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Short: MPW, PEB, ULTA, REXR, CFG, ONON, KNX, HELE, KO, KIM, MAR Long: DKNG, MCK |
This week we added McKesson (MCK) to the Long side and removed Short Anheuser-Busch (BUD)
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. 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. 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) - The debate about the impact of "return to office" (RTO) on hotel revenue per available room (RevPAR) has evolved over time. Initially, it was seen as a key factor in boosting weekday RevPAR, especially in urban areas. However, recent trends suggest that this impact has been less significant than expected. Despite some improvements, the increase in office attendance hasn't significantly boosted hotel demand in key urban markets, hitting a plateau in the past year.
This situation continues to be a challenge for the hotel industry, particularly affecting urban hotel Real Estate Investment Trusts (REITs). Among these, Pebblebrook Hotel Trust (PEB) is highlighted as a short investment option due to its exposure to these trends. We remain Short PEB.
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. |
ULTA
Ulta Beauty (ULTA) - This week it was reported that Sephora (an Ulta competitor) has locked up all of its fragrance products, with just testers on the shelf. The company is responding to rampant theft of the fragrance products that has been seen industry wide. Ulta has take similar action in its stores.
The situation ends up being lose lose for the retailers, as they risk higher shrink if they don’t take action, but then risk lower sales given the friction created in the buying experience by having to request items being kept in back. So either way the rising shrink problem in fragrances is a sales/margin risk going forward. ULTA is coming off peak demand, and peak margins now seeing demand slowdowns and margin reversion. We think the stock continues to head lower as numbers and the multiple compress in the coming quarters. ULTA remains a Short.
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. |
Rexford Industrial Realty (REXR) - 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) - In their Oct 18th earnings, the bank's non-GAAP earnings per share fell short of expectations at 0.89, primarily due to reduced revenue from both net interest and non-interest sources, and higher operating expenses. There was a notable decline in net interest income, partly due to increased funding costs. Loan growth slowed, and deposits decreased slightly due to interest rate impacts. Although overall credit quality was stable, there was a minor uptick in non-accrual loans, especially in commercial real estate. These factors contribute to the current challenges in the regional banking sector, including increased deposit costs and regulatory changes affecting capital requirements.
Below is a Real-Time Alert that went out to subscribers on Tuesday this week:
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This move in Regional Banks (KRE) today is largely a function of short-covering... Coaching Notes: 1. That's why we like moves like this 2. The only way to make more money on the Short Side heading into a recession is to have more Bear Market Bounces in Sector Styles like Industrials and Financials like this 3. If it wasn't a Bear Market, it wouldn't bounce like this! KM |
CFG remains a Short.
ONON
On Holdings (ONON) - Reported Earnings This week. By all means it was a good headline, with the company putting up CHF0.20 vs the Street at CHF0.14, but the good news pretty much ends there. Gross margins were up a healthy 280bp, but the improvement marked a sharp deceleration from last quarter. We think next year the change goes negative. There was a pull forward in revenue as the company unloaded some of its excess inventory into the wholesale channel, but receivables rose materially (+44% vs +27% last quarter), which makes us raise an eyebrow as it relates to the terms it's offering wholesale accounts.
Inventories are still up 66% vs last year, and while that improved sequentially, the company remains aggressive with its product buys. On top of that, it guided 4Q wholesale growth in the high-single-digits, which is simply a massive slowdown from its 3Q and TTM run rate of over 50%. The company cited shutting down certain doors in Europe, and the impact of the 3Q pull-forward. But optically, the rate of change is staggering. Our concern here remains that over 80% of the company's cash flow comes from a single silhouette, and it's simply not innovating enough, aside from tweaking the design and coming out with new colorways.
We're also concerned that growth at HOKA is slowing (we just went short DECK after getting more than a 2-bagger out of it long-side), and the competitive set including Asics, Brooks and Saucony are all stepping up their game and going right at HOKA and ONON. The nail in the coffin is that we think Nike will launch a major running platform in the March/April timeframe (ahead of the Olympics), which will stress the category beyond a level that ONON and DECK management are currently banking on. Whether Nike succeeds or fails is irrelevant. The fact is it's coming. We'd short ONON first, as the multiple has more torque (35x earnings and 20x EBITDA), though both names are likely to work short-side over the next 12 months. Knowing what we know today, we'd stay short ONON until 15, and wouldn't buy it unless it were a single digit stock. Yes, seriously. The risk that's building here is frightening. ONON remains a Short.
KNX
Knight-Swift Transportation (KNX) - The recent earnings report from KNX had an initial surprising bounce, but the stock has since fallen by approximately 6%. Despite beating consensus on the surface, their downward revision of guidance suggests potential challenges in the fourth quarter. This is reflected in their shrinking profit margins, signaling a tough environment. The trucking industry as a whole is facing a profit recession and dealing with structural overcapacity. High barriers to exit mean this overcapacity issue may persist. Earnings estimates for KNX have sharply declined, now barely exceeding 2 per share.
Moreover, the trucking industry is in a difficult phase, evidenced by a 33% year-over-year drop in Class A truck orders for October. This overcapacity, challenging to offload in the current climate, afflicts the entire sector.
This downturn aligns with a broader macro deceleration in transport data, especially in North America, where reduced government spending and a slowing consumer market are evident. KNX remains a Short.
HELE
Helen of Troy (HELE) - An important piece to be aware of for HELE is what it actually owns. The company highlights its brands, including the likes of Vicks, Revlon, and Braun. But the company doesn’t own all of its brands (none of these). Rather it has licenses for some sub categories of the brands that typically dominate in one. For example, it doesn’t own Vicks VapoRub, but has the license to make and sell the Vicks vaporizer machines/refills.
It doesn’t own Braun Razors, rather the license for other random categories like thermometers and nasal aspirators. Below details out the products by brand when licensed. A lot of the offering is home related items, like small appliances, and non-consumable in nature. We think we can see prolonged pressure in these categories that were over consumed during the pandemic, and that HELE will be losing share in them as well.
KO
Coca-Cola (KO) - The future threat from GLP-1 drugs reducing demand for Coca-Cola’s products is weighing on the multiples of food and beverage stocks. As a marketer of sugary beverages, Coca-Cola faces an existential threat from consumers reducing their calorie consumption. It will take some time for the market to assess the full impact of GLP-1 drugs, but in the near term the data points will continue to be more consumers taking the drug and more insurance companies paying for the drugs. Investors should expect a lower valuation range for the company while the data points point to more patients on the weight loss drugs. KO remains a Short.
KIM
Kimco Realty Corp. (KIM) - Recently acquired RPT at or near peak earnings for the retail REITs, paying a full price heading into a consumer led recession. We think forward earnings are at risk from rising debt costs + small tenant defaults that always accompany a recession. KIM remains a Short.
MAR
Marriott International (MAR) may face a weaker recovery in revenue per available room (RevPAR) due to limitations in business travel. Marriott's growth may be hindered by various factors, including a decline in construction mix, underperformance of growth brands, and delays in the full-service segment. As a result, MAR's growth is expected to lag behind its peers, and the current stock valuation may not be justifiable.
Consensus estimates for Marriott's performance may be overly optimistic and could require downward revisions in the near term. This leads to the suggestion that Marriott could be a good candidate for short selling due to expected underperformance, estimate reductions, and a cut in valuation. MAR remains a Short.
DKNG
DraftKings (DKNG) - Set new records in Massachusetts for sports betting in October, with over 300 million in bets and 34.3 million in revenue. This marks a significant increase from their previous record in September and demonstrates their dominance in the state's sports wagering market. The company's success is attributed to a high percentage of bets held, contributing to its substantial revenue growth.
MCK
This week we added McKesson (MCK) to the Long side of Investing Ideas.
Below is a Real-Time Alert that went out to subscribers this week:
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There aren't nearly as many Risk Range™ Signal Strength Longs in my #VASP Machine right now... but there are Longs (like DKNG, META, MNSO, etc. that we've reviewed consistenly across our content platform ever since they've signaled Bullish TREND)... Coaching Notes: 1. But we don't just signal buy, buy, buy on them every day 2. We signal WHEN they are for SALE towards the LOW-end of their Risk Ranges 3. See Tom Tobin's Healthcare Pro Long/Short product for why on MCK, KM |
