Below are analyst updates on our nineteen current high-conviction long and short ideas. Please note we removed long Exact Sciences (EXAS) from Investing Ideas this week. We also added Moelis (MC) and Tesla (TSLA) to the short side and Teladoc (TDOC) to the long side. We will send Hedgeye CEO Keith McCullough's refreshed levels for each in a separate email.
IDEAS UPDATES
TWX
Click here to read our original analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
In less than two weeks, the FCC conditions on the Comcast-NBC Universal deal will expire. The expiration will provide greater operating flexibility for Comcast and diminish the regulatory rights of online video distributors (OVDs) as they seek NBC content and program access. Although the FCC conditions expire soon, the Justice Department consent decree conditions remain in force until September.
Pressure to Revisit Comcast-NBC: The conditions are an ongoing operating concern and forces are building to push DOJ to open an investigation so it can determine whether a petition to the federal court for an extension of the conditions is needed. Democratic Senator Richard Blumenthal (D - Connecticut) is leading the charge on Capitol Hill, sending a letter to antitrust chief Maken Delrahim that requests an investigation, an extension of the conditions and, if conditions are inadequate in current circumstances, a move to undo the merger and break up Comcast-NBC. His letter builds on Mr. Delrahim's expressed skepticism toward behavioral remedies as one of the reasons for considering an outright breakup.
We cannot cavalierly dismiss the prospect that DOJ could take an interest. President Trump, as candidate Trump a few weeks before the general election, took a shot at Comcast-NBC within seconds of promising that his Administration would block the AT&T/Time Warner deal. Moreover, the President's feud with the mainstream media has MSNBC as second behind CNN on his fake news most wanted list. Mr. Delrahim's decision to file a lawsuit against the T/TWX transaction, despite his pre-election statements that the deal did not raise antitrust problems, at least raises questions about a possible relationship between the President's fake news agenda and antitrust enforcement policy.
This could be a topic of exploration in the upcoming T/TWX antitrust trial in federal court.
WYNN | MLCO
Click here to read our analyst's original Wynn report. Click here to read our analyst's original Melco report.
The Hedgeye Mass Tracker suggests mass revenues may have grown in the range of +6% to +9% in Q4 after facing the most difficult quarterly comparison (+11% to +12%) since Q3 2014. October 2016, in particular, really knocked the cover off the ball with the first holiday (Golden Week) since the recovery began. Moreover, Macau fully lapped the opening of Wynn Palace and Parisian in Q4, as both commenced operations in Q3 2016. Thus, all of the growth is of the same store variety which should bode well for flow through. With only one new property opening in 2018 and another in 2019 (off a larger base), much of the market growth should flow to the existing properties and drive continued EBITDA growth.
We continue to favor MLCO as the valuation and estimates do not seem to reflect the potential for secular margin growth, along with overall market driven top line growth. WYNN may be set for another earnings season of outperformance due to the Palace ramp and its outsized VIP exposure. Melco Resorts & Entertainment (MLCO) and Wynn Resorts (WYNN) remain our top picks in the space.
RRR
Click here to read our analyst's original report.
We called the positive Q3 turn in the market and it’s looking sustainable. With no new gaming supply on the horizon, the demand side is finally starting to catch up to the very strong macro environment in the LV metro area. Negative wealth effect headwinds are dissipating as the % of mortgages under water fell under 10% recently and housing prices continue to climb. Tax reform should help the economy (doubling of standard deduction helpful for a blue collar town) but also accelerate the sizeable cost of living advantage versus California, already Nevada’s largest population donor. Population growth was already accelerating, due in part to a casino’s favorite demographic – retirees, but with the elimination of the SALT deduction, look out. Nevada is set to benefit.
Red Rock Resorts (RRR) is the most exposed to the locals LV market (90% of the value) so we’ll stick with that one as our horse.
DE
Click here to read our analyst's original report.
Next Year’s Future Payments Vs. Depreciation: In FY17, Deere (DE) recognized depreciation expense of $853 million, but had future lease payments of $878 million at year end. Depreciation expense on just the static portfolio should be higher than the FY17 average on leasing growth, so investors should be asking how lease payments next year will cover depreciation expense. For comparison, the FY16 depreciation expense was $742 million vs. Year 1 future lease payments of $827 million. The spread for FY15 was even wider ($712 future payments vs. $577 depreciation). Is Deere underpricing leases? It looks that way to us.
CERN
Click here to read our analyst's original report.
We remain convinced Cerner (CERN) will not be able to grow new client bookings (~30% of total bookings) over a multi-year duration due to a saturated EHR market with limited replacement opportunity. We presented the analysis behind this conclusion in our June 2017 CERN Black Book. “The top 20 deals represent $500 million or ~35% of total bookings each quarter, including an average of 2 deals over $100 million."
Therefore, one or two deals slipping into or out of the quarter can significantly impact the reported number and makes the task of forecasting bookings increasingly difficult for management and investors. However, with the EHR replacement slowing and "white-space" opportunity diminishing, the probability that Cerner experiences an outsized quarterly bookings decline increases greatly”.
HBI
Click here to read our analyst's original report.
Below is a note written by Retail analyst Brian McGough:
Out of any call I have on the short side the highest conviction call has been, and remains, Hanesbrands (HBI) – where I believe there is terminal value, but it will all be in debt. But with the strong holiday, could we see better reorders in core product from legacy US retailers that have already reported Holiday sales? Yes, we could.
The stock is up 13.5% from the Oct bottom – which underperformed the ‘junktail’ rally by roughly half. It’s on a Calendar year (i.e. quarter just ended and has some visibility on reorders in 1Q, while its customers’ FY ends in Jan). Hype over Champion (overblown). And better liquidity (though will go to pay for higher tax bill – as opposed to other companies getting a benefit). Coming off a squirrely but in-line 3Q, with a defined history of preannouncements.
If there was EVER a quarter HBI should beat – this is it. Is this a set up for an outstanding short opportunity? Yes. But getting that opportunity at $26-$27 instead of $21.65 is what keeps me up at night. I don’t want to make the ‘I’m wrong, so let’s double down’ call. I hate those ‘I really like this call – but I’m wrong on it today’ calls.
APD
Click here to read our analyst's original report.
Given a favorable economic and consolidation backdrop, there are many straightforward reasons to favor the industrial gas industry at present. Overhangs on Air Products (APD) shares, from the not-so-straightforward Yingde deal to changes to the position sizes of certain activist funds, have largely moved out of the picture. As projects mature and the company invests substantial available capital in PX/Linde divestitures, other well-suited deals, or buybacks, it become hard to avoid well above consensus EPS forecasts.
VIRT
Click here to read our analyst's original report.
We highlight that Virtu Financial's (VIRT) business is no longer responding to volatility like it used to and most recent quarterly revenue results are well historical levels per unit of vol. Knight's business looks challenged by the recent Ameritrade/Scottrade deal as Scottrade market maker allocations to Knight will go from ~19% before the deal, to ~6% under Ameritrade. In addition, payment for order flow (or market maker costs) will go up as Ameritrade gets paid ~$2.60 per trade allocated to wholesale market making, versus ~$1.60 per trade charged by the former Scottrade.
HST
Click here to read our analyst's original report.
US hotels posted an expected strong week of RevPAR growth that was aided by the NYE holiday. As we discussed last week, New Year's Eve (NYE) is a critical final data point for December as its RevPAR in dollar contribution terms is substantially higher than that of the rest of the month. NYE for Total US RevPAR $ is ~50-60% higher vs the rest of December. With the data now reported, we believe the final December RevPAR number will finish ahead of our initial expectations of 4%-4.5% growth.
For last week, we estimate that Top 25 Market RevPAR grew ~19% and outperformed the Total US which grew 6.7%. Excluding all hurricane impacted markets, Top 25 RevPAR still grew ~17%, a strong number.
We continue to reiterate our conviction that a positive inflection in RevPAR is ongoing. Host Hotels (HST) remains one of our top picks in the space as it looks poised for RevPAR and earnings beats in the coming quarters. Stay tuned for a Lodging earnings preview in the coming weeks.
HCA
Click here to read our analyst's original report.
The deceleration in our Insured Medical Consumer model has remained intact throughout 2017 and has historically led US Medical consumption by 1-2 quarters. We expect 2018 to be worse than 2017 and our Insured Medical Consumer model now forecasts growth of less than 1% through the end of 2018. We remain convinced that utilization remains under pressure broadly as areas we previously pointed to as positives such as physician office employment appear to be rolling over. The deceleration in the November JOLTS data is in line with our negative outlook for the US Health Care economy and consistent with the deteriorating fundamentals of many healthcare provider and services names. We remain confident in our negative outlook for HCA Healthcare (HCA) and SHORT health care broadly.
CREE
Click here to read our analyst's original report.
Remember that when we got involved with Cree (CREE) our research data indicated that in Cree’s core LED chip category, price declines were already moderating. This idea is so contrarian in Cree. Most investors have been eager to remind us that Chinese capacity in core LED chips will continue to pressure LED chip pricing. It thus strikes as a material takeaway that Acuity is forecasting more in line with our data, which indicates that the negative ASP trends in chip lighting for IPR sensitive buyers has moderated. None of this absolves Cree from the long term pressure to think outside the box about the addressable opportunities ahead using their technology, but it does point to a core business being less bad in the near term than is commonly assumed.
RDFN
Click here to read our analyst's original report.
In the most recent quarter, Redfin’s (RDFN) Real Estate Revenue grew +31.6% Y/Y, a 150bps deceleration from last quarter. The company saw a 14bps Y/Y increase in US market share to an all-time high of 0.71%, with strength coming from the middle portion of the United States, where competition is low and housing supply is in less dire straits than the coastal cities.
However, this came in conjunction with lower gross margin from buying and selling homes through their own agents, with margins in their main business dropping from 39.4% last year to 38.1% this quarter. As affordability gets tougher in the large cities, customers are struggling to buy homes, which has been lowering Redfin's close rates. In turn, they are spending more on lost business for each home that closes- so in other words, they are spending more on customers who don't close, as well as the compensation for contractors and agents who worked with those lost customers.
In trying to alleviate that, Redfin will "experiment" with allocating fewer homebuyers per agent, hoping that a more personal service leads to higher close rates. They don't believe that the gross margins will improve in the near term, but rather starting in 2019. The reality of the situation is that housing inventory is extremely low, especially in competitive markets. As we have noted in our data notes, buyers are beginning to show disappointment with the combination of supply and rising prices.
DPZ
Click here to read our analyst's original report.
Despite the management team’s position, we are confident that the evolving delivery space will hurt Domino’s Pizza (DPZ) in the long run. Pizza is no longer the only option for consumers, and ever-changing consumer preference will hurt DPZ, if it hasn’t already.
Additionally, the CEO's decision to leave the business at this point makes us think that Mr. Doyle may be looking to get out of dodge before top-line momentum significantly begins to slow. Looking at this logically, if there was a significant growth opportunity still ahead for DPZ, we would be hard pressed to think that Mr. Doyle at the age of 54 would choose to walk away. With that in mind, there actually does not appear to be much more left for the CEO to do going forward.
For example, DPZ’s reimaging initiative is close to complete (see image below), so the benefits offered by this initiative are in the rearview, further buttressing our view that Mr. Doyle knows there isn’t much upside left here.
TWTR
We suspect Twitter (TWTR) could return to double-digit ad revenue growth by as early as 1H18.
The Olympics and World Cup were a big driver for 1H14 results. We’re not expecting comparable growth since TWTR was a much smaller company back then. But if TWTR can reproduce comparable absolute revenues from these events, it would translate to an extra 2% and 5% growth to 1Q18 and 2Q18 results, respectively; not a tall order considering its user base is ~30% larger now.
Further, after vetting what we had previously viewed as the two biggest risks to the story (users and advertiser demand), we now feel more comfortable heading into 2018 given the collective growth driver between the two.
We see 25%+ upside from current levels.
KR
Click here to read the Kroger (KR) stock report Consumer Staples analyst Howard Penney sent Investing Ideas subscribers earlier this week.
TDOC
Below is a brief note from CEO Keith McCullough on why we added Teladoc (TDOC) to the long side of Investing Ideas earlier this week:
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Been waiting for a US stock market down day to buy something on sale? Join the club – it’s JAN 10th (my daughter Lucy’s bday) and today is the 1st down day of the year! Since I came into today with zero LONGS in Real-Time Alerts, now I can cover some shorts and get longer (net) buying some new ideas my Research Team has been working on. One of those ideas is Teladoc (TDOC), on the long side. Here's an excerpt from Tom Tobin and his team's recent Institutional Research on the name: "We have long been skeptical of Teladoc's business model for reasons currently reflected in the exceptionally high 42% short interest. However, our skepticism has significantly dampened on what appears to be a consensus short heading into 2018. The acquisitions of HealthiestYou and BestDoctors, as well as growth in higher margin specialty services and increasingly favorable policy tailwinds contribute to our positive short-term view." Buy red, |
MC
Below is a brief note from CEO Keith McCullough on why we added Moelis (MC) to the short side of Investing Ideas earlier this week:
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No we didn't issue SELL signals at yesterday's US stock market lows. That's when we sent you buy/cover signals. The #process is designed to fade the direction of the market and help you make better decisions than chasing price emotionally. Just because I wasn't sending out sell signals doesn't mean I don't have SELL Ideas! One of our newest SELL ideas in a sector that has been ripping higher with rates this week (Financials) is Moelis (MC). Moelis himself has been selling stock and the short interest here is low. Here's an excerpt from Jonathan Casteleyn's latest Institutional Research note on MC: "Moelis stands most at risk from an activity decline in its upcoming 4th quarter report. The firm was involved in just 36 assignments worth $38.7 billion this past quarter, essentially flat compared to the 39 deals worth $38.8 billion completed in 3Q17. Most importantly, having completed 52 deals totaling $68.5 billion in 4Q16, MC is set to record the largest year-over-year decline in the M&A subgroup." Sell on green, |
TSLA
Click here to read our analyst's original report.
Below is a brief note from CEO Keith McCullough on why we added Tesla (TSLA) back to the short side of Investing Ideas earlier this week:
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I'm still looking for names that are at either the top or the bottom end of the @Hedgeye Risk Range to send you signals on. Essentially, that is what I do, working alongside my Research Team, every day. Tesla (TSLA) is a name Industrials analyst Jay Van Sciver timed well. He went bearish on it near the highs of 2017 and continues to be The Bear. Here's an excerpt from his Institutional Research note last week's production miss. "Idiotic Excuse: Only a company that really, really, really doesn’t understand world class manufacturing would provide the above excuse for missing production targets. It is the equivalent of an athlete saying that they lost the game because they were focusing on technique and executing plays precisely. Efficiency, quality, and manufacturing speed aren’t trade-offs. That Tesla would imply a trade-off shows a stunning failure to understand the company’s core problem. Tesla is ill-equipped to produce a high quality Model 3 every 40 seconds, every production shift, every year, year-after-year." Sell green, |
