Investing Ideas Newsletter

This week we added First Watch Restaurant Group (FWRG) and Beyond Inc. (BYON) to the long side of Investing Ideas.

Below are updates on our 18 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) - North Carolina's launch of OSB earlier this week has exceeded expectations so far, with early data indicating strong consumer engagement.  According to GeoComply, a geolocation compliance company, North Carolina witnessed over 5.36 million geolocation checks within the first 48 hours of the launch on March 11.  This figure significantly surpasses the activity seen in neighboring Virginia, which recorded just over 2 million geolocation checks during the same period, despite having online sports betting since January 2021.  Additionally, nearly 370,000 active online sports betting accounts were identified in North Carolina during the state's first two days of activity, compared to 134,000 active accounts in Virginia.

This data is very early and raw data but a decent proxy while we are waiting for NC to get through their first weekend to really get a good perspective on how the launch compares to bigger launches like OH and MA from 2023.  Lindsay Slader, GeoComply’s SVP of Compliance, expressed optimism about the state's potential for continued growth, especially with the upcoming ACC men's basketball tournament and NCAA March Madness tournaments.  The early success of North Carolina's online sports betting market, which features eight OSB operators, is causing some buzz in South Carolina as well, where there has been an increase in efforts to access OSB.  North Carolina being a big sports and Basketball state should have a strong first month. 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) - The company'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 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) - Along with our long iCasino call on DKNG, we believe that WYNN is set to benefit in the brick and mortar space. Recently, CEO Craig Billings has said that the debate pertaining to online casinos potentially damaging their land-based counterparts is, to this point, “reductive.” Wynn has all but exited the iGaming and online sports wagering industries and the operator doesn’t have an extensive portfolio of regional casinos. Its lone venue that’s classified as a regional casino is Encore Boston Harbor, which is one of the highest-grossing properties of that type. The Wynn chief executive officer acknowledged that while online casinos’ impact on the total addressable market (TAM) for brick-and-mortar equivalents is pertinent, there’s more to the story. We remain long WYNN.    

GIL

Read Retail analyst Brian McGough's original stock report outlining the Long call on GIL HERE

Gildan Activewear (GIL) - This GIL board and investor situation continues, taking an ugly turn. A ‘Large Shareholder’ of GIL supplied a story to the NY Post about an inappropriate work relationship the newly announced CEO Vince Tyra had back ‘over two decades ago’.  The shareholder is implying that this could be a MeToo risk for the company.  If there is a pattern of behavior, perhaps that makes sense. The smear campaign from both sides is getting ugly…  Lawsuits, accusations, now (alleged) personal faults highlighted in national news.  It probably gets worse into the May shareholder vote, which will continue to be a distraction.  We like the business and model setup here for accelerating growth, share gains, and ultimately big earnings growth and cash generation.  The stock may not realize its full potential until this leadership debate is resolved so incremental buyers know who will be leading the company into the next growth phase. GIL remains a long.

TJX

Read Retail analyst Brian McGough's original stock report outlining the Long call on TJX HERE

TJX Companies (TJX) - Looking at the credit card data together with the traffic data, we can see that the traffic data does help give a read for sales. During the mid-December to mid-January timeframe visits at all TJX banners were down or close to zero YY and we can see that sales, based on the CC data, were basically flat YY. Now this isnt always the case when you look at the October CC data basically flat compared to traffic data, which was up YY, but overall there is a general read. Looking at the quarter we’re in now we can see that both CC data and traffic data has been trending positive YY. The company guided to slowing comps, but it typically gives a conservative guide at the start of the FY. We think the company set beatable expectations. We think this should get a 25x PE, and over a TAIL duration has around 50% upside. TJX remains a long.

EDU

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

New Oriental Education (EDU) - The company provides private educational services in China. The Beijing-based company is the largest comprehensive private educator in China based on the number of programs offered and total student enrollments. Earlier this year, The Ministry of Education issued a draft policy on off-campus training, suggesting potential positive changes with education policy. Education is one area where we see no regulation risk - instead, it's been countless, positive reinforcement from regulators, particularly on non-academic areas e.g. dance, programming, arts. Flipping from bearish to bullish on China, this is a name we like as there is a booming Chinese market for quality education and overseas learning experiences, which EDU capitalizes on. We remain long EDU as a result.

BYON

Beyond Inc. (BYON) - The growth and catalyst calendar here will prove to be explosive in 2024 – with new branding and new business initiatives coming to market literally every month. Things are coming down the pike with creative ways to build the brand(s) that traditional retail analysts can't even grasp. Influencer strategies with TV shows to reach a broad swath of America, an Omnichannel presence, Baby, Backyard, Dorm...the list goes on with new business drivers. The Overstock banner relaunch is happening on the 28^th of March and, not to mention, the recently announced Zulily acquisition provides product tiering and assortment expansion, allowing BYON to target consumers across all demographics.

Our estimates – beginning almost immediately, are nearly 5x the 'consensus' and we build to $6 per share over a TAIL duration and $400mm in EBITDA, with the Street underwriting something closer to $2ps. This is, for all intents and purposes, a brand new company. Historical multiples are absolutely irrelevant, as is the 'historical margin structure'. We think margins are going from -4% last year to 12%+ over a TAIL duration – simply massive, with outsized Operating Asset turns that should drive ROIC to new highs. But the driver will be outsized top line growth, which should command a premium multiple. The pushback we get today is that it's too small and illiquid for many institutions to buy. But putting 20x EBITDA on this model builds to a $7bn EV, or a stock price of $150-$160. Go long BYON.

FWRG

First Watch Restaurant Group (FWRG) was added to the long side this week. Below is a Real-Time Alert from CEO Keith McCullough:

Looking for Small Cap Growth Stocks to buy on sale?

Coaching Notes:

1. I am

2. We're buying more Russell Growth (IWO), and my #VASP likes this relatively new growth story that Howard Penney likes called First Watch Restaurant Group

3. It's down on decelerating volume today – that's what I'm looking for too,

KM

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. 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.

CLICK HERE for a clip of Simone explaining the dynamics of PSEC on "The REITs Show."

EWCZ

Read Retail analyst Brian McGough's original stock report outlining the Short call on EWCZ HERE

European Wax Center (EWCZ) - After the print, the stock initially was up about 16% on okay results but a negative guide. This week the stock has rerated and hit 3mo lows at $12.20. With the deleveraging the unit growth implied in the guide and revenue and EBITDA deceleration, all while the company is carrying balance sheet leverage its 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 still think the stock has about ~25% downside from the ~$13 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) - Apple faces significant antitrust and regulatory challenges in the US and EU that threaten its App Store revenue model, notably from the Epic Games litigation over in-app payment exclusivity and potential DOJ monopolization lawsuit, alongside compliance pressures from the EU's Digital Markets Act. These developments challenge Apple's control and commission rates, demanding adjustments in its software licensing and revenue strategies. The outcome of these legal and regulatory battles will crucially influence Apple's ability to maintain its services revenue growth, amidst a broader push towards regulating the market power of major tech platforms, highlighting the importance of Apple's adaptability in its IP licensing practices and the potential impact on the digital marketplace ecosystem.

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) - Pfizer can't seem to choose a path forward, and is reeling from their post COVID slump. The company is looking to move in to the booming weight loss category, but their own drugs are not cutting it. Their two top drug prospects are far from being approved for distribution, with many human trial participants dropping out due to nausea, among other side effects. The company is rumored to be looking into an acquisition of Viking Therapeutics, but nothing is confirmed yet. 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.