|
Short: MPW, PEB, ULTA, REXR, CFG, CMG, ONON, BUD, KNX, HELE Long: DKNG, ATVI |
This week we removed Tesla (TSLA) from the Short side, and replaced it with Short Helen of Troy (HELE).
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
|
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.
We just released a research note detailing the preposterous dealings of MPW. Read HERE
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. |
Pebblebrook Hotel Trust (PEB) announced an agreement to part ways with one of its SF assets and thereby reducing NOI/EBITDA exposure from ~16% down to 14% of total. Assuming the sale goes through, PEB will still hold the 2nd most exposure to SF but if PK does ultimately walk from its CMBS assets, PEB will catapult back into the #1 spot among all REITs. Normally, a company would want to be #1, but not when it comes to SF exposure. PEB ran the implied math on the sales price $69MM and suggested the company is selling the asset at a 3 cap and a 25x EBITDA multiple. That may look like value creation as compared to the 12.5x multiple the stock current trades at, but running the comparison on pre-Covid EBITDA, the valuation looks decidedly different. On an average of ’18 / ’19 EBITDA, PEB is selling the hotel at 8-8.5x EBITDA and a 9 cap… not exactly value creating as compared to the current trading multiple of the stock. Wait, we thought the NAV calcs suggested much more value…. PEB remains a Short.
ULTA
L’Oreal reported its 9mo. earnings this week, with North America and North Asia seeing a decline YY and sequentailly in Q3 from 1H. North Asia includes a lot of travel retail, which is mainly dominated by the Luxe division, which was down 3.2%. We are slowly seeing parts of beauty start to slow and crack. The overconsumption during the pandemic and that has continued so far, is not sustainable. There are only so many products the average consumer can purchase and use and collect. The majority of L’Oreal brands are sold at Ulta, so if the company is seeing slowing sales in North America it is a potential read for Ulta, or at the very least L’Oreal owned brands at Ulta not being as strong. We expect demand to continue to slow with slowing sales, and Ulta will make sure to keep its market share as sales slow, meaning more discounts and promotions hitting gross margins. While this stock is down about 30% from the beginning of the year, now at about $375, we think it could easily see sub-$300.
REXR
|
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
Last week, 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.
Hedgeye CEO Keith McCullough released a Real-Time Alert shorting CMG yesterday. Read Keith's commentary below:
Higher-high here for US Equity Vol (VIX) is NOT a bullish intraday update!
Coaching Notes:
1. We have zero Longs in RTA for a reason
2. We're still hunting for green in Shocktober
3. Howard Penney remains The Bear in Chipotle (CMG)
KM
ONON
Old Wall downgrade this week on FL, which carries shoes from ONON. While we are bullish on FL, its based on the return of Nike expected in 2024, which is bearish for ONON at FL. The downgrade includes the macro risk over the next few quarters, with consumer under pressure which could lead to markdowns and margin pressure. If margins come down and demand slows at ONON, the stock will certainly rerate lower. While it is already down about 20% over the last month, it could still go much lower with the multiple at 35x PE right now.
BUD
|
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 said it would provide support to its wholesalers with several actions, including:
- financial support – incentive payments will continue through Q1
- freight/fuel surcharge reimbursement - surcharge reimbursement will continue through Q1
- extended credit – additional credit will be extended through Q2
- market share recovery incentive – beginning in Q2, a market share recovery incentive will be paid through the end of the year
BUD has to show its support to its wholesalers while the retail channel contemplates shelf space resets. Laws in some states limit what support the brewer can give. The wholesalers need the support, but it’s not the middlemen’s actions that have hurt sales. There is only so much they can do when the problem is on the demand side. Bud remains a Short.
KNX
Knight-Swift Transportation (KNX): Jay Van Sciver said on yesterday's Industrials Show (click HERE for access), "I understand the stock is up today or whatever, but this is a BAD earnings report." Van Sciver continued, "It may have beaten on the headline consensus, but they moved guidance down. It's not a great implication for 4Q." Their margins are going down, as you can tell by the acceleration in OR on the chart below. The whole industry is going into a profit recession, and this pain will go across the industry because their is structural overcapacity. There are high barriers to exit, so we will be stuck with overcapacity for a while. Earnings estimates have crashed, as guidance was cut to just above $2 per share. KNX remains a Short.
HELE
Helen of Troy (HELE) is good at one thing...using a zero-interest rate environment to lever-up and buy mediocre non synergistic brands, and then use 'creative accounting' to take special charges consistently and get the Street focused on fake non-GAAP, non-cash 'earnings'. That game is over. This is the Hanesbrands from 5-yrs ago, Newell from 10-yrs ago, and Jones Apparel Group from 15-yrs ago. The CFO knew it, which is why he just left. The CEO is leaving at the end of this year. The spread between GAAP and non-GAAP earnings will narrow now that the company can no longer do acquisitions, while the core brands consistently lose market share across the board. This name is a melting ice cube. Even if the Street believed the consensus numbers, this should be an $80 stock. But we think that over time it's heading much lower. HELE is a Short.
DKNG
Draftkings (DKNG) continues to dominate the mobile sports wagering scene in its home state of Massachusetts, again accounting for more than 50% of the online handle as total wagers accepted reached $512.2 million in September. DKNG, which is headquartered in Boston, set an all-time handle high for any mobile operator in the state with $290.1 million in September. That bettered its previous standard of $283.8 million in April and marked the third time it had cleared $250 million since mobile wagering launched in March.
On Thursday's edition of The Call @ Hedgeye, GLL analyst Todd Jordan noted that DKNG officially took over the top spot in online gaming (which includes iCasino and sports betting) from Fanduel. Since 4Q22, when we went long DKNG, they have been gaining market share, and continue to do so. This rise hasn't been due to marketing/promotions, but we see their product catching up to Fanduel in terms of quality, which is the main factor in the continued attraction of bettors to their platform. Although this may go back and forth between the two online gaming giants for some time, DKNG remains a Long.
ATVI
Microsoft's acquisition of Activision was completed on Friday, October 13th. The stock is no longer trading, but our Long call booked an absolute performance of +14.7% on Investing Ideas over 86 days of trading. Book this one as a win!
