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Short: MPW, PEB, REXR, CFG, KNX, HELE, PSEC Long: DKNG, GD, GIL, ROKU |
This week we remove McKesson (MCK) from the Long side and added Roku Inc. (ROKU) 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) - 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. Should they obtain secured financing on a portfolio, the stock will likely squeeze in the near-term as it is an exercise in "buying time," but then on the other side the question will be "what is left?" The answer is "not much," and it will become a raging short again. 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) - Hotel bookings from business travelers have recovered over the last few years and we can see that from the RevPAR numbers; however, through Q4-TD there’s been little incremental lift vs Q3 or Q2. Instead, per some bookings data we track there’s been deceleration into mid-December. On the other hand, leisure hotel bookings are still growing, both relative to ‘19 and YoY, and ticked up from October with November and December accelerating. For the most part, this data jives with airlines bookings data on both corporate and leisure. Our forward rate survey suggests hotels are feeling a little more confident in their weekends (mostly leisure) while weekday rates have faded and look very soft heading into ‘24. While the leisure data is encouraging, the lack of acceleration (so far) portends a soft start to ’24 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) - Uses some of the most aggressive adjusted EPS accounting we have seen. The company actually adds back stock based compensation, amortization of intangibles, and restructuring charges. We’re ok with the amortization add back, but nobody does stock based comp as an add back in adjusted EPS in the land of consumer. As for the restructuring charges, we tend to think its correct to add back one time charges around acquisitions, like deal costs, initial severance, etc. However, when you take one time acquisition charges for several years, they are no longer one time charges, they are probably costs of business. HELE has one of the biggest variance in GAAP vs adjusted EPS and we think ultimately the long term trend will be towards the GAAP EPS which is upwards of 50%+ lower than the adjusted number that management is feeding to the street.
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).
PSEC has been late in filing their annual 10-K reports for the last two years due to issues with internal control over financial reporting, particularly concerning their Collateralized Loan Obligations (CLOs). These deficiencies have been flagged by auditors during the year-end audit. They filed for an extension (NT10-K) in both years and changed their auditor recently, which is a concerning sign. We remain Short PSEC.
DKNG
DraftKings (DKNG) - It’s still early in the reporting cycle for November but as of right now, we’re not concerned about the threat of ESPN Bet and other forms of competition. Yes, in a month where free money is being sent out to new users, there was bound to be some share degradation. However, when factoring in states like MA, OH, and KY into our market share analysis (updated charts below reflect this), we don’t see a material shift in November, at least not on a total online GGR basis. Remember, ESPN Bet nor Fanatics are a factor on the rapidly growing and profitable iCasino space, so market shares will probably manage just fine. So far, this seems to be the case as FanDuel and DKNG maintain their top status across the industry, even as PENN’s ESPN Bet climbs out of the basement. Owing to weaker OSB performance, BetMGM’s share weakened further in November… urgency level for MGM and ENT management teams should be materially different vs the LTM.
DKNG and the industry’s Q4 will be impacted by softer OSB hold in October and November, but the competition bogeyman seems to be less of a factor relative to sentiment. As hold % drifts higher (seems to be in December) and market share continues to hold, the path for a big ’24 remains clear.
ROKU
Roku Inc. (ROKU) - Caught two downgrades in past 2 days; one is based on valuation and one is based on TAM pressures and losing share gains to bigger players (DIS, AMZN); we strongly disagree with both points and ROKU remains one of our top long ideas.
Below is a Real-Time Alert from Keith McCullough that went out to subscribers this week on ROKU:
On The Call @Hedgeye this morning, Freebird briefly walked us through why you should buy the dip on ROKU post a few broker downgrades...
Coaching Notes:
1. His numbers are materially higher than the Street's
2. See his Communications Pro research for details on why,
KM
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) - This week we hosted a call on our take on the GIL management shakeup and battle with the board (replay available to Retail Pro Subscribers). The GIL board came out with a statement shortly before our call… it gave more specific details about the conditions of removal of the CEO. That included Chamandy acting against a succession plan he had previously agreed to, outlining plans to do large dilutive deals outside of the core, and giving the board and ultimatum acting as if he owns the company vs the shareholders. It certainly looks like grounds to remove him should the board choose to do so, and they did. Ultimately we think the outcome of this conflict between the board and the former CEO will be very good for shareholders as all the parties involved will clearly be focused on driving shareholder value or will be at risk of losing their jobs. This business is setup to see accelerating growth and high margin flow through for an upwards earnings revision cycle and multiple expansion.
