Investing Ideas Newsletter

This week we added Rentokil Initial (RTO) to the Long side of Investing Ideas and removed Brinker International (EAT) 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) -  The online betting industry was hit with negative headlines this week, with the most newsy being an NCAA pushing for an all-out ban on college player prop betting (betting on a single player's statistics in a game). We conclude that a ban of this multitude would not pose a material risk to the industry. College betting is a smaller chunk of the broader industry, and most states do not even currently offer single player props. We are buyers of the pullback on DKNG.

Our GLL team, led by sector head Sean Jenkins put out a comprehensive note on the implications of this ban coming to fruition. For more information on the topic, CLICK HERE.

HII

WEEKEND UPDATE: Huntington Ingalls Industries (HII) - The company boasts one of only two shipyards in the country that are capable of building nuclear-powered submarines. While competitor General Dynamics (GD) can only build subs, HII builds both subs and nuclear powered aircraft carriers. The Navy is working on clearing the budget to start work on next-generation attack submarines built by the two companies. The final design of the ships has not been confirmed, but the plan has been brought to Congress to begin design and assembly within the next several years. HII remains a Long.

XYL

WEEKEND UPDATE: Xylem (XYL) - The U.S. Environmental Protection Agency (EPA) has issued a fourth Toxic Substances Control Act (TSCA) which requires testing on per- and polyfluoroalkyl substances (PFAS). Xylem's water infrastructure will come into greater demand as more emphasis is put into removing these particles from the water, as the current deteriorating water infrastructure is not keeping up with modern health standards for purification of the nation's water supply. XYL remains a Long.

GTBIF

WEEKEND UPDATE: Green Thumb Industries (GTBIF) - Minnesota is now under the cannabis legalization spotlight, as legislators debated this week on updating their cannabis law. They aim to streamline the business licensing process in order to encourage new businesses to open in the state. This news comes at the same time as Minnesota's former governor launched his own cannabis edibles brand. We remain Long GTBIF

RTO

This week, Rentokil Initial (RTO) was added to the Long side of Investing Ideas.

Below is a "Real-Time Alert" delivered to subscribers:

Check back next week for the full stock report.

WYNN

WEEKEND UPDATE: Wynn Resorts (WYNN) - Wynn Macau has awarded a total of 6,977,787 shares, each valued at HKD0.001, to 151 employees and one executive director, representing about 0.13% of its total issued shares. C.O.O. Frederic Jean-Luc Luvisutto received 2,365,896 of these shares. Performance targets are set for the shares awarded to the executive director and two others, while the remaining 149 participants will receive their shares on January 31, 2027, with no performance conditions. We remain long WYNN.

GIL

WEEKEND UPDATE: Gildan Activewear (GIL) - The company has been investing in manufacturing capacity to serve the growing fashion basics category.  Fashion basics is more form fitting, softer ring spun cotton that commands a higher price in the retail channel.  Interestingly though, with the right assets, they are not much more to make, meaning the margin opportunity of the industry shift towards fashion basics is immense.  GIL will take share in any category it wants to with its low-cost advantage, but fashion basics is where it can get really good margin flowthrough and returns on investment for capital deployed. We see the industry shift to fashion basics as a significant tailwind to GIL margins and earnings growth. We remain Long GIL.

TJX

WEEKEND UPDATE: TJX Companies (TJX) - At TJMaxx, we’re seeing YY traffic data remain positive and relatively consistent over the last few weeks. The start of the quarter was a little rough, with negative traffic at TJMaxx, but it has improved since mid-January, and have improved since the time the company issued its guidance. The company guided to slowing comps but we think that was conservatism on its part based on trends it saw in January.  We expect the company is going to come out and beat the quarter and raise FY guidance. Trading very close to the 25x PE (the multiple we think this company deserves), we see close to 50% upside from here with both earnings and potential valuation upside. We remain Long TJX.

EDU

WEEKEND UPDATE: New Oriental Education (EDU) - As the significance of test scores in China continues to grow along with emphasis on securing access to prestigious universities and promising career opportunities post-graduation. Private education sectors continue to reap benefits of the increased importance. Recently, the government has been promoting vocational education to meet the global demand for skilled labor. Private education institutions have quickly adapted to this initiative, capitalizing on the heightened demand. We remain long EDU as a result of continuing industry trends.

BYON

WEEKEND UPDATE: Beyond Inc. (BYON) - The company announced a partnership with X (Twitter) this week that will include short and long form content, targeted campaigns, and future shopping integration. BYON’s goal with the partnership is to develop customer acquisition and retention strategies and put a spotlight on BYON’s brands through the lifestyle entertainment content. This is going to be a piece of the puzzle in BYON’s overall marketing campaign designed to bring back online millions of former customers and acquire millions of new ones through an innovative media/marketing strategy under Marcus Lemonis that we are perhaps only scratching the surface of. We remain Long BYON.

FWRG

WEEKEND UPDATE: First Watch Restaurant Group (FWRG) - Recently, the company surpassed yet another milestone in the restaurant industry by crossing the $1 billion sales mark. This nearly doubles its sales total since 2019, as they also reported 5% same-store sales growth while overall restaurant traffic declined. First watch also announced they will be expanding into new markets: Las Vegas and New England. The path forward looks clear, and we remain Long FWRG.

SMCI

WEEKEND UPDATE: Super Micro Computer Inc. (SMCI) - The company may be up 1000% in a year, but we think there's still more room to grow. Don't let the news fool you, we see high growth coming from AI servers, especially in a hardware company like SMCI. They have a good relationship with NVDA, who continues to grow, and we continue to see positive signs that this company will outperform in the future. SMCI blows NVDA and other AI hyperscalers out of the water in terms of growth potential in the next two years on fundamentals, if they meet their growth benchmarks. We remain long battleground stock SMCI.

DIDIY

WEEKEND UPDATE: DiDi Global (DIDIY) - The company's market share of ride-hailing order volume in China for February 2024 rose to its highest level since February 2022 with an estimated year-over-year growth of 34% in Q1 2024 transactions. Despite mixed Q4 2023 results, including a revenue beat and an EBITA miss, a $2.1bn investment revenue from selling its smart auto business to XPEV contributed to Didi's highest quarterly profit in history. The company trades at an attractive valuation compared to Uber, showcasing faster growth. Q4 highlights include a gross transaction value (GTV) beat, improved take rates, record transaction volumes in China, and sequential improvements in international price per transaction and gross margins, despite a year-over-year decline. We remain Long DIDIY.

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) - The company is set to launch its flagship heated tobacco device, IQOS, in Texas as a US entry point for the product. This is the top selling heated tobacco device globally and is at the core of PM's strategy to shift focus away from traditional tobacco consumption into new re-imagined, and possibly healthier methods. We remain Long PM.

MPW

WEEKEND UPDATE: Medical Properties Trust (MPW) - The company disclosed in their 2023 annual report (Form 10-K) a "definitive agreement" to divest five properties leased to Prime, expecting net proceeds of $350 million. However, during Prime's recent investor call, they highlighted that discussions with MPW are ongoing and have yet to be concluded. This statement contrasts with MPW's announcement, which had previously led to a notable increase in MPW's stock price. We reiterate our Short MPW call.

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) - This is a broken IPO that’s 3.6x levered with decelerating comps. It isn’t improbable that comps go negative in 1H. With about 99% of the stores franchised and unit growth slowing and negative comps, its not unlikely for total revenues to decline. Given the stock characteristics -- valuation, leverage, failed IPO -- we wouldn't touch this long side unless we can model material earnings upside, which we're not likely to see with an increasingly strapped consumer that traffics EWCZ stores. Knowing what we know today, we aren’t buyers of this stock until it is closer to $5. Stay Short EWCZ.

AAPL

WEEKEND UPDATE: Apple Inc. (AAPL) - Felix Wang pitched Apple as a Short on "The Pitch" this week. AAPL is down 7% since January, down 10% YTD, and underperformed the NASDAQ by 20%, which is its worst performance in 11 years. Wang cited severely lagging shipment rates, slow iPhone sales data in China, and the relative failure of the iPhone 15 in terms of phone activations. We remain Short AAPL. 

To watch the full presentation from Felix, CLICK HERE.

PFE

WEEKEND UPDATE: Pfizer (PFE) - The company has shifted its global creative duties from Interpublic Group’s FCB and IPG Health to Publicis, just 10 months after consolidating with them, while retaining IPG for its PR account and health remits. Pfizer aims to integrate creative services into Publicis's existing services, maintaining a flexible partnership between Publicis and IPG to support its marketing model. The account, valued at $1.41 billion and covering over 30 markets, was one of 2023's largest account moves. We remain Short PFE.

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.