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Short: MPW, PEB, TSLA, ULTA, REXR, CFG, CMG, ONON, BUD, KNX Long: DKNG, ATVI, NYT |
This week we removed Match Group (MTCH) from the Long side and Kennedy Wilson Holdings (KW) from the Short side; We also added Knight-Swift Transportation Holdings (KNX) to the Short side of Investing Ideas.
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.
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) - A Connecticut hospital owned by Prospect Medical Holdings owes vendors tens of millions of dollars, and a deal to sell Prospect’s Connecticut facilities to Yale New Haven Health could be at risk due to their “deteriorating conditions...” A completion of sale and a certificate of need is still pending in the Yale deal. The certificate of need was recently postponed, and it questionable whether or not MPW will be able to close this deal (we do not believe they will). This is the most important near-term catalyst for MPW, and we believe they will run out of liquidity FAST if this deal does not go through. MPW remains a Short.
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. |
Pebblebrook Hotel Trust (PEB) was out with their typical monthly update this AM and irrespective of the quoted and estimated disruption from Hurricanes, the company is tracking in line with their previously guided expectations for EBITDA. Judging by the July and August performance, we concur that the company does look like it’s tracking in-line. However, September might prove more challenging for the company that’s already facing decelerating RevPAR growth (declining Resort RevPAR), as comps in September get materially harder for the company, both in resorts and urban markets. In fact, September is toughest comp for the quarter (up MSD in RevPAR vs ’19) and judging by the reported STR data for the Sep-TD, that does not bode well. Net-net, we wouldn’t get too excited about the update, and we still see a miss vs consensus and the low end of EBITDA guidance as very much on table as of today. PEB remains a Short.
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) was discussed in the Industrials 3Q Themes Update last week. TSLA has seen the stock rebound despite many things going wrong for them due to its liquidity dynamic, but Industrials analyst Jan Van Sciver thinks this is no different than crypto and NFTs in terms of the stock displaying signs pointing towards it being a bubble. One such example is Morgan Stanley analyst Adam Jonas upgrading Tesla and claiming the automaker could add $600bn in market cap with their plan for AI implementation. There is no particularly relevant thing he's talking about in our opinion, and has overvalued the move tremendously. Hedgeye CEO Keith McCullough touched on this topic during a recent edition of The Macro Show, saying, "There's nothing else for Adam Jonas to do than pump Tesla."
The reality is that TSLA has aging models, increased competition, and collapsing margins. The brand is weaker and at the same time, we see inventory going up by $500m per quarter, giving reason for their recent aggressive price cuts. They recently built two expensive factories in Germany and Texas to produce mainly the Model Y while they can't sell the existing production. This is "really bad," says Van Sciver, especially at a time when the rest of the auto industry is making record profits. TSLA's outperformance YTD is confounding given... well... everything. We remain negative on these with 'death by dilution' likely for many. TSLA remains a Short.
ULTA
Ulta Beauty (ULTA) visits are flat compared to last week after decelerating during the prior 4 weeks. During this steady deceleration in YY visits, Ulta was running its 21 Days of Beauty promotion, which was run during the same time last year. Although traffic was still up YY, we did see a progressive slowdown. Even deals and promos are struggling to draw the customer in. Demand is slowing as consumers are reaching a saturation point in quantity of product as well as facing a more uncertain and difficult macro environment. With headwinds to consumer spending continuing to build here in fall 2023, we expect demand to continue to slow, driving sales pressure and margin degradation. ULTA remains a Short.
REXR
Rexford Industrial Realty (REXR) had a 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. Net effective rates signed with new leases have peaked/are peaking. REXR remains a Short.
CFG
Citizens Financial Group (CFG) continues its negative trend since being downgraded by Moody's, down nearly 8% since the event. Their position is worsening from a funding cost standpoint. They continue to carefully watch for signs of stress in CRE general office, with 98.5% of CRE general office borrowers remaining current. Within CRE office, Citizens' office exposure ($6.2B or 4.1% of total loans) is located in suburban areas in the southern U.S. and away from MSAs like San Francisco where office is expected to be met with much greater distress based on the proliferation of remote work.
From a broader market standpoint, we see a slowing in commercial and industrial lending as well as credit card and auto. "Generally, across most if not all categories, we’ve been seeing a rate of change slowdown,” explains Financials analyst Josh Steiner in a recent episode of The Call @ Hedgeye (watch the full clip here). With the current rate backdrop, we expect this trend to persist. CFG remains a Short.
CMG
Chipotle Mexican Grill (CMG) 2Q23 was strong, with sales growing by 14% to $2.5 billion, and SSS increased by 7.4%. In-restaurant sales rose by 16%. Digital sales accounted for 38% of total sales. Restaurant-level margin was 27.5%, up by 230bps YoY. Adjusted diluted EPS was $12.65, marking an increase of 36% YoY. The biz model will have significantly less leverage in 2H23 and 2024, 3Q32 SSS guidance is expected in the low to mid-single-digit range, and for the full year, mid to high-single-digit comps are anticipated. The midpoint of the range of SSS guidance for the forward quarter has gone from 8.5% in 1Q23 to 3.5% in 3Q23. Post reporting its 2Q23 results, Revenue Revisions are up 30bps, and earnings revisions are down 110bps. 3Q23 COGS is expected to be around 30% due to higher beef and avocado prices. CMG remains a short.
ONON
After investigating Google interest trends, competitor Hoka's trends have been making higher highs and higher lows lately, On Cloud has been struggling to maintain higher highs with the same frequency, finally eclipsing last year’s black Friday in this year’s back-to-school season. On Holdings (ONON) has been pushing heavily into wholesale, with broad distribution of its product. On top of the exponential wholesale growth, the company has been carrying a large amount of excess inventory on its own balance sheet. There is a ton of ON inventory available for consumers to buy, anywhere and everywhere. We think the poor distribution control and lack of product tiering is going to cause a margin problem for the company, and will show cracks in the long-term growth and margin profile relative to expectations. Once estimates get lowered, the stock will rerate accordingly. ONON remains a Short.
BUD
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Short Thesis Overview: Anheuser Busch (BUD)'s Bud Light brand is permanently impaired. Bud Light volumes have been consistently 30% lower YOY since the social media marketing mistake. Making matters worse, some customers are also avoiding other AB InBev brands pressuring sales. With lower velocity the company is losing shelf space ahead of the spring resets. Management has told stakeholders that it is pulling marketing dollars from international markets to support domestic sales. International markets had been the strong part of the portfolio as various regions recover from the pandemic. What was a brand specific problem has become a problem across all U.S. brands and international markets. |
Anheuser Busch (BUD) Bud Light sales decreased 26% in the latest week, with volumes down 29.3%. YTD Bud Light sales decreased by 16.9%. Michelob Ultra sales decreased by 0.7%, with volumes down 3.1%, and Budweiser sales down 10.7%, with volumes down 14.7%. In comparison, Miller Lite sales increased 18.2%, with volumes up 12.8%, and Coors Light sales increased 21.6%, with volumes up 16.5%. Modelo Especial sales were up 14.8%, with volumes up 10.1%, and Corona Extra sales increased by 4.6%, with volumes up 0.5%. Bud Light volumes have remained in a -30% trend since the end of April, as seen in the following chart. Boycott fatigue is likely being offset by the loss of shelf space, making the declines self-perpetuating.
KNX
Knight-Swift Transportation Holdings (KNX) was added to Investing Ideas this week. Below is Commentary below from Keith within "Real-Time Alerts" delivered to #HedgeyeNation:
While our Core Real Estate, US Retail, and US Bank Shorts (XLRE, XRT, and KRE) are delivering alpha today, Industrials (XLI) aren't ...
Coaching Notes:
1. So we'll cover-SOME XRT, for example, and re-short some KNX on the bounce
2. KNX is what we look for on the Short Side = bouncing to lower-highs within a Bearish @Hedgeye TREND view on #decelerating volume
3. See Van Sciver's Industrials Pro research product for why on the truckers who clearly aren't immune to Labor Strikes,
KM
DKNG
Make sure to tune in to the GLL team's Call on Monday, September 25th @ 2PM ET as they take a deeper dive into the world of OSB and iC. They will discuss their outlook for the entire industry and what's next for stocks like DKNG.
MA, a new growthy and highly competitive market, is a great example of why the setup today is just worlds different than a few years ago. DKNG continues to dominate in terms of both handle (>50% share) and GGR (>45% share) in its home state, and the latest push by Fanatics hasn’t put much of a dent into the King. DraftKings maintained its status as the mobile sports wagering juggernaut of Massachusetts in August, accounting for over half the state’s $314.9 million handle. It was the second straight month and third time overall that DraftKings claimed more than 50% of the market share since mobile betting launched in March. It remains the only operator to surpass $1 billion in accepted wagers in the state, and the $161.9 million handle for August represented an 11.8% increase from July. That rise outpaced the overall 6.8% increase in handle generated by the state’s eight mobile and three retail sportsbooks.
NYT
New York Times Company (NYT) Back on August 15th, we added The New York Times (NYT) to the long bench on the basis that their transition to a digitally-driven journalism brand has been a success, and they have the potential to grow even further in the digital space. Furthermore, strategic acquisitions have diversified their product offerings and an aggressive bundling and promotional strategy will accelerate this subscriber growth and drive ARPU expansion as the subscriber base matures. We also have cyclical tailwinds over the next 9-12 months, as anticipated strength in digital advertising and a U.S. Presidential Election cycle are upon us. We see The New York Times as the strongest digital journalism brand at the moment and anticipate 30% upside to it's current price.
ATVI
On Aug. 22 the Competition and Markets Authority (CMA) in the UK opened a new regulatory review for final approval of the Microsoft acquisition of Activision Blizzard (ATVI). We continue to believe the UK regulators are likely to approve the revised transaction at the end of Phase 1 of the CMA, and are still aiming for approval before the current merger agreement expires on October 18. Head of Microsoft Gaming, Phil Spencer, made positive comments recently, indicating confidence the regulators will clear the deal the acquisition. This dispels the sentiment that further merger agreement extensions (beyond the current October 18 expiration) do not appear necessary at this point. The FTC is still appealing the denial of the preliminary injunction to block closure of the deal, but the appeals court denied the FTC request to freeze the deal pending the appeal. So the UK process is the only obstacle to closure, and we anticipate the deal will soon get the green light there.
