Tom Tobin's 'Best Idea' Long Call on $TXG

“I'd love to make this as difficult and painful as possible”
–Nobody Ever

This summer, I decided to run a marathon in a year. Despite being active and eating healthy, I can’t seem to shed my COVID belly. I am at that age when people sense the clock running down and do mid-life bucket list-type stuff like running marathons. It’s also better to get as fit as possible before the really bad stuff starts to happen.

I did some research, developed a training plan, signed up for a 10K trail race, got a friend to join me, and started running. Unfortunately, I wasn’t as fit as I imagined, both physically and mentally. Initially, my pace resembled walking, and my heart rate felt like an actual panic attack. Pushing through discomfort is something I am familiar with, but I also heard a new inner voice running me down and trying to convince me how pointless it was to try. 6 weeks in and I am finally turning the corner from building a base to making actual improvement. Running can still be a chore, but more often I find a pleasant rhythm of churning legs and breathing that feels productive and optimistic. I’m pretty sure I’ll have a good race, but the real gain has been to recognize and feel how much further there is to go and how much more I can do.

Back to the Health Care Grind...

I am refreshing 10X Genomics (TXG) as a short today at 12:30 PM (CLICK HERE to get access), an idea we’ve been short since early 2022. More than just a presentation, it’s the result of a long cycle of doing the reps of success, failure, and iteration within the Hedgeye framework. I started on the buyside where an analyst gets paid for the ideas that get into the portfolio and make money. To get an idea into the book you pitch it. If your PM likes it and if you make money, the next idea goes in the book a little easier, and you share the credit (and profits) with your PM who is a genius for listening to you. If your idea blows up, you get to keep 100% of the blame and the next idea may not get in the portfolio at all. This is The Analyst’s Dilemma, finding the line between credibly acknowledging the limits of what you know and expressing conviction. You need to do both to get paid.

People solve the Analyst’s Dilemma in all sorts of ways. In my solution, I have come to recognize three important things over 15 years at Hedgeye iterating my process and building a bridge from Macro Quads, to Health Care Macro, to Factor Scores, to the top line of my companies, and finally to my fundamental view and Position Monitor.

First, Macro Quads are the foundational condition for any stock moving higher or lower. The four quadrants of economic growth and inflation are the air they breathe, the stream they swim in. Quad 3 in 4Q24 is a headwind, even if Health Care is a relative outperformer, average returns and batting averages are worst in Quad 3. We also have Health Care Macro headwind with indications that hospital wage inflation, and Health Care more broadly, will reaccelerate to 6.4%, reversing a massive labor tailwind by the end of the year. Second, stocks with different factors behave differently across Macro Quads. Every week we assign a Factor Score to our Health Care universe by mapping the historical batting averages to an individual stock’s current factor combination. High multiple, unprofitable, high beta, and small cap describe the stocks in the lowest quartile bin in Quad 3. Through this week’s update the stocks with the highest Factor Scores in my universe carry a 68% weekly batting average with an average weekly/monthly/quarterly performance of 0.27%, 1.58%, and 6.56%, respectively. Despite those excellent numbers, it’s still easy to overthink it and screw it up. A PM still needs to put the stock in a portfolio, and I am still on the hook if it doesn’t work.

TXG has been a consistent Factor Short each week with a bottom quartile Factor Score that carries a prospective batting weekly batting average of 41% and average weekly performance of -2.23% for the current Quad regime. That could be enough of a thesis, but it also has deteriorating fundamentals based on our analysis of the entire history of NIH grants and a model that forecasts TXG’s revenue trajectory with high accuracy. TXG will likely miss 3Q24, guide 2024 lower, 2025 revenues will likely decline raising concerns about cash burn and the balance sheet, and a $10 price target doesn’t seem like a stretch. If you want to hear more tune in at 12:30 PM ET today, check our work, and ask probing questions. As much as we value quantitative methods, it’s the Analyst’s Dilemma and our collective qualitative feelings that ultimately drives decisions.

Best of luck out there today,

Tom Tobin

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