Investing Ideas Newsletter

This week, we added longs TJX Companies (TJX) and New Oriental Education & Technology Group (EDU) to Investing Ideas.

Below are updates on our 16 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) - Another state is making progress toward the legalization of gambling apps, which would open up another chunk of the U.S. population to DKNG's services.

Missouri is collecting signatures and has a lot of support among the population. We think this will get over the line and could set up legalization for later this year or early next year.

Click here to watch Jenkins discuss DKNG on Thursday's edition of The Call @ Hedgeye.

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 The initiation of a replacement cycle for outdated water infrastructure, spurred by federal legislation, is expected to sustain this upward trend.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) - As we navigate the evolving landscape, the squeeze on margins remains a pivotal factor to keep under surveillance, especially as equity prices find their new equilibrium in a potential rescheduling environment. Despite the challenges, the elite cadre of MSOs has managed to maintain robust financial health, with gross margins consistently over 50% and EBITDA margins surpassing 30%. On the EBITDA front, the average margin is 32%, led by GTBIF, at 32.6%. 

EAT

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

Brinker International (EAT) - Chili’s is significantly outperforming the industry from a traffic perspective. Chili's traffic was up last week, while the industry as a whole was down.

Chili’s is also the new primary sponsor for NASCAR driver Corey LaJoie's No. 7 Chevrolet Camaro ZL1. The car’s interactive paint scheme shows the restaurant's famous Presidente Margarita and features nine QR codes.

Click here to watch a clip of Penney discussing Brinker on "The Consumables Show," which airs at 11am ET Mondays.

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) - February GGR trends will remain the focus of markets this week, but as we look back on the Q4 prints and assess the full year performance, there’s plenty of detail to consider. Market share in prior years and quarters doesn’t necessarily indicate future share, but at the property level, there are market dynamics and clues to be gleaned from prior results. Focusing on Wynn Palace on Cotai, we’d note that the vision of former WYNN CEO and founder Steve Wynn is coming to fruition. As GLP opened its doors and the construction disruption subsided, the Wynn, MGM, and GLP neighborhood of the market is getting solid traction with both WYNN and MGM China benefiting materially. MGM Cotai’s success (also fixing their prior mistakes) hasn’t received enough credit, but neither has the performance of Wynn Palace. On our calculations, Wynn Palace has continued to ramp its share toward ~7-8% of the mass market, mostly led by premium table play. 

Historically, WYNN likes to operate directly next to competitors (plenty of old Steve Wynn quotes on this) as the overflow tends to benefit them (since their hotels always sell out) … seems to be ongoing theme in Macau as well. From our vantage, the Street continues to over-estimate share losses for WYNN China and for that we see opportunity and upside to numbers.

GIL

Gildan Activewear (GIL) - GIL’s new Bangladesh facility is an accretive kick-off to meaningful international share gain in fashion basics, at a time when we think GIL is winning in North America as the consumer trades down to the low-cost producer for screen-printed product. GIL is now seeing accelerating revenue trends against easy compares. The company has been accelerating stock buyback ahead of the cashflow unlock to come, a smart move for creating value. Currently trading at around a 12x PE, we think its worth 15-16x and on our EPS estimates we get to over 50% upside next year from where the stock is today.

TJX

TJX Companies (TJX) - The most recent quarter, reported last week, didn’t knock our socks off. Total company revenues slowed, with segments putting up varying performance. Inventories ended +3% – up for the first time in five quarters. The guide has comps slowing from +5% in Q4 to +2-3% in Q1; the quarter started off slow but traffic has started to normalize gross margins continue to improve as merch margins increase. Even with slowing comps (which we're not convinced will happen), with gross margin strength and growing store base sales will continue to grow as the company puts the right inventory in front on consumers. We think that the buying environment for off-price retailers (especially TJX) will be simply exceptional as the year progresses. As such, we think that comps will come in ahead of plan, and take margins with it – particularly as we see margin recovery at Home Goods. In other words, we think there’s a better chance of hitting the 10.6% target EBIT in year 2 rather than having to wait to year 3. We think this should get a 25x PE, and over a TAIL duration has around 50% upside.

EDU

New Oriental Education & Technology Group (EDU) 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:

If you're going to be there selling the rips in things we're long (on green), you gotta be there buying the damn dips on things that are for sale ...

Coaching Notes:

1. Felix just pinged me and said we want to be long EDU at the LRR (low-end of the Risk Range)

2. We've been waiting, patiently, on this one 

3. Execute,

KM

MPW

Medical Properties Trust (MPW) - Got their 10-K done. Using a revenue multiple for a bankrupt company is very interesting. MPW’s auditor did not give consent to include the audit report on a registration statement. Consent has to be given in order to raise capital. This could be a material break with protocol that MPW would file their 10-K without this consent.

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) - EWCZ beat but guided down. Revenue accelerated from +1.2% to +5.3% YY but overall comps slowed on the margin from +3.4% to +1.3%. Wax center openings slowed from +12.6% to +10.6% YY and FY24 guide only implies total YY wax center openings of +8%. Guidance was not much to get excited about when you are a unit growth story at 12x EBITDA. Guided down, on revs and EBITDA, and that store growth of about 8% growth is leading to revenue around $230mm vs street $233.9, which is only about 5% growth. So deleveraging the unit growth is implied in the guide, with this company carrying balance sheet leverage. Not a great look. There is a chance we are close to trends getting less bad, and the company looks like it guided to something beatable. We think the stock has about 30% downside from the ~$15 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) - Wang's first big call as Hedgeye’s Global Tech analyst was to short Apple on January 17, citing slowing international demand.

Shares of Apple have been sliding ever since and another 3.15% this week after Apple reported a 24% drop in iPhone sales in China.

“The problem with Apple now is that every single day it signals a lower low and a lower high within a bearish Trend,” McCullough said Tuesday on The Macro Show. “An Old Wall static moving monkey person is just looking at the 200-day moving average. Completely useless.”

Click here to watch McCullough explain why we remain short Apple.

PFE

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

Pfizer (PFE) - The Street is not liking their oncology play. Pfizer has stopped talking about COVID and is now pivoting to oncology. The reviews have not been great, as oncology is a crowded space. We remain short Pfizer.

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.