Below are analyst updates on our fourteen current high-conviction long and short ideas. Please note we removed Melco Resorts (MLCO) from the long side of Investing Ideas this week. We also added Mammoth Energy Services (TUSK) to the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
RRR
Click here to read our analyst's original report.
Based on a variety of factors including high pricing, we do not foresee a steady rebound in Las Vegas visitation metrics, at least not any time soon. At the airport, seat capacity growth is not negative on a YoY basis but the second derivative continues to slow and flatten out, after accelerating and maintaining a strong level of growth in late 2015 into early 2017. Looking out through June, capacity growth for McCarran is slated to slow down to about ~1% growth. For further context, prior to the real start of this slow down (2Q 2017), capacity growth was trending around 5% for the prior 18 months.
As we have said previously, we don’t think a slowdown in capacity growth will signal the demise of Las Vegas, but the removal of a solid tailwind in the past doesn’t get us excited about owning Vegas exposure. We’d prefer owning the Locals Market, Red Rock Resorts (RRR).
HST
Click here to read our analyst's original report.
The latest weekly STR data indicates that Hotel RevPAR growth picked up a little bit last week, and grew at the high end of its recent and improving range. The high end (Luxury) and upper midscale/upscale segments led the way. UUP growth of 3.2% is solid, and we've been waiting for an inflection point there. For the week ended 3/10/18, total US RevPAR grew 3.9% YoY.
With February in the books and moving through the first half of March, things are looking up for US hoteliers. More specifically, for the YTD through February, RevPAR is now tracking up 3.2% which is ahead of the same period in the prior year where RevPAR was growing just 2.4%, and that’s inclusive of the big Inauguration boost.
We expect a similar week of growth next week, likely in this 3-4% range. But we expect the last week of March to show material weakness due to the anticipated shift in the Easter holiday as Good Friday (March 30th) will compare against a normal Friday in the prior year period. Net/net, we are anticipating March to post Total RevPAR growth in the 1-2% range - no change to last week's forecast.
Yes, we still like the relative opportunity that the REITs offer, with Host Hotels (HST). We believe that both HST is likely to outperform in terms of EBITDA and RevPAR growth in the coming year. As it currently stands, our top down view is unchanged and we still see better RevPAR growth as the more probable outcome.
TWTR
Click here to read our analyst's original report.
We view the series of events that ultimately led to Twitter's (TWTR) restructuring as the result of self-inflicted wounds on the part of an unsustainable monetization strategy (i.e. excessive ad load). We believe mgmt's pivot to de-emphasizing legacy CPC ads in favor of Autoplay video ads is a more sustainable long-term growth strategy. Further, we don’t think it will take much to return to double-digit if not +20% ad revenue growth during 2018, possibly as soon as 1H18, as the Olympics, World Cup, and mid-term elections are all incremental positive catalysts for ad spend.
We saw early validation of our thesis on the last print with TWTR returning to ad revenue growth in its core O&O segment. Further, we believe it did so on declining ad load, which was previously its sole growth driver, but also its Achilles heal.
ORLY
Click here to read our analyst's original report.
One of the investment attributes for O'Reilly Auto Parts (ORLY) is that it still has future store growth opportunity.
O’Reilly has the potential to operate 6,000-6,500 stores nationwide compared to its base of 5,019 at the end of 2017. This represents several years of 4% annual store growth.
As O’Reilly enters new markets and wins new customers through superior service and parts availability the maturation of its store base also provides a tailwind to same store sales growth. The maturation of its stores and markets is one of the reasons its same store sales have been the best in the industry for many years.
The map of O’Reilly stores shows the opportunity to back fill many areas of the country, notably west of the Mississippi. The company has also not penetrated the Northeast.
If Advance Auto Parts’ latest turnaround efforts fail there is a possibility it is acquired by O’Reilly. Acquiring Advance at a depressed price would be very accretive. A merger would provide for a significant amount of synergies as the combined company could leverage the fixed distribution costs, enjoy better buying power over suppliers, and reduce corporate overhead costs.
COST
Click here to read the Costco (COST) stock report Hedgeye Consumer Staples analyst Howard Penney sent Investing Ideas subscribers earlier this week.
VIRT
Click here to read our analyst's original report.
Virtu Financial's (VIRT) Aggressive Accounting? While there is often times an industrial reason to hold various securities inventory in Level 2 classifications, it is rare to classify any sort of equity security in that bucket as the vast majority of global equities have observable pricing from transparent exchange venues. Thus the recent disclosure of over 50% of its equity inventory in Level 2 in Virtu's most recent financial statements is aggressive and starts the conversation about lower quality accounting in our view.
HCA
Click here to read our analyst's original report.
HEALTH CARE JOB OPENINGS -0.6% IN JANUARY | BLS released the Job Openings and Labor Turnover Survey (JOLTS) for January 2018 last week. Health Care & Social Assistance Job Openings accelerated to -0.6% in January but remains negative and well below its most recent peak of +56.9% in December of 2014. We have found a strong relationship between job openings in Health Care to overall medical consumption generally, and hospital same-store admissions specifically.
However, as we outlined last month, a worse flu season, improving maternity trends and higher acuity led to a divergence in the fourth quarter. Historically, demand for labor follows growth in the insured population and medical consumption demand. Health Care Job Openings improved to -4.0% YoY on a rolling 3-month basis through January 2018, below its peak of +38.1% in December of 2014. As a percentage of Health Care Employment, Health Care & Social Assistance Job Openings increased to 6.5%. We reiterate our short call on HCA Healthcare (HCA).
DPZ
Click here to read our analyst's original report.
When we first unveiled our official Domino’s Pizza (DPZ) short deck, the international issues facing the Domino’s brand were too big to overlook. In a far more mature delivery environment, Domino’s has been hit hard by competition. As the U.S. food delivery space continues to grow at a very impressive clip, we continue to gain confidence in our position that Domino’s domestic business will meet the same fate. In mid-February, Domino’s Australian franchise business (Domino’s Pizza Enterprises) reported 1H18 earnings figures for its Australia, EU, and Japan business and the numbers were not pretty. Group SSS came in at +4.0%, a sequential deceleration of 720bps.
On a two-year average basis, Group SSS saw a 460bps deceleration. The Australia/New Zealand and Japan portions of the business also saw similar decelerations, further showing that DMP-AU has continued to aggressively cede market share.
TSLA
Click here to read our analyst's original report.
Hedgeye Industrials analyst Jay Van Sciver hosted a webcast discussing his Tesla (TSLA) short thesis this week. Click here to watch the entire 52-minute presentation.
MC
Click here to read our analyst's original report.
For the pending 1Q18 period, our Boutique Activity Tracker (BAT) indicates that the M&A sub-industry is running below pace from a year-over-year standpoint, with first quarter activity in 2018 falling below 1Q17 production levels. While the boutique advisory stocks are pricing in an acceleration in activity due to the new, more favorable corporate tax regime in the United States, simply put, announced M&A activity hasn't responded yet.
Moelis (MC) is again lagging most at this point in the quarter, a status that our tracker picked up in 4Q17 which outlined the biggest year-over-year decline in recent 4Q17 earnings. Thus far in 1Q18, the firm has been involved in just 16 assignments worth $32.3 billion, an absolute decline from the 36 deals worth $38.7 billion last quarter. The first quarter of 2017 for MC was associated with 38 transactions worth $44.3 billion.
Hence, our tracker outlines again that MC is running behind most on a year-over-year comp basis of all the boutique advisors.
HBI
Click here to read our analyst's original report.
Cotton prices have be rising over the last 6 months. Prices are up nearly 20% from the middle of 2017.
Hanesbrands (HBI) downplays its cotton exposure, noting it is only 4% of COGS. That number is actually the % of COGS for cotton manufactured by the company, it does not include cotton items bought from third parties, which is now about 45% of the total. So the real % is more like 6-8%.
Therefore a 10% move in cotton prices is roughly 50-75bps headwind to HBI gross margins.
The price changes take about 12 months to flow through the supply chain and hit the P&L so unless cotton reverts back to trough levels seen in 2016, HBI will continue to face margin pressure from input costs.
With organic growth negative, and no levers to pull on margins with rising cost pressure, we see HBI missing long term earnings and cash flow expectations.
UAL
Click here to read our analyst's original report.
Friendly skies? Not so much...
After a protracted fare war between United Continental Holdings (UAL) and Spirit Airlines (SAVE), both companies suffered body blows.
After their battle, they remain two of Hedgeye’s favorite stock picks in the industrial space—but for very different reasons.
Industrials sector head Jay Van Sciver’s call is short UAL and long SAVE.
Watch the full clip below for more.
SBUX
Click here to read our analyst's original report.
Return on capital deployed is a focal point of the health of a business, and Starbucks' (SBUX) ROIIC has seen a marked decline. Despite a SSS slowdown and elusive traffic, SBUX accelerated unit growth in 2017 in their Americas segment to 6.1% YoY from 5.4% in 2016. Looking into 2018, SBUX is projected to slow slightly to 5.5% YoY unit growth, but we would contend that this is still far too aggressive given the current restaurant environment. Akin to 2008/2009, SBUX needs to cut new unit growth specifically in the Americas in order to focus on their core business.
Click here to watch Restaurants analyst Howard Penney's brief video update on our SBUX short thesis.
TUSK
Below is a note from CEO Keith McCullough on why we're adding Mammoth Energy Services (TUSK) to the short side of Investing Ideas today:
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Our All Star short-selling Energy Team's latest Best Idea (Institutional Research Product) on the short side is Mammoth Energy Services (TUSK). It's signaling immediate-term #overbought this morning. Per Director of Energy Research, Al Richards, Mammoth Energy Services (TUSK) is a small cap oilfield services company that has recently been awarded a highly-profitable yet controversial $945 million contract from Puerto Rico’s bankrupt, state-owned utility to repair the damaged grid in the wake of Hurricane Maria. Since first announcing the contract and its foray into electrical T&D work on October 19, 2017, TUSK’s stock price is up close to 130% while the oilfield services index (OIH) is about flat. TUSK’s market cap has increased by more than $800MM over that time. In our view, the market’s optimism over this contract and new line of business for TUSK has gotten out of hand, far overestimating the true value added and underestimating the risks associated with the Puerto Rico contract. Sell Green, KM |
