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Short: MPW, PEB, REXR, CFG, KNX, HELE, KIM Long: DKNG, MCK, GD |
This week we removed On Holdings (ONON) and Marriott (MAR) from the Short side and added General Dynamics (GD) to the Long side.
Below are updates on our 10 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. Obviously this is less exciting as a short at 4-5/share versus >20, but there is still ~100% downside from here. It is headed there over time unless management can pull a MASSIVE rabbit out of a hat. We remain Short MPW.
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) - There has been improvement in forward room rates on a year-over-year basis, indicating a slight positive shift in the hotel market. However, the overall trend in the industry remains negative. Particularly concerning is the declining state of corporate travel, which continues to worsen. This trend directly impacts the outlook for business-related hotels, which is still negative.. We remain Short PEB.
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. CFG 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) - Heavily exposed to Amazon, Target, and Walmart, all making up approximately 40% of total revenues for the company. It’s risky to have so much revenue exposed to those three major retailers as they have to power to apply pressure to any direct vendor. We have seen Target with comps down about 5% the past two quarters, and expected to say in that general range for the last Q with discretionary categories (like what HELE sells) underperforming. The Target CEO said on TV that the consumer is buying less stuff, trimming spend on goods, and even pulling back on grocery. Sounds similar to what we’ve heard out of AMZN with, “From a customer behavior standpoint, we still see customers remaining cautious about price, trading down where they can and seeking out deals, coupled with lower spending on discretionary items.” We’re also seeing a deceleration in traffic at WMT with same store sales following suit, and the home being a subcategory of weakness flagged within the general merchandise bucket (comping negative) that Walmart breaks out. The three biggest wholesale partners for HELE are all seeing and commenting on the softness in consumer spending, which certainly is bearish for HELE. Consumers are spending strategically on necessities not spending up on discretionary items. The continued share/sales risk for HELE is a big risk to organic revenue growth, and when that disappoints vs expectations yet again the stock will head lower. HELE 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.
DKNG
DraftKings (DKNG) is poised for further growth following Kindred Group's announcement that it will cease U.S. operations, including its Unibet brand, by the end of Q2 2024. This move signals a consolidation in the online sports betting arena, potentially benefiting DraftKings. Already a major player with significant market share, DraftKings stands to attract additional customers seeking alternatives to Unibet.
In Ohio, DraftKings experienced a slight setback due to an increase in gaming taxes. However, there's growing opposition to this tax hike, which might reverse the trend, offering a potential boost to DraftKings' business in the state. Given these dynamics, DKNG remains a Long.
MCK
Ocado Group (“Ocado”) has announced a deal for Ocado Intelligent Automation (“OIA”) to provide automated fulfilment technology at a distribution site for McKesson Canada (MCK). The deal will see Ocado sell its proven, unique warehouse fulfilment technology in a sector outside of grocery retail, and provide the AI-powered software applications necessary to operate that technology long term. McKesson Canada is a leading diversified healthcare provider in Canada and is the largest pharmaceutical distributor in the country. We remain Long MCK.
GD
General Dynamics (GD) was added to the Investing Ideas Long side on Wednesday.
Commentary below from Keith within "Real-Time Alerts" delivered to #HedgeyeNation.
In addition to buying-more Uranium (URNM) and Nuclear (NLR) today on red, adding to Defense Longs is where I'm personally deploying my hard-earned capital...
Coaching Notes:
1. When you start to think about this as your hard-earned capital instead of what people that get paid to chase need to do with OPM (other people's money), the lights start to go on...
2. If you didn't have to chase, you wouldn't
3. Our risk management #process is both different and a better way
See Van Sciver's Industrials Pro research product for why on GD,
KM
