Below are analyst updates on our twelve current high-conviction long and short ideas. Please note we removed Tesla (TSLA) and United Continental (UAL) from the short side and Wynn Resorts (WYNN) from the long side of Investing Ideas this week. We also added United Natural Foods (UNFI) to the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
TWTR
Click here to read our analyst's original report.
Below is Internet & Media analyst Hesham Shaaban's long thesis overview on Twitter (TWTR):
VFC
Click here to read our analyst's original report.
VF Corp (VFC) owns 25 brands that together have $12B in revenues. It makes for a complex company that can be difficult to model accurately. VF Corp. also changed its fiscal year end while divesting several brands and acquiring several more.
This has made it close to impossible to model, but we think we have. The guidance management provided in May for the new fiscal year sets up for a series of sandbags and 15-20% earnings growth WITHOUT a transformational deal – which is better than 80% probability.
Q2 is coming to a close and Q2 earnings have a favorable setup for the whole retail sector. Due to easier comparisons, a calendar shift, clean inventory levels and favorable weather many companies should report upside in Q2. We think VFC will be one of those.
We’re 15% above Street consensus estimates for VF Corp.’s current quarter.
RRC
Click here to read our analyst's original report.
We’ve had a number of constructive conversations with investors over the past month about our recent long Range Resources (RRC) call. Responses to our analysis spanned from the receptive to the dismissive. We expected both sides given the 20%+ short interest and stock price 80% off its highs. Here's a key discussion point raised by investors.
There Is No Catalyst: While admittedly there is no explicit “catalyst calendar,” we’d disagree with the premise. RRC is amongst the most hated E&Ps in the energy sector due to the company’s previously poor capital allocation decisions. With a name as widely out of favor as RRC, management has the opportunity to create its own catalysts by delivering on expectations promised to the market. That means efficiently operating the company’s prolific Southwest Pennsylvania assets – something it has been quite adept at historically.
CACC
Click here to read our analyst's original report.
Credit Acceptance Corp (CACC) has been piloting extended-term loans for several years, at maturities far greater than the averages that define its most recent vintages. With several years of collections data originating from these extended-term pilot programs, the firm has closely studied the behavior and performance of these longer-dated loans, conditioning its forecasting methodology accordingly. The firm's seasoned management team, exemplified by the foresight to test extended-term loan performance in anticipation of late cycle phenomena, and its robust risk management framework give us confidence in Credit Acceptance's ability to navigate these heightened, industry-wide risks.
MTCH
Click here to read our analyst's original report.
The biggest impediment to broader adoption of online dating is its stigma. Facebook (FB) may be at an even greater disadvantage there. The surveys we've done suggests those willing to try FB's upcoming dating service are lower than that of those willing to use an online dating service in general. We believe this is due to either FB's perceived data protection issues and/or user hesitation to commingle their online dating and social media worlds.
We suspect it's more the latter given the sudden surge in non-FB sign-ups on Tinder, which occurred shortly after users were given the option to do so and well before the Cambridge Analytica news broke. Either way, this survey is not central to our long thesis since Tinder offers a unique use case that FB probably can't replicate (no, we don't mean a hook-up app).
We reiterate our long call on Match Group (MTCH).
BL
IS BLACKLINE (BL) JUST FACING TYPICAL EARLY ADOPTION HEADWINDS? We pay close attention to market penetration curves; TAMs are often ill-defined either by a paid consultant, or a broad-strokes prognostication, or done as a rough back of the envelope napkin math by companies themselves. In this case, BL is so small, and the problem they solve is so large and so manually driven (historically) that for now we think we will err on the side of management’s Napkin.
Click here to read last week's update.
HBI
Click here to read our analyst's original report.
We’ve noted the pressure on Hanesbrands (HBI) from cotton prices, however another macro force is working against HBI lately, foreign currency.
HBI has about 35% of its business internationally now, with about 13% in Australia. Both the euro and the aussie dollar have weakened since the end of 1Q. The AUD is down about 4% and the EUR is down about 5% since the beginning of April.
Our macro team presented its quarterly themes call this week and theme #1 was #StrongDollar. The currency issue is likely to get worse in the coming quarters. After what should be a solid 2Q, with peak FX help, FX becomes a headwind in 2H. And that headwind is strengthening.
With FX as one of many factors/reasons, we don’t think HBI will be able to meet 2H earnings and cash flow expectations.
SBUX
Click here to read our analyst's original report.
As the Starbucks (SBUX) management team tried to make the best of a bad situation recently, they revealed/confirmed the company was growing too fast without addressing the issues directly (this will be CEO Kevin Johnson’s undoing). Shifting new unit growth to less penetrated markets is a mistake, as they are less penetrated markets for a reason. The company needs to cut its absolute growth rate of new units and the capital spending associated with those units. Additionally, the company will find cutting G&A by 1% without slowing unit growth is nearly impossible!
Oh and by the way...
ADT
Click here to read our analyst's original report.
ADT (ADT) management downplayed the threat of Amazon’s new home services security offering indicating that it was just a different strain of what Amazon already does. We see Amazon as taking incremental steps to replicate more and more of the benefits of ADT's offerings at a considerably lower price. We think that this is a threat that needs to be taken more seriously, not less, especially considering Amazon’s recent marketing effort directly targeted at consumers paying monthly monitoring contract fees.
MCD
Click here to read our analyst's original report.
McDonald's (MCD) has been on a great run from 3Q15 to now, starting with the simplification of their menu, introduction of All Day Breakfast (ADB), the trial of many value platforms, store remodels, and roll-out of Experience of the Future (EOTF), just to name a few things they have been working on. But the thing is, all companies go through cycles, and we believe MCD is about to enter a down-cycle.
CCL
Click here to read the Carnival (CCL) stock report Gaming, Lodging & Leisure analyst Todd Jordan sent Investing Ideas subscribers earlier this week.
UNFI
Below is a brief note from CEO Keith McCullough on why we added United Natural Foods (UNFI) to the short side of Investing Ideas earlier this week:
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Here's another name that has bounced recently on decelerating volume post a fundamental blowup: United Natural Foods (UNFI). And here's how Howard Penney and Shayne Laidlaw explained that blowup in a recent @Hedgeye Institutional Research note: "We just witnessed a complete breakdown of UNFI. The break down came in many places: 1. The management team 2. The income statement 3. The balance sheet and cash flow statements The break down from the management team came at the end of the earnings call when they were finally put to the test about the new guidance and the Q3 accounting change. Yesterday, the center of the controversy was a non-cash accounting change for the accrual for inventory purchases which benefited gross margin by 78bps and EPS by $0.27 in Q3." Sell the bounce, KM |
