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Short: MPW, PEB, ULTA, REXR, CFG, CMG, ONON, BUD, KNX, HELE, KO Long: DKNG |
This week we added Coca-Cola (KO) to the Short side.
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, 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 continue to think the equity is effectively worthless, but there are several paths to absolute zero and it may take time (another 6 months to a year?). We would not fault anyone who has shorted it since ~$20/share from taking their gains. 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. |
Once again, Pebblebrook Hotel Trust (PEB) beat lowered expectations but then provided guidance well below consensus. Our initial review of PEB’s print, guidance, and our model, does not instill much confidence that this company or industry is turning a corner. We remain bearish on much of the hotel complex with PEB a standout on the Hedgeye Best Idea Short List. Lower numbers heading into a possible recession at ~7x leverage is a scary proposition.
For Q3, better RevPAR (likely in Sep) was the biggest driver of the beat while higher costs kept a lid on the size of the beat. Any excitement around PEB’s beat should be quickly tempered because the guidance range provided on both RevPAR and EBITDA implies a lot of weakness. Due to easing comps (hurricane last year), RevPAR will “accelerate” in Q4, but to a lesser magnitude than initially expected. Management is looking for 1-4% comp RevPAR growth to should yield $51-$57MM in EBITDA. Relative to the Street at $65MM (pre-print) and Hedgeye at $67MM, the range, while beatable, is a disappointment.
Under the hood, PEB’s Q3 continued the company and industry trend of higher incremental hotel OpEx growth (on a “POR” basis) than incremental total revenue growth (on a “POR” basis), putting pressure on margins. Keep in mind, margins remain ~300-500bps below pre-Covid, and were down YoY on the back of Resort RevPAR and ADRs being down HSD to LDD YoY. With ADRs set to keep rolling over there could be downside risks to the quarter and downside risks for the coming 12 months. For the 4th consecutive quarter, our numbers are heading lower and so is our target downside on the stock. On ~12.5x next year’s EBITDA, PEB could be a $10 stock, good for 20% downside.
ULTA
The big Sephora semi-annual sale event started today for the highest level of loyalty members and Ulta is putting up some competition. The company started its Early Black Friday Deals event, which look like they started a few days earlier than it did last year. Ulta runs various levels of promotions on select brands or groups of products for the 5 weeks leading up to Thanksgiving, with each week having a different offering. Despite the discounts being steeper at Ulta, the Sephora sale is a broad based discount code, ranging from 10-20% off. It is smart that Ulta displays the various items that will be included every week’s promotion, it will help win some sales if the consumer is shopping around and debating on where to buy the item. The brands and promotions look even better this year than they did last year. As we’ve said, Ulta will fight for market share, and it will come at the expense of its gross margins. This stock is still too high at $380, the unit growth and big margin expansion are no longer part of the investment case and the stock is unlikely to hold these levels on that slowing earnings trajectory. We think its worth closer to the mid-$200s.
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. REXR remains a Short.
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; low cost deposit migration & repricing of interest-bearing deposit costs a la "higher for longer"; new regulatory concerns around capital requirements; and normalizing credit accelerated by the dual vacancy and refinancing risk associated with general office exposure continue to plague the regional banking space.
CFG recently released their 3Q earnings, and period-end loan growth decelerated from -3% y/y to -4% y/y from 2Q23 to 3Q23, while period-end deposits were down -1% y/y on rate-related outflows. CFG remains a Short.
CMG
In 2022, Chipotle (CMG) increased prices significantly, driving their growth. However, they recently announced another price hike, which could impact customer loyalty. "Anchor Pricing" means that customers have a set price in mind for a product or service. At Chipotle, the consistent price increases in recent years have caused this anchor to shift, potentially affecting customer loyalty and the company's brand perception. Diners might choose to visit Chipotle less often or skip on additional items, like the extra guacamole. The long-term consequences of these actions are uncertain, and as a result, CMG remains a Short.
ONON
DECK, which owns HOKA, reported Thursday night, with risk of slowing growth into the end of the year. HOKA put up 27% growth YY in the quarter, that growth was similar to last quarter. This doesn’t bode well for On Holdings (ONON). HOKA is truly a performance brand that had a slight bump from fashion trends over the last couple of years. ONON on the other hand is a fashion brand that claims to be performance driven, but you’d be pressed to find a runner, or really anyone for that matter, who buys the sneakers to workout in. Fashion trends are much more finicky than performance products, and there is increasing competition on both fronts. With slowing demand and increasing competition and increased discounting of “old” product (ON lacks on the true new and innovation front, just putting out new iterations of the same product and discounting the last version that looks exactly the same), revenue growth is going to slow along with margins coming down, which will cause the stock to rerate lower.
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) 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): The effects of KNX's rough recent earnings report have kicked in after their surprising bounce, with the stock down ~6% since. While the company may have technically beaten the consensus on the headline, they adjusted their guidance downwards, signaling potential trouble ahead for the fourth quarter. The concerning trend doesn't stop there; their profit margins are visibly shrinking, indicating a challenging landscape. And it's not just this one company; the entire industry is feeling the pinch, facing a looming profit recession and grappling with structural overcapacity. Unfortunately, exiting this predicament won't be easy due to high barriers, meaning we might be stuck with overcapacity for a while. Earnings estimates have taken a nosedive, with guidance now hovering just above $2 per share. In light of these factors, we maintain our short position on KNX.
HELE
Helen of Troy (HELE) had and Investor Day last week, where management said the company is undervalued and by 2030 the stock price should be $228 to $398, depending on the multiple. To be clear, you should be wary of any management team that tells you what its stock price should be at an investor day. The long term earnings targets includes share buybacks, lower interest rates, and acquisitions. The company is placing a lot of faith in the benefit it will see from acquisitions that haven’t even been identified yet. Nothing is changing for this company; it will continue to be a rollup of middle of the road brands that don’t gain share. The stock dropped to trade below $100 this week for the first time since the end of June, but ultimately we think its worth closer to $40.
KO
Coca-Cola (KO) is facing challenges in Quad 3, a Quad setup it has historically underperformed in. The company is seeing topline trends slow while commodity costs are inflecting upward. The international prospects look to be even more challenging than the conditions domestically.
With an EV/EBITDA ratio of 17.5 x 2024 estimates, the stock remains relatively expensive. The rising popularity of GLP-1 weight loss drugs has put additional pressure on Coca-Cola's shares. Given the current market conditions, slowing growth, changes in Fx, interest rates, and the high valuation, it appears that Coca-Cola may have experienced a bounce after being oversold. We've taken a "short" position on KO, anticipating a decline in its stock price.
Below is a recent Real-Time Alert on KO from Keith McCullough to subscribers this week:
The experienced (and successful) PMs in Bear Markets understand how to have a A) Diversified Short Book and B) move their inventory around as the market moves...
Coaching Notes:
1. So, I'm covering some QQQ here... but shorting more XLU and XLP
2. And I'm looking for something in that XLP Sector Exposure that's green...
3. And I find Coca-Cola (KO) which Daniel Biolsi updated us on The Call @ Hedgeye
Sold to whoever needs to chase on green,
KM
DKNG
DraftKings (DKNG) - It’s not just the market that has impacted the stock recently – investors have expressed consternation surrounding the promotional and marketing environment. Measured as a % of handle, promos have increased in MI and PA. But is this something to worry about? Not for us. The overall trend appears lower, not higher, even in those states. One month of data is not usually a trend, and it’s not in this case either. Many other states are showing favorable promo rates and new states are showing a better cadence than prior years. DKNG seems to be taking a more targeted approach to promos likely yielding a higher return. Meanwhile, most metrics suggest the business overall continues to get healthier and leads us to believe that the company will post another quarterly beat and guidance raise.
Will it be enough? To the extent management can quell the promo consternation, we think it will. Moreover, the analyst day in mid-November could provide another catalyst. While ’23 was the year of inflection, ’24 should be the year of profitability and provide a bridge to long term International level margins. We expect that management’s long term targets, likely to be disclosed on the analyst day, could really firm up the path to a “real business” and entice some longer term investors. The business is evolving very nicely and not only is DKNG a top dog and prime beneficiary of the trends, but also still gaining share. DKNG remains a Long.
