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Short: MPW, PSEC, EWCZ, AAPL, PFE, BIRK, ABR Long: DKNG, HII, XYL, GTBIF, EAT |
This week we removed Long Frontier Communications (FYBR) and Short Helen of Troy (HELE) from 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) - Along with some other stocks, DKNG got “ARKK’d” yesterday and was tagged for a 7% drawdown off its recent post-earnings highs. Unfortunately, DKNG still has the overhang of ARKK which in the meme stock days of ’20 and 1H’21 might have been a good thing, but at times when ARKK-like holdings are taking it on the chin, DKNG falls victim to the factor moves of “profitless tech”, “ARKK”, “Retail baskets”.
DKNG is no longer a top 10 position for the flagship fund at ARK, but they are a top 3 holder of DKNG. As fundamental analysts, this is mostly noise to us but given our views of Q1 and ’24, could present a buying opportunity for those that have been sitting on the sidelines or lightened up ahead of the print. On the data side, January data continues to trickle in well ahead of our internal expectations, and although much of the January data was baked into management’s Q1 guidance, this data suggests there’s upside to the quarter. Our sense is that management was baking in some conservatism around 2H February and March (smart), but we see upside.
Our scan of estimates suggests consensus has revised their numbers higher, but not enough in our view. DKNG 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 potential reclassification of cannabis from Schedule I to Schedule III by the U.S. Department of Health and Human Services may significantly impact the cannabis industry, suggesting a gradual move toward full legalization over the next 7 to 10 years. This change could prompt a surge of investment, especially in well-established companies and some smaller firms, potentially leading to an industry-wide increase in capacity. However, this may also result in lower cannabis prices and pressure on profit margins due to an oversupply, echoing market dynamics observed in 2022 and 2023. While lower tax rates may offset some financial pressures, uncertainties remain regarding the banking and exchange sectors' attitudes towards the industry. Additionally, it's unclear how this reclassification will affect the entry of foreign competition into the market.
GTBIF is one of the better capital allocators in the space. With operations currently spanning 15 U.S. markets, this nimble consumer packaged goods company continues leading the expansion of its hyper-competitive retail network and house of brands. GTBIF remains a Long.
EAT
Brinker International (EAT) - Brinker International, Inc. has reported its latest quarterly figures, marking a notable upswing from the previous year and underscoring the efficacy of its strategic maneuvers over the past 18 months. At the helm, CEO Kevin Hochman and CFO Joe Taylor are steering the company with a clear vision, prioritizing an enriched experience for guests and staff alongside dynamic new marketing approaches.
Notably, in the quarter, Chili's and Maggiano's have eclipsed industry benchmarks, with Chili's surpassing industry sales by a notable 4% and traffic figures by 2%. The company's concerted efforts in diminishing guest-reported issues and bolstering managerial retention are evident. Financially, Brinker International stands stronger than before, reflecting the fruits of its strategic initiatives and its agile response to evolving market challenges. This commitment to refining customer and employee experiences, coupled with astute marketing strategies, lays a robust foundation for sustained growth. EAT remains a Long.
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 company reported earnings this week and missed expectations on both EPS and revenue. The company is a complete mess, and quarterly earnings are becoming undecipherable after reading their latest filing. Again, we cannot stress this enough, but as with every MPW quarter nothing matters until the 10-K gets filed. MPW remains a Short.
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).
2Q24 results for PSEC were pretty bad. Not terminal yet, but indicative of a company that we think is gradually going to have its equity value whittled down to nothing ahead of an inevitable dividend reduction / recap. Cash flow after common distributions was negative in 2Q24, and has been negative in 3 of the past 5 quarters. PSEC remains a Short.
EWCZ
Read Retail analyst Brian McGough's original stock report outlining the Short call on EWCZ HERE
European Wax Center (EWCZ) - The stock traded down almost 8% this week on seemingly no real news with the market going up. The company did announce its Q4 earnings report date as March 6th. Looking at recent traffic data we see a slight acceleration from last week, but overall the end of Q4 and beginning of Q1 haven’t seen strong trends. We expect comps to continue to fluctuate, but remain negative over the coming months. Given the sales and earnings risk combined with a levered balance sheet, we think the stock has about 30% downside from the ~$14 its trading at today. 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) - So far in 2024, data trends continue to worsen for the iPhone in China. Prices are hitting new lows, and transaction volumes are sharply falling. Meanwhile, there are mixed trends for the iPhone in the US (similar to Q4 2023), and Vision Pro momentum is peaking - with multiple issues after launch. Apple's services segment is also tracking slightly below double digits growth QTD.
Moreover, none of Apple's AI announcements/rumors in the past month are surprising or material movers. All of these themes were discussed in detail in my Short pitch last month. I firmly believe Apple will not grow this year, and estimates remain too high. Apple is already underperforming QQQ by 10% points this year. AAPL remains a Short.
PFE
Read Health Policy analyst Emily Evans' original stock report outlining the Short call on PFE HERE
Pfizer (PFE) - Even Pfizer isn't immune to the AI hype. Announced this week, PFE has developed their own generative AI platform to be used for marketing the pharmaceutical giant's products. Dubbed "Charlie," after the company's founder, the program will aid in content supply chains and restructure their entire marketing workbench.
More bad news for the company. A study from this week noted that the COVID vaccine could potentially be tied to certain medical conditions, notable a slight increase in neurological, blood, and heart-relates issues. We remain Short PFE.
BIRK
Read Retail analyst Brian McGough's original stock report outlining the Short call on BIRK HERE
Birkenstock (BIRK) - The company reporting 1Q24 next week. The stock is back to trading above its IPO price, now at around ~$50. Birkenstock has been benefitting from fashion trends working in its favor, while we like the product and don’t think the 250 year old company is going away, it went public at peak growth and peak profitability. That’s what we find issue with. The growth has been abnormally high and the company will need to continue to put up this double-digit growth and high-teens margin to maintain this stock price. Revenue growth and margins will both be under pressure over the upcoming quarters with the company needing to lap some price increases as well as now expanding into other product categories and having to spend to get those new platforms off the ground. We think this could be trading closer to $30 in the next 9-12 months.
ABR
Arbor Realty Trust (ABR) - We see downside to ~$10/share at least. Another possible "donut," so short it. The underlying loan collateral and average borrower/sponsor is on the extreme low-end of the quality spectrum. Leverage is too high, and the company must continue to raise equity. This is the second most compelling short in our view, but we think should be a small position.
