Investing Ideas Newsletter

This week we removed Short Birkenstock (BIRK) and added Longs Clorox (CLX), Gildan Activewear (GIL) and Wynn Resorts (WYNN) 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) - Following the ESPN BET launch and up until very recently there’s been ongoing concerns about the promotional backdrop across the industry.  We disagreed with the negative narrative during Q4 and continue to disagree with it.  The updated chart below and slide reflects on some of the promo trends in newer competitive markets of OH and MD as compared to the very competitive MI market – the data measures promotional trends from the time of launch through the most recent data points.  Note the improved cadence of market promotional activity in both compared to MI.  Yes, there might be a month or two where DKNG or FanDuel steps up with special promos to high frequency users, or there’s a big market launch… But the reality in the data suggests that markets are ramping up faster and promos normalizing faster.  The industry is benefiting from its accelerated consolidation and there’s a whole host of additional benefits within that trend. 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. Recapitalization of aging platforms can take decades of sustained investment. The investment surge we saw in the 2000s was mostly in things like consumables, but not in shipbuilding. Increasing geopolitical tension has caused a rise in global defense spending. The US doesn't have the largest Navy by number of boats, that title goes to China. Our lack of nautical assets is a potential defense liability, which could become a focus in the presidential cycle. HII is trading at a steep discount to other defense names, despite clear investment cycle dynamics and autonomous growth potential. HII remains 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 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 reported strong financial performance for the fourth quarter and full year of 2023, emphasizing the company's revenue growth, gross profit, operational efficiency, and strategic capital allocation. They reported a revenue of $278.2 million for the fourth quarter, marking a 7% increase compared to last year. This increase was attributed primarily to the legalization of adult-use cannabis in Maryland and Connecticut, as well as revenue from 15 new stores opened throughout the year. 

GTBIF has been proactive in expanding its retail footprint, opening new stores across critical states, and investing in wholesale operations, anticipating future market growth, particularly in states poised to legalize adult-use cannabis. The company's investment in brand development and product quality has also paid off, with award-winning cannabis brands like Rhythm, Dogwalkers, incredibles, and Beboe gaining momentum. The strategic focus on building a strong brand portfolio and expanding market reach enhances GTBIF's competitive position and long-term growth prospects. GTBIF remains a long.

EAT

Read Consumables analyst Howard Penney's original stock report outlining the Long call on EAT HERE

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.

CLX

Read Consumer Staples analyst Daniel Biolsi's original stock report outlining the Long call on CLX HERE

Clorox (CLX) - Clorox had $7.4 billion in net sales in FY23, but operating margins were 600bps below 2020 levels. The company's valuation, selling at a one-third premium to its pre-pandemic historical valuation, reflects the market's optimistic outlook on its growth trajectory and ability to recapture margins lost during the inflationary surge over the last couple of years. With consensus expectations embedding a significant expansion in gross and EBITDA margins, Clorox is poised for further margin recovery and earnings per share (EPS) upside, supported by its strategic pricing and cost management initiatives. Stay long CLX.

WYNN

Read Gaming, Lodging, and Leisure analyst Sean Jenkins' original stock report outlining the Long call on WYNN HERE

Wynn Resorts (WYNN) - The company was added to the Long side of Investing Ideas this week. Below is a Real-Time Alert sent to subscribers from Hedgeye CEO Keith McCullough:

Looking to go from short to LONG China, as a Factor Exposure?

Coaching Notes:

1. We have been

2. But we have patience embedded in the process and pick our spots

3. Here's what I explained on The Macro Show on China this morning:

CHINA – my #VASP (Vol Adjusted Signaling Process) #likes China more this morning with the Shanghai Comp successfully passing the @Hedgeye TREND Signal Support test (that breakout level = 2953) and Dr. Copper is interested in prescribing the same Signal +0.6% and testing a Bearish to Bullish TREND Phase Transition

And I discussed Long Wynn Resorts as a China Factor play LIVE on The Call with Sean Jenkins. If you're doing ALL the real work, you saw this Buying Opportunity coming,

KM

GIL

Gildan Activewear (GIL) - The company put up a solid quarter last week. Rev and EPS beat as revenue accelerated to +9% from +2%. There was some early replenishment in 4Q, so there is some shifted revenue from 1Q, with management guiding that to down LSD.  That’s weaker than we would think even with the shift. The full year was guided inline, which we like to see, though that is with the company baking in some pressure from a Global Minimum Tax.  We still see around 5% to 10% upside to the full year guide, and greater upside to numbers 2 to 3yrs out.  We think the P&L is about to see strong topline and margin trends, so we like the buyback it did at lower prices throughout 2023.  The noise around potential management/board changes will provide some chop and turnover in the shareholder base, but the resulting setup will be a board and management team highly focused on execution and driving shareholder value.  We think this is a great TAIL long headed to $60 over 1.5 to 2 yrs. Stay long GIL.

MPW

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. 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) - Looking at the YY weekly Google interest in European Wax Center is pretty volatile, but a five-week average smooths out the data a bit. We can see that after trending down over the last few months, more recently there has been an acceleration. The company is reporting earnings next week, when we should hear more about the actual conversion rates, pricing, and how business is trending overall. The upcoming quarter to be reported has tougher comps than last Q, which saw a major sequential deceleration and although 1H24 compares ease slightly, they are still tough levels to try to grow against. We continue to expect revenues to slow, with negative comps. 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. We remain short EWCZ.

 AAPL

Read Global Tech analyst Felix Wang's original stock report outlining the Short call on AAPL HERE

Apple Inc. (AAPL) - The company is once again underperforming. ; YTD, it has underperformed QQQ by 15% points.  Apple's official China website showed yet another price reduction to as low as 3,499 RMB.  The price cut was across all iPhone models.  This is their 2nd official price cut this year in China.  This also means third party channels which we track closely immediately cut iPhone prices as well. AAPL remains a short.

PFE

Read Health Policy analyst Emily Evans' original stock report outlining the Short call on PFE HERE

Pfizer (PFE) - Pfizer shares fell 44% last year and are down 9% so far this year, bringing its market cap all the way down to $150 billion. The company is hoping to reel in investors by making a push into cancer drugs. The acquisition of Seagen in 2023 was a strategic play to increase their effort in biologics and a handful of cancer types. This shift will bolster its oncology business to be 65% biologic therapies by 2030. This is an effort to rebound from their 4Q earnings, which took a 42% hit driven by decreases in demand for their COVID products. We remain short PFE.

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.

We can unequivocally state that ABR's earnings power is declining. The loan book is shrinking, pay rates and average servicing fees are down, provisions are up, the company is originating more mezz/pref equity (we think as part of workouts under the surface) and originations are declining from a RoC perspective + remain a tiny fraction of 2021/2022 levels while those vintage loans are running off. The company also remains a net issuer of stock. Despite these facts, ABR trades at ~1.1x TBV. ABR remains a short.