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Short: MPW, PEB, ULTA, REXR, CFG, ONON, BUD, KNX, HELE, KO, KIM Long: DKNG |
This week we added removed Chipotle (CMG) from the Short side, and replaced it with Kimco Realty (KIM).
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. We await the 10-Q filing later this week, which (again) is all that matters for this name each quarter.
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. |
The Hedgeye RevPAR model has been showing a slowdown in growth since early Q2 this year, and it's turning out worse than expected. This trend is now expected to continue into 2024. While we're looking for signs that challenge our negative hotel outlook, consensus RevPAR projections remain too high, and the data's trajectory keeps us bearish. Although leisure demand is strong and still growing year over year, it won't face easier comparisons until late Q2 '24. On the other hand, business transient demand isn't supporting group RevPAR. After a bounce in October due to the calendar, growth is likely to return to a 1-2% range or worse. With no immediate positive factors, we maintain our negative stance on most hotel stocks and have active short recommendations on CHH, MAR, PEB, PK, and XHR.
Commentary on recent Earnings Report: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. |
On a recent episode of The Call @ Hedgeye Todd Jordan showed that there are no signs of business travel picking back up to save PEB, which remains a Short.
ULTA
Ulta added the cult classic DTC beauty brand, Lush. This partnership is the first wholesale partnership Lush has ever had. The initial offering is through ulta.com, with the majority of it being Ulta-exclusive discovery sets. When Lush holiday sets drop, customers will also be able to buy those at Ulta. Lush stands to gain more from this partnership than Ulta, as Lush is still has relatively low consumer awareness. For those who do know of the brand, the Ulta partnership will increase ease of purchase. Especially once the product offering at Ulta expands past exclusive discovery sets. Ulta is lapping several big brand additions/expansions last year and a price increase in 2H22. Going into holiday Ulta is doing everything it can to gain and maintain market share; including adding brands and running more promos. The company is trying to engage the consumer and increase demand that is ultimately slowing. We expect margins to continue to decline. 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. 3Q23 results validated our concerns around a faster-than-average market rent growth RoC deceleration. REXR remains a Short.
CFG
Citizens Financial Group (CFG) - Recently reported earnings. 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.
Keith McCullough recently reiterated his Short call in a Real-Time Alert sent to subscribers. Check out what he said:
There's a way to short broker and bankers...
Coaching Notes:
1. So let's start with this US Bank Short by Steiner (CFG)
2. It's at the top-end of its Risk Range alongside the Squeezed KRE here
3. I don't fear bankers and brokers. I am on the other side of their trades today,
KM
ONON
Brooks Running, owned by Berkshire Hathaway, announced on Wednesday that it saw a 5% increase in global revenue and 7% surge in North America year-to-date. This is on the back of a 25% YTD increase in U.S. e-commerce sales through its DTC business, a 22% combined YTD revenue increase in France and the UK, and market gains in China with regional and omnichannel growth. Although ONON claims to be performance driven, we think performance running minded consumers will always go with a brand like HOKA, Nike, or Brooks first. That leaves ONON exposed to both competitive risks within the performance sector that it claims, as well as the inherent fashion risks, where trends are fleeting and finicky. Not to mention, online interest in the company continues to weaken amid the industry dynamics and a weakening consumer. With demand slowing, increasing competition, and increasing discounting, revenue growth will slow and margins will collapse, which will cause the stock (which trades at ~40x earnings) 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. |
The National Beer Wholesalers Association’s (NBWA) Beer Purchasers Index (BPI) improved to 48 in October from 45 in September. The BPI is a diffusion index where a reading above 50 denotes expansion in volumes while below 50 indicates contraction. October is the third consecutive month of contraction. Only two of the seven beer categories were in expansion. AB InBev needs a healthy beer industry, because Bud Light continues to lose share in the U.S. AB InBev said Bud Light has only lost 5% of its shelf space in the U.S. in the fall resets of retailers. In comparison, Miller Lite and Coors Light have gained 6-7%. Mexican imports have gained share as well and have led the beer category in growth this year. Both Constellation Brands and Molson Coors have expressed confidence in gaining additional shelf space in the spring resets. Losing the shelf space will make it more difficult for Bud Light to claw back its losses next year.
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 the trucking industry overall, Class A truck orders for October were down 33% YoY; this is a problematic industry right now. Every player continues to add capacity, and this capacity is difficult to unload in the current environment. In light of these factors, we maintain our short position on KNX.
HELE
Helen of Troy (HELE) - One of the core drivers of growth over the last few years at HELE has been Hydro Flask. The brand became hot shortly after the company’s acquisition, and growth and margins ripped. Then in the pandemic, home drinkware became a hot item, driving another leg of growth. All the while HELE printed massive margins while not investing in the brand. Soon it started to lose relevance being beaten by YETI and Stanley in the core water bottle and drinkware categories. Now its losing shelf space and in a decline. You can see the google interest year to date indicating interest falling and finding lower lows YY. As the macro environment deteriorates we expect to see consumers go either for the premium product, or trade down to the lowest priced alternatives on AMZN and other points of distribution. That means continued share/sales risk for this core profit driver at HELE. When the market realized the persistent organic growth risk here, we think the stock will head much lower. We remain Short HELE.
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.
KIM
On The REITs Show this week, Rob Simone explained why Kimco Realty (KIM) is the latest addition to Investing Ideas. "They're allocating capital aggressively at the wrong time of the cycle, and if the consumer’s as bad as we think it is, all of these things are going to trade lower and suffer." Watch The REITs Show.
Below is commentary from Keith within "Real-Time Alerts" explaining his reasoning behind initiating the Short on KIM.
Looking for more Real Estate Shorts? You should be...
Coaching Notes:
1. Evidently the KIM guys don't have live quotes of the US Retailers (XRT) and/or the US Consumer Slowing slide deck from Hedgeye into the holiday shopping season
2. That's good, because the discipline and patience embedded in my risk mgt #process had me waiting and watching on this one for a day like today
3. See REIT Rob Simone's Sector Pro research for the "why" on this one,
KM
DKNG
DraftKings (DKNG) - Focus is clearly on driving profitability and EBITDA; crushed it on all metrics and their guidance was great; they are way above our estimates for next year; 2024 will be the first year when most of the industry will be profitable
In Friday's edition of The Call @ Hedgeye, Todd Jordan showed the tremendous success his Long DKNG call has had. “It's proving to be a really good business, really good company gaining share in an industry we really like,” Jordan said. “It's been our consistent theme on this one. It's just that it gets better and better with each quarter.”
