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Short: MPW, HELE, PSEC, EWCZ, AAPL, PFE, BIRK, ABR Long: DKNG, FYBR, HII, XYL, GTBIF, EAT |
This week we added Arbor Realty Trust (ABR) and Brinker International (EAT) to Investing Ideas.
Below are updates on our 14 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) - The company reported earnings this week on Thursday after market close. DKNG fell short of making it 5 near-perfect quarters in a row, so the illustrious “5-peat” is now off the table. For a variety of reasons, we think the company and stock will be just fine, though. Headline Q4 results missed slightly, but that's really the only negative thing from this print. They upped guidance and forward commentary delivered in a big way. Ultimately, we don’t think a hold impacted quarterly miss is derailing this story – forward numbers need to move much higher, starting with the Q1, and expectations for long term growth and margin expansion also need to move higher.
Looking ahead, as the recent competition and promotional wave moderates and industry growth charges ahead, DKNG should benefit disproportionately. In the words of management, ’23 was a “prove it” year for the company. In the words of Hedgeye, ’24 should be the “breakout” year for the company. It’s time to reload and chase that next championship season (Q1 print and '24). DKNG 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 Navy's ships are old, there is replacement demand plus growth as the government turns over the current Navy fleet. The US is in a refresh cycle for a lot of the larger military platforms like aircraft carriers. There is likely going to be development of a 'drone fleet' of ships, introducing something totally new. There are really only two major ship builders, and you'd want to be long either HII or GD to capitalize on the uptick in shipbuilding set to take place. We remain Long HII.
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 reported positive fourth quarter earnings on Feb. 6th. They beat on EPS and revenue, with 2.12 billion vs estimates of 2.05. They forecast above estimates as well, with a main driver being growth in its water infrastructure segment. XYL remains a Long.
GTBIF
Read Consumables analyst Howard Penney's original stock report outlining the Long call on GTBIF HERE
Green Thumb Industries (GTBIF) - The company is scheduled to report earnings on Feb. 28th. Their last earnings call provided a positive outlook for the future. The company has robust financial health with significant revenue growth and adjusted EBITDA margins. The company's focus on maintaining a healthy balance sheet and generating substantial cash flow positions it well for ongoing investments and shareholder returns.
The company is leveraging strategic investments to expand its market presence, particularly in states like Maryland and Ohio, where legalization has opened up new opportunities. The emphasis on brand building and award-winning product offerings will likely continue driving market share gains.
GTI plans for the future without relying on federal regulatory changes or tax relief, indicating a prudent and disciplined approach to growth. This strategy ensures stability and profitability regardless of external changes in the cannabis industry landscape. GTBIF remains a Long.
EAT
Brinker International (EAT) - This week we added EAT to the Long side of Investing Ideas. Below is a "Real-Time Alert" from Keith McCullough to subscribers:
There's plenty to buy, WHEN it is on sale...
Coaching Notes:
1. I've been waiting, patiently, for Howard Penney's Long Brinker (EAT) Long to correct towards the LOW-end of its Risk Range on #decelerating volume and it's doing that today
2. Patience pays, if you have a #process that perpetuates patience...
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) - YETI reported this week with a miss with DTC decelerating and wholesale accelerating. We consider Yeti a share gainer against Hydroflask, owned by HELE, and if the share gainer is down, imagine what is happening to the share loser. Especially with Yeti wholesale up so much, it is taking shelf space directly from Hydroflask at retailers like Dicks. We would be pressing the HELE short here.
PSEC
Read REITs analyst Rob Simone's original stock report outlining the Short call on PSEC HERE
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) - Traffic trends at EWCZ trended down post-Christmas but ticked up slightly this past week, while still staying negative. The sequential improvement was most likely due to the timing of Valentine’s Day. But not even that was able to turn traffic trends positive YY. Comps here are going to continue to be tough as consumers are either slowing the frequency in which they go for their services or all together trade down to DIY options. The current 34x PE should come down over the next few quarters, causing the stock to fall from the ~16 today to under 10. EWCZ remains a Short.
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.
This week, Berkshire Hathaway (Warren Buffett) sold 10 million shares of AAPL stock. Previously, AAPL represented ~50% of Berkshire Hathaway's portfolio. This was a risk that Wang highlighted in his Short AAPL presentation last month. Is this going to be the start of more selling?
We remain Short AAPL.
PFE
Pfizer (PFE) - This week, the company ended a decade-long court battle and paid 93 million to settle the Lipitor antitrust lawsuit. Pfizer did not admit liability, and called the allegations "factually and legally without merit." The claim was that Pfizer fraudulently sought to extend its patent rights over Lipitor and purposely delayed the introduction of a generic version of the drug. PFE remains a Short.
BIRK
Read Retail analyst Brian McGough's original stock report outlining the Short call on BIRK HERE
Birkenstock (BIRK) - Catterton wanted to sell this company at a $6bn price tag, which equates to a 30 stock price. The bankers walked the price materially higher to $47ps, which is why, at least initially, this IPO failed miserably. Like it or not, we think Catterton was right in its pricing assessment, and that's where the stock will ultimately trade. If our below-consensus numbers are correct, that 30 price could be as soon as 9-12 months out. That should, in theory, be when the rest of retail is facing easy comps and putting up accelerating earnings algorithms, and BIRK will be putting up the exact opposite. We remain Short BIRK.
ABR
Arbor Realty Trust (ABR) - This week we added ABR to the Short side of Investing Ideas. Below is a "Real-Time Alert" from Keith McCullough to subscribers:
If you're with me (and my Signals) on Higher For Longer (on inflation and Bond Yields)...
Coaching Notes:
1. The you're with me hunting for Rate Sensitive Shorts like certain REITS
2. REIT Rob Simone remains The Bear on this REIT,
KM
