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Short: MPW, PEB, TSLA, ULTA, REXR, CFG, CMG, ONON, BUD, KNX Long: DKNG, ATVI |
No changes to the lineup this week.
Below are updates on our 12 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. The equity is very possibly completely worthless, as we think the assets are worth no more than ~$9 billion (updated) to true "arm's length" third-party buyers vs. pro forma net debt of ~$10.5 billion at share. |
Medical Properties Trust (MPW) - The only thing propping the structure up had been extremely liquid debt markets and artificially low borrowing costs. The bonds are perhaps a more interesting story than the equity right now (on its way to "Dr. Zero"), and we think bondholders need to start thinking about recoveries here. Longer-dated maturities beyond 1Q25 look especially precarious. Prospect is a disaster, Steward appears insolvent without MPW's balance sheet, Swiss Medical/Priory/Median are more of the same, and ScionHealth may be having rent deferred.
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. |
For much of the last 2 years, pricing power in the hotel industry has been THE story. There have been warning signs on the weekends with stagnating YoY growth, but the weekdays are probably the most troubling from an incremental perspective. The headwinds for a (lack of) return to office is showing through on the pricing side. Our forward rate survey suggests hotels are feeling confident to at least hold price on weekends (mostly leisure) while weekday rates have faded and look soft heading into late spring. In fact, the spread between weekend and weekday rates has never been wider, a challenging setup for the over reliant businesses on weekday demand.
TSA data shows a week over week slow down which was expected as the positive effects of holidays start to roll off; there will be a little bit of a pop this week too but slowing vs. the prior week; net-net, the broader trend should stay fairly unchanged, tracking in this 1-3% range, though mostly at the lower end. Pebblebrook Hotel Trust (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. |
The EV market is one of the most competitive out there. Is the Cybertruck introduction a good thing for Tesla? Probably not. The Tesla Model Y, their hot seller, is cheaper than ever while inflation is up. This isn't a minor issue, this is a big issue in the context of a portfolio of aging product. The competition is too much relative to the absorption consumers are willing to take. TSLA remains a Short.
ULTA
Visits at Best Idea Short Ulta (ULTA) continue to weaken after the short-term jump due to its 21 Days of Beauty Sale and fall stock-up event that occurred over the past two weeks. We continue to expect demand at ULTA (and across the space) to slow and margins to degrade significantly, especially if the company continues to offer additional items at a discount. After a very strong past two years of growth and margin expansion, Beauty is staring down the barrel of tough comps and high expectations.
REXR
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Short Thesis Overview: Rexford Industrial Realty (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. Net effective rates signed with new leases have peaked/are peaking.
CFG
Citizens Financial Group (CFG) 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. CFG remains a Short
CMG
The new wave on social media sites like Tik Tok and Instagram is that hoards of young people are complaining about how expensive Chipotle (CMG) has gotten. We are short for Macro and long term outlook related reasons, but nonetheless, that is not the image you want for your brand circulating online. The headwinds that Chipotle face outside of this public perception crisis are surmounting, and the brand is very clearly evolving as they expand.
Yesterday, Chipotle announced yet another price increase. This markets the 4th price increase in the last two years. Chipotle’s last price increase was in August of 2022 when the company raised prices $1+ for every item on its menu. Chipotle increased prices by about 3.5-4% in June of 2021, citing a raise in employee wages, and then again in the first quarter of 2022, also around 4%. Chipotle used to always pride itself on bringing “value” to its customers, but the constant price increases over the past two years have erased that. CMG remains a Short.
ONON
To its credit, On Holdings (ONON) keeps putting out new styles and collaborations, such as the Cloudnova Z5 and the Loewe Cloudtilt. That said, they're on the standard On Cloud base -- and have the same base and styling that the rest of the ON offering. Our problem here is that 80% of this company's cash flow comes from one silhouette. Not sure who the incremental buyer of these ON x Loewe sneakers are, since the typical ON customer most likely isn’t interested in them, and then the typical Loewe customer is probably just buying the nicer-looking Loewe own-branded sneakers. While it's good to come out with new offerings, the lines aren’t really incremental to the core Cloud platform/silhouette. We think that core shoe is being over-distributed, and will see some growth and margin pressure that change the expectations and valuation framework of the company.
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. |
The National Beer Wholesalers Association’s (NBWA) Beer Purchasers Index (BPI) remained flat both sequentially and YOY in September at 45. The BPI is a diffusion index where a reading above 50 denotes expansion in volumes while below 50 indicates contraction.
- Below premium was 42, lower than the prior year of 47 and 52 in August.
- Premium lights were flat YOY at 47 and below the 58 in August.
- Premium regular increased to 40 in September from 36 in the prior year and 48 in August.
The at-risk inventory measure ticked up one point to 53 in September as slower sales trends are leading to higher inventory levels. The higher distributor inventory levels are a negative read-through for AB InBev since its brands have been the underperforming brands this year. Both Molson Coors and Constellation Brands discussed shelf space gains and tap handle wins this past week, helping to cement their recent share gains at Budweiser’s expense.
KNX
Knight-Swift Transportation (KNX) is "an enterprise consolidator in the industry," which we have seen come down quite a bit in terms of earnings estimates. 4Q is particularly challenging due to a drop in trucking activity entering October. This likely relates to the UAW strike (which is now expanding) as well as increased activity in rail, hijacking share. Issues at the Mexican border, tension surrounding the government shutdown risk, and other factors are all going wrong and weighing on the freight market as a whole. From a macro level, we see a GDP contraction in 4Q, which is a total mess for trucking. KNX remains a Short.
DKNG
We may sound like a broken record but the data suggests what the data suggests. DKNG continues to shine brightly in the OSB/iC data and momentum for the company is building. We remain bullish on the overall data trends as well. An improving competitive position in a growing and outperforming industry with an increasingly better margin outlook is an enviable situation to be in and should lead to continued stock outperformance. Our latest data reads bullish, both from current and forward looking perspective for the industry and DKNG in particular. DKNG remains a Long.
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. ATVI remains a Long as we await more data pertaining to the trial.
