital Expansion To Feed Onboard Revs?
Cruise lines might not have that techy AI narrative to wrap around their stories right now, but there’s been a massive and successful push for the companies to “go digital” over the last number of years. Of late, it seems that cruisers are accelerating that digital push, as the installed base on the mobile app side continues to expand rapidly. Covid was an obvious trend killer, but through last week, the installed base of weekly active cruise app users is up >70% on pre-Covid levels.
Judging by Carnival (CCL) recent comments and our own work, the industry bookings backdrop continues to chug along well and the outlook for cruise over the NTM looks very solid, but the below app trends could be another positive indicator for pre-booked onboard revenue and overall, onboard spend. These apps have gotten a lot better over the years and can now help guests manage their trip in real time and onboard app adoption, which should be aiding onboard spend and B2C interaction. We continue to like the setup for the cruise industry and associated stocks, with CCL still having the most to gain over the near term.
LFST
Lifestance Health Group (LFST) dropped providers in June 2023 according to our tracker. The overall impact was modest to estimates. The pace of adds was strong the first two months of the quarter, so even with the softer finish, our revenue estimate is coming in at $268M compared to consensus of $255M. We are modeling a slightly higher clinician utilization rate in 2Q23 given the efforts by management to retain therapists and enhance their scheduling. LFST remains a long.
CHH
Was there a real reason for Choice Hotels International (CHH) wanting to put out a press release reaffirming their ’23 outlook and providing some preliminary guidance for ’24? Perhaps the company is doing some damage control? CHH’s stock has underperformed the past few months, short interest has ramped, and much of the remaining positive narrative has faded since the rumors of a Wyndham Hotels merger. Those rumors resurfaced a lot of questions about the company’s organic growth potential. Those seem like viable reasons to us, but the company also provided a little ’24 guidance “carrot” for investors, which would imply that sell-side numbers and Hedgeye numbers are too low.
Our initial reaction is that the approach to guidance seems aggressive and could hurt the stock more in the long run. For incremental fee and EBITDA growth, CHH is far more dependent on RevPAR growth than peers, so the visibility into a full year ’24 is far less than peers … and their peers won’t be guiding to ’24 until the Fall. Seems a little desperate to us. CHH’s release provides a bunch of bullish color on select brands and segments of their business but at the end of the day, their guidance for ’23 is unchanged and their approach to Radisson for this year and next is also unchanged. Despite the stock underperformance, share repo activity has been merely in line with our model, so again, the press release and timing is curious to us.
CHH looking to juice their stock ahead of more merger talks with WH? We have some questions and few answers, but if there’s any material strength in the stock, we’d fade it. 2H still at risk of earnings misses despite managements reaffirmations and ’24 is now on notice. RevPAR and NUG catalysts continue to lean negative for CHH.
CFG
The commentary below is from Keith McCullough's "Real-Time Alerts" when Citizens Financial Group (CFG) was added to the Short list on July 20.
Long Healthcare vs. Short Banks Stocks, #reiterated ...
Coaching Notes:
1. My #VASP (Signaling Process) doesn't particularly care "why"... but for those of you who do care on the fundamental component of our fully integrated Research Process, we have Sector Pro products...
2. The following is an example of what Financials analyst Josh Steiner wrote on both CFG and the Banks:
Slowing loan growth, both due to planned run-off and weaker demand in retail and commercial banking resulting from historic credit tightening; rising deposit costs; new regulatory concerns around capital requirements; and normalizing credit accelerated by the dual vacancy and refinancing risk associated with general office exposure are plaguing the broader regional banking space.
The earnings impact of higher funding costs will be amplified by increased conservatism through tighter underwriting and shifting asset mix targeting higher precautionary levels of liquidity.
Despite our continued view that this is indeed a well-run bank, as evidenced by the prudent run-off of its auto and unsecured personal installment loan portfolios, Quad 4 gravity historically imposes itself indiscriminately across the regional banking industry. We recall management's comments from the 4Q21 earnings call in which macro was appropriately cited as the the principal risk to its outlook, particularly around the Federal Reserve's delicate balancing act of controlling inflation and not harming the expected trajectory of real economic growth.
HCA
The commentary below is from Keith McCullough's "Real-Time Alerts" when HCA Healthcare (HCA) was added to the Long list on July 17.
HCA is nearing the LOW-end of its Risk Range and Tom Tobin remains bullish on the name. We remain Bullish on our Healthcare Exposures (PINK and XHE) as well from a Macro perspective.
