Investing Ideas Newsletter

This week we added Super Micro Computer Inc. (SMCI), DiDi Global (DIDIY), Canadian Pacific Railway (CP), and Philip Morris (PM) to the long side of Investing Ideas and removed Clorox (CLX) from the Long side.

Below are updates on our 21 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

WEEKEND UPDATE: DraftKings (DKNG) -  Early signs in online sports betting are indicating February could see over 30% year-on-year growth. There's an increasing emphasis on iCasino due to its solid growth prospects. DKNG is notably gaining incremental market share, although FanDuel remains the top operator. Despite the competition, DKNG's continued share acquisition positions it as a favorable long-term investment. DKNG remains a Long.

HII

WEEKEND UPDATE: 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.

This week, HII secured a contract to conduct research and development of submarine tech from the Naval Sea Systems Command in Washington, DC. The contract is valued at $33.2 million, and research will be conducted in Newport News, VA. The Navy's focus on continuing to increase defense spending to enhance defense systems is a core stimulus. HII remains a Long.

XYL

WEEKEND UPDATE: 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 The initiation of a replacement cycle for outdated water infrastructure, spurred by federal legislation, is expected to sustain this upward trend.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 remains a Long.

GTBIF

WEEKEND UPDATE: 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%. 

This week in cannabis news, Germany is said to have approved cannabis use starting April 1st. This new law will allow adults to carry up to 25 grams of cannabis for personal consumption, and store up to 50 grams at home. The legalization wave continues to roll! We remain Long GTBIF

EAT

WEEKEND UPDATE: Brinker International (EAT) - The company continues to outperform in the dining space, especially in comparison with competitors such as Dine Brands Global (DIN), who's main chain is Applebee's. In their latest earnings report, they exceeded in industry sales and traffic, while other brands in the same space saw decline over the same period. We remain Long EAT.

WYNN

WEEKEND UPDATE: Wynn Resorts (WYNN) - The company recently filed a lawsuit against Fontainebleau Las Vegas over noncompete clauses relating to executive poaching. WYNN says they normally see this type of behavior whenever a new competitor shows up, but that this time, the actions are persistent. The company is seeking an injunction to stop the poaching and are looking for damages of $15,000. We remain long WYNN.    

GIL

WEEKEND UPDATE: Gildan Activewear (GIL) - When the initial news was announced about Chamandy being removed from the CEO seat in December, we highlighted the rising probability of a sale of the company as a potential bullish catalyst. Chamandy created value in the stock in the early years of his tenure, but since 2014 the stock has done little to nothing, significantly underperforming both the S&P and XRT.  A business with this moat and growth opportunity isn’t going to sit at depressed multiples forever. 

Perhaps a reason for the timing here is the pressure being applied on the board from long time shareholders with the constant drama around the CEO change ahead of the May shareholder vote. There has been news articles and official letters with accusations from the shareholders and justifications from the board seemingly every week since year end. Potential suitors might see an opportunity to get a decent price on a buyout. Shareholders that want the board changed are throwing around a $42 price being whispered as where bids are coming in.  Ultimately, we think a price to get a deal done here is about $50/sh vs current $37 after yesterday’s 10% rally. We’re still buyers here as we build to $70+ in value over a TAIL duration and a sale being a shorter-term payday. We remain Long GIL.

TJX

WEEKEND UPDATE: TJX Companies (TJX) - The company is executing and we think management is overly conservative in its multi-year outlook; specifically noting plans to return to FY2020 pre-tax margins of 10.6% by FY2025 but it’s on track for that to happen this coming year.  We think that the buying environment for off price retailers (especially TJX) has been and will continue to be simply exceptional. 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. We think this should get a 25x PE, and over a TAIL duration has around 50% upside.

EDU

WEEKEND UPDATE: 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

WEEKEND UPDATE: Beyond Inc. (BYON) - We love a name in which management compensation and incentives are aligned with shareholder returns, and that is exactly the case with BYON. The numbers here are simple. Executive Chairman Marcus Lemonis’ performance awards consist of 500,000 stock options if the stock hits $45, 750,000 if it hits $50, and 1,000,000 if it hits $60. Likewise, the Division CEOs of Bed, Bath, & Beyond and Overstock.com, Chandra Holt and David Nielsen, will both receive incremental stock option packages if the stock hits $40, $50, and $60. That, clearly, means management has every incentive to get this stock as high as possible, and that is ultimately done by executing on the business plan. Keep in mind this is a whole new company with an innovative and experienced leader at the helm in Marcus Lemonis. We are Long BYON.

FWRG

WEEKEND UPDATE: First Watch Restaurant Group (FWRG) -The company's stock is built on a foundation of strong performance, strategic growth initiatives and an optimistic outlook for the future. This report outlines the reasons why FWRG presents an attractive investment opportunity, particularly for those seeking exposure to the small-cap growth segment within the restaurant industry. We remain Long FWRG

SMCI

WEEKEND UPDATE: Super Micro Computer Inc. (SMCI) - This week, SMCI announced they are adding $2bn additional shares of common stock. The stock slid on the news, but we think there is sustained upside to this name. Recent advancements in AI have required more and more computing power and data storage. SMCI stands to benefit from this increased demand in the future. We remain Long SMCI.

DIDIY

WEEKEND UPDATE: DiDi Global (DIDIY) - The company was added to Investing Ideas this week. Below is a Real-Time Alert from CEO Keith McCullough that went out to subscribers:

Looking for ways to get longer of China today? 

Coaching Notes:

1. I am. I like to signal buy on red.

2. One of Felix's better China and Global Tech Longs is DIDI Global 

3. This is the 1st time its been nearing the LRR (low-end of the Risk Range) since the end of FEB,

KM

CP

WEEKEND UPDATE: Canadian Pacific Railway (CP) - The company, following its strategic merger with Kansas City Southern (KSU), now branded as CPKC, is a standout in the North American rail industry. CPKC's network is positioned to capture NAFTA volumes, growing as concerns over China's manufacturing dominance curtail activity. This merger not only solidifies CP's growth prospects but also its lightly regulated oligopoly status within the industry. With exceptional investment opportunities ahead, CP is poised to outperform the broader rail sector, offering a compelling case amid global supply chain adjustments. We are Long CP.

PM

WEEKEND UPDATE: Philip Morris (PM) - Cigarette smoking is the leading cause of preventable disease in many countries. Philip Morris’ strategy is to move away from tobacco smoke and its health risks towards smoke-free nicotine delivery. The company’s smoke-free products now represent nearly 40% of revenue. Driving that change is Zyn, a nicotine oral pouch that is among the fastest growing consumer brands in the U.S. and IQOS, now the largest nicotine brand globally outside China. By the end of the decade, smoke-free products project to represent 2/3 of the company’s top line. We are Long PM.

MPW

WEEKEND UPDATE: 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

WEEKEND UPDATE: 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

WEEKEND UPDATE: European Wax Center (EWCZ) - We continue to see weak YY traffic trends at EWCZ. We think comps over the upcoming few quarters will remain under pressure. The company is planning for center openings of +8% this year, but this is implied deleveraging unit growth and revenue and EBITDA deceleration, all while the company is carrying balance sheet leverage - not a great look.  We could be 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. We remain Short EWCZ.

AAPL

WEEKEND UPDATE: Apple Inc. (AAPL) - As Felix Wang mentioned in his Short pitch on AAPL in January, the regulatory risk that the company would face a DoJ antitrust/monopoly case was high. The DoJ announced the suit this week, and they accuse AAPL of monopolistic practices that stifle competition and innovation in the smartphone market, notably targeting Apple Pay, device interoperability, and the App Store's restrictive policies. Apple's defense emphasizes its commitment to innovation, privacy, and user experience, warning that the lawsuit could hinder its ability to deliver high-quality technology. This legal battle marks a significant escalation in regulatory pressure on Apple, challenging its market strategies and operational principles. Stay Short AAPL.

PFE

WEEKEND UPDATE: Pfizer (PFE) - The company has reduced its stake in Haleon, a consumer healthcare company, from 32% to 22.6% by selling shares worth approximately $3.5 billion. This move marks Pfizer's first divestiture in Haleon since its 2022 spin-off from GSK, aligning with its previously announced plan to methodically decrease its ownership. The sale includes 594 million shares and 196.5 million ADS, totaling about $3.1 billion, with Haleon also repurchasing $399.92 million worth of shares from Pfizer. The transaction is set to finalize on March 21, followed by a 90-day lock-up period for Pfizer's shares. We remain Short Pfizer.

ABR

WEEKEND UPDATE: Arbor Realty Trust (ABR) - The company's first quarterly report as a public company surpassed consensus estimates with its Core FFO at $0.38/share, 23% higher than expected, indicating a strong start. Despite some metrics not being directly comparable to peers and a cautious forward SSNOI growth guide of 5% to 7%, potentially underscoring a conservative approach by management for its IPO debut. AHR's performance in key segments like ISHC and SHOP showed robust growth, albeit with a slight deceleration in pace. The company's FY24 guidance aligns conservatively with consensus, possibly setting a low bar to ensure early public market success, with an implied NAV estimate around $18-19/share, suggesting room for growth and the need to outperform initial projections. ABR remains a short.