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Short: MPW, HELE, PSEC, EWCZ, AAPL, PFE, BIRK Long: DKNG, FYBR, HII, XYL, GTBIF |
This week we removed Knight -Swift Transportation (KNX), General Mills (GIS), and Lamb Weston (LW) & added Green Thumb Industries (GTBIF), Pfizer (PFE), Birkenstock (BIRK) to Investing Ideas.
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.
DKNG
Read GLL analyst Sean Jenkins' original stock report outlining the Long call on DKNG HERE
DraftKings (DKNG) -Georgia is wasting little time on OSB but adding in another layer to the legalization process… The state Senate has passed sports betting bill, SB 386, but with a significant modification: it now requires a constitutional amendment for enactment. This bill, which was approved by a 35-15 vote, aims to legalize online sports betting for 16 license holders and appoint the Georgia Lottery as the regulator. However, with the new amendment, Georgia voters will have the final decision in the November 2024 general election. If passed, sports betting could launch in 2025, probably by March Madness in the optimistic case. Most models have Georgia OSB coming online in ’25 or ’26, but the clarity and political traction is an important and positive step.
Mississippi is not waiting around either, they too passed HB 774 with a sweeping 97-14 vote. The bill now moves to the Senate. The bill allows for all of Mississippi’s 26 casinos to partner with operators. There is still no hard timeline on the launch but the session in MS goes until May 5th, 2024, and with the pace that they are moving at, we expect to get more on this situation soon. If the bill moves through the Senate, MS could be live by NFL Season in ’24, or perhaps sooner given the existing infrastructure (Retail SB and Gaming Commission in place). All positive drivers for DKNG, which remains a Long.
FYBR
Read Communications analyst Andrew Freedman's original stock report outlining the Long call on FYBR HERE
Frontier Communications (FYBR) board and management team are executing a formal and comprehensive review process. Upon announcing the recent hiring of Woody Young, a former chairman of mergers and acquisitions to its board of directors. “The board and management team are executing a formal and comprehensive review process of all opportunities to unlock shareholder value, including continued optimization of our operational and financing strategy, strategic partnerships, joint ventures, divestitures, mergers, and business combinations,” Frontier told investors in a statement. The company is expected to report earnings on February 23 before market open. FYBR remains a Long.
HII
Huntington Ingalls Industries (HII) - The company reported a beat on their earnings call February 1st. They beat EPS and total revenue Old Wall projections, in line with our idea that HII is a solid long. The geopolitical uncertainty coupled with conflicts popping up around the globe lend to the strength of the defense sector in the coming future. The use of drones in warzones such as the Red Sea show why HII continues to work as a long.
XYL
Read Industrials analyst Jay Van Sciver's original stock report outlining the Long call on XYL HERE
Xylem (XYL) - XYL's metrics are poised for growth, driven by increased infrastructure fund dispersals and regulatory actions like PFAS implementation. The initiation of a replacement cycle for outdated water infrastructure, spurred by federal legislation, is expected to sustain this upward trend. In the US, organic growth has reached the mid-teens, reflecting a significant uptick in water spending per capita after years of stagnation. Urban areas, in particular, face high costs for clean water delivery, while sewer infrastructure investments are rising due to environmental concerns. With the onset of a replacement cycle for 50-year-old infrastructure, supported by government stimulus, a prolonged growth period is anticipated. XYL remains a Long.
GTBIF
Green Thumb Industries (GTBIF) - We added Green Thumb to Investing Ideas earlier this week. Below is a "Real-Time Alert" from Keith McCullough delivered to #HedgeyeNation.
Howard Penney has us back on the RTA board with a Long Cannabis Pick!
Coaching Notes:
1. As Portfolio Solutions Subs know, we remain Long of Cannabis via MSOS
2. Howard has plenty of picks in this space that are breaking out on my TRADE and TREND durations and this is one of them
3. AFTER that happens, the process says you buy the damn dips,
KM
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 ~$7.1 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 longer-term risk of MPW eventually becoming a bankruptcy is extraordinarily high. It MUST sell equity to recapitalize itself, including cutting the remaining cash portion of the dividend to the maximum amount possible. It must first address any SEC investigations and/or unresolved staff conflicts before raising public equity. MPW is "shrinking to attempt to save itself," which buys time but materially impairs MPW on the other side after selling the highest-quality remaining cash flow.
REITs analyst Rob Simone was recently featured in an interview with WBUR in Boston. Click here to access.
The Boston Globe released a scathing article on how MPW is not only effecting their investors, but causing human harm in their hospitals. Click here to access.
HELE
Read Retail analyst Brian McGough's original stock report outlining the Short call on HELE HERE
Helen of Troy (HELE) - On recent investor presentations, HELE management has talked about how it makes brands it buys better. We think its quite the opposite, in that the company does not invest in brands, milking them for profit and ultimately making them less and less relevant driving sales declines. This is demonstrated by a core asset from prior years, where the company bought several personal care brands, spending about $180mm, only to see those assets decline and ultimately sell them for $45mm a few years ago. We think HELE’s core brands will show persistent organic growth declines leading to lower earnings and ultimately multiple compression when the market wakes up to the fact that it will not grow.
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).
Recently, PSEC reported that it has given about $58.6 million more in loans to NPRC since the end of the first fiscal quarter of 2024. Most of this money, around $50 million, was used during the second fiscal quarter, marking the third quarter in a row where NPRC has borrowed over $50 million. This money was mainly used for improving existing properties and for general business expenses. Despite this, NPRC hasn't bought any new property since June 2022, but PSEC's total loans to NPRC have gone up by $150 million, an 18% increase. It's not clear where all this extra money is being spent. Last quarter, PSEC lowered the interest rates on some loans, which is like giving a rent break to a big tenant who is having financial troubles. We think PSEC did this to help NPRC manage its costs better, especially with the increased interest expenses. We remain Short PSEC.
EWCZ
Read Retail analyst Brian McGough's original stock report outlining the Short call on EWCZ HERE
European Wax Center (EWCZ) - This week we heard comments out of the McDonald’s CEO saying that consumers are getting weary of higher prices, and that there was a decrease in the most recent quarter due to eating at home becoming cheaper, so consumers are choosing to stay home to save money. Similarly at EWCZ, when it comes to saving money, people can easily find alternatives for at home hair removal. Aside from the obvious option of shaving, there are at home waxing kits and creams people can use, nearly all of which are less expensive than a trip to European Wax Center. As consumers find ways to cut down on excess spending and increase saving, they are likely to turn to cheaper alternatives for goods and services they receive. We think comps will slow in the upcoming quarter, which should cause the multiple to come down from the 34x today, causing the stock to head sub-$10 from the $14 its trading at today.
AAPL
Read Global Tech analyst Felix Wang's original stock report outlining the Short call on AAPL HERE
Apple Inc. (AAPL) - Tech analyst Felix Wang has consistently argued that AAPL's issues extend beyond the Chinese market, facing broader challenges across their business spectrum. This perspective was validated by their recent earnings report, where Apple's performance in the U.S. market barely surpassed expectations, achieving a modest 2% growth. There's hope that the Vision Pro could provide a significant uplift to their revenue mix; however, it currently represents a mere 0.3% of total revenues, casting doubt on its immediate impact.
The earnings details further highlight areas of concern: Mac sales underperformed, with only a 1% year-over-year growth, falling short of market expectations. Additionally, the growth in Apple's Services segment slowed down by 5% quarter-over-quarter. This deceleration raises concerns about the future prospects of both the services' margins and growth into 2024.
The market's response to these developments was notably negative, with AAPL's stock price declining over 3% within the week.
We remain Short AAPL.
Felix Wang presented his full AAPL Short Black Book recently, as the first major call of the new Global Tech Sector at Hedgeye. For the full presentation and to view more of Felix's research, CLICK HERE.
PFE
Pfizer (PFE) - This week we added PFE to the Short side of Investing Ideas. Below is a "Real-Time Alert" from Keith McCullough to subscribers:
You didn't think that a little #Quad1 pin-action was going to scare the Thunder Bay Bear away from his Best Shorts, did you?
Coaching Notes:
1. Bears gotta eat
2. Emily Evans has absolutely nailed this dumpster fire of a stock
3. Like MPW, it's just bouncing to A) a lower-high within B) its longstanding Bearish @Hedgeye TREND C) on decelerating volume AFTER a SPY rally to all-time highs,
KM
BIRK
Birkenstock (BIRK) - This week we added BIRK to the Short side of Investing Ideas. Below is a "Real-Time Alert" from Keith McCullough to subscribers:
Been waiting, patiently, for BIRK to bounce to a lower-high on decelerating volume...
Coaching Notes:
1. We get that, not surprisingly, AFTER SPY Monkey made multiple all-time closing highs
2. That doesn't change the fundamental realities of this IPO's business
3. Brian McGough has been all over those and has been trying to get people #out!
KM
