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Short: MPW, PEB, REXR, CFG, KNX, HELE, PSEC Long: DKNG, MCK, GD, GIL |
This week we added Gildan Activewear (GIL) to the Long side of Investing Ideas.
Below are updates on our 11 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) - After two weeks of sluggish and below trend Revenue Per Available Room (RevPAR) growth, the US hotel market put up a stronger week that was aided by the shifting of city wide events in key markets. Last week we discussed that the shift in Miami's Art Basel event was probably a negative impact of about 100-150bps total US on growth and for this week it would appear that the impact merely reversed. Controlling for the event shift and simply averaging out the weeks ended 12/2 and 12/9 gets us to a RevPAR number in the 1-2% growth range, not all that exciting and reflective of a slower trend.
We remain mostly negative on the backdrop for US hotel RevPAR. 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) - 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 remains a Short.
KNX
Knight-Swift Transportation (KNX) - The current trucking market is significantly oversupplied with truckload capacity. Despite an increase in freight volume and a decrease in tender rejections, the industry hasn't yet recovered from the excessive capacity growth experienced during 2020-2022. This growth was a response to reduced velocity and increased congestion during the pandemic. Although exits from the market are happening at an unprecedented rate, they haven't matched the surge in growth from the past few years. This oversupply poses challenges for the trucking sector as it enters the contract season. Specifically for KNX, we can expect a decline as the gap between spot rates and truckload contracts narrows, a result of the excessive industry capacity. We remain Short KNX.
HELE
Helen of Troy (HELE) - HELE Brands are mostly stuck in the middle. That means there is a high-quality competitor above it in price and lower priced options below it. That’s a bad spot to be, particularly in a consumer slowdown. Customers will be looking either to save money or pay up for the best offering. Middling brands will tend to lose shelf space and lose market share. This is illustrated below on Amazon with a search of Insulated Water Bottle. Hydro Flask is one of the more expensive items, and there are many options at lower prices. The top-quality brands in Yeti and Stanley will be in the good retail stores gaining shelf space, low priced options hit the mass merchandiser where HELE actually has a large portion of revenue (AMZN, WMT, TGT). We think HELE brands will continue to lose share in this consumer trade down environment as the company doesn’t invest in the brands to make them the top quality or top preference for consumers. We remain Short HELE.
PSEC
Prospect Capital (PSEC) - An externally-managed Business Development Company (BDC) that has elected RIC status. Similar to a REIT, it is a pass-through entity where the corporation pays no income taxes (so long as it meets certain requirements) and individuals are taxed at the individual level on their distributions. It owns 100% of the common stock of National Property REIT ("NPRC"). NPRC is hopelessly over-levered, approaching ~20x net debt-to-EBITDA. NPRC did not cover its interest payments to PSEC with internal cash flow over 2020-2022 (Hedgeye estimates the shortfall at ~365 million combined). We remain Short PSEC.
DKNG
DraftKings (DKNG) - There’s never a dull moment in the world of Online Sports Betting (OSB) and iCasino (iC), and the past month or so following ESPN Bet’s launch has been interesting. Alongside some hold % issues in October and November, the narrative surrounding ESPN Bet’s early “success” seems to have impacted some of the stocks and especially DKNG. Our overarching takeaway and feedback would be to relax – 1 month of download data does not make a trend and the early signs on ESPN Bet’s GGR / handle impact are within expectations. As we have cautioned and laid out in detail before, it is 2023, not 2021 or 1H 2022 where industry market share traded back and forth, promos were still running very hot, and the product standard was not yet established for many operators. The industry has rapidly consolidated following the analog of comparable international markets, and importantly, those trends don’t typically reverse, which favors DKNG and FanDuel.
Our latest data updates below attempt to paint the status of the industry, and based on our findings suggest that on app usage, time on app, and retention metrics DKNG and FanDuel were not materially affected in November. To us, this data bodes well as we look into the end of the year and ‘24. 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) - Keith talked about Hedgeye's view on GD this week on The Macro Show, saying, "When you see economic deterioration like you saw in Russia and have been seeing in China, what’s going up is geopolitical risk, whether you know it or not." We like defense as a sector. GD remains a Long.
GIL
Gildan Activewear (GIL) has built up a competitive moat around large scale basic apparel manufacturing facilities maximizing fixed cost leverage, making it the lowest cost producer of basic apparel in the world. GIL will be able to win business in Private Label retail, at the same time as the screen print T-shirt industry is moving to basic tees rather than the old tube tees. These new shirts are higher priced, but not much more costly to make. Additionally, GIL is driving international gains with its new Bangladesh facility. Historically, the time to own GIL is when new factories are opened, as it means accelerated growth, strong incremental margins and potential SG&A leverage. With consumer and corporate macro pressure, we think GIL's cost advantage presents an opportunity to accelerate share gains. We think TAIL earnings are 4.50 to 5.50 with the multiple heading higher as growth and earnings accelerate. 2 year double. GIL remains a Long.
