Below are analyst updates on our fifteen current high-conviction long and short ideas. Please note we removed Boyd Gaming (BYD) from the short side of Investing Ideas this week. We also added Zimmer Biomet (ZBH) and Tapestry (TPR) to the long side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
CACC
Click here to read our analyst's original report.
Credit Acceptance Corp (CACC) is currently among the most reviled companies in the financials space, with both a decimated buy-side and sell-side sentiment, partly attributable to a regulatory activist short thesis floated publicly over the course of the last year. Given modest street expectations for 2018-2020, and unaccounted recent sales force growth of 30%, earnings power is on track to exceed expectations over the next 12-18 months and high short interest may find itself at risk for a short squeeze. Also, the all-weather success of the firm is rooted in its lending formula capable of robustly servicing the credit needs of deep subprime auto buyers across economic cycles. Further, management consists of great operators and seasoned veterans and the only unprofitable year in the firm’s history was 1999. CACC’s 28-member management team, averaging 15 years of experience/person, has proven to be good stewards of capital as they have bought back roughly half of the company’s stock back to 2001. In addition, incentive compensation is aligned with shareholders determined by economic profit: earnings produced in excess of the imputed cost of capital.
STAY
Click here to read our analyst's original report.
Extended Stay America (STAY) has moved to the top of our lodging long stock picks. We have well documented our bullish bias towards hotel stocks over the last year, though much of this this bias has been expressed via the lodging REITs, especially recently.
STAY seems to fall through the cracks of investor interest due to its unique niche operating segment, ownership of a single brand, and ownership of the majority of its hotels. A perceived lack of near term catalysts and recent quarterly earnings volatility has widened the valuation discount - a big opportunity in our view.
We get the sense that many investors do not fully understand the bullish fundamental backdrop in the extended stay industry, and more specifically, STAY's leading position within the segment. Moreover, the company's numerous value levers do not seem to be in the stock.
GIL
Click here to read our analyst's original report.
One of the larger growth opportunities that Gildan sees is private label basics.
Gildan Activewear (GIL) sees the mass retail chains looking to reduce price comparison shopping. That does not mean that Gildan is looking to exit from selling its own brand at retail. Gildan has become agnostic whether it sells its own label or a retailer’s brand. Instead Gildan is focused on what the larger revenue opportunity will be.
This past week at an investor conference Dollar General said its most productive category of apparel is basics. Dollar General also said, “We love apparel. It throws off a good margin.” Dollar General is looking to reduce the fashion component of apparel.
Gildan supplies the majority of Dollar General’s basic apparel under the Gildan brand. And Dollar General continues to grow its store footprint, adding 800+ stores this year.
CMG
Click here to read the Chipotle Mexican Grill (CMG) stock report Restaurants analyst Howard Penney sent Investing Ideas subscribers earlier this week.
MD
Click here to read the Mednax (MD) stock report Healthcare analyst Tom Tobin sent Investing Ideas subscribers earlier this week.
ZBH
Click here to read the Zimmer Biomet (ZBH) stock report Healthcare analyst Tom Tobin sent Investing Ideas subscribers earlier this week.
TPR
Below is a brief note from CEO Keith McCullough on why we added Tapestry (TPR) to the long side of Investing Ideas earlier this week:
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With the SP500 down for the 4th trading day in a row (ok, one of those days it ended up closing flat), does the herd sell? Of course. Chase charts high, sell lower - that is the recipe to leading an under-performing life! As a matter of risk management #process, during market corrections we like to add back names that A) my analysts like and B) have corrected towards the low-end of the @Hedgeye Risk Range on C) #decelerating volume. Since Tapestry (TPR) broke out in August, it fits that profile. Fundamentally, Brian McGough thinks people are underestimating how this new TPR story will mimic the RL license takeback/renegotiation story circa 2003-2006. Sell side likely to upgrade in 12 months at $70. Pushback is fierce. That increases his conviction. Buy on red, KM |
SBUX
Click here to read our analyst's original report.
Starbucks (SBUX) is getting a new license holder for its New Zealand stores, which further shows how irrelevant and forgotten some of their non-core markets are (ARTICLE HERE). The story still boils down to the U.S. and China, which are both slowing and facing increased competition. From management issues, globally intensified competition, and drink innovation that looks like a mix between Baskin-Robbins and Smoothie King, we believe SBUX has lost its way!
MCD
Click here to read our analyst's original report.
As they alluded to on their last conference call, McDonald's (MCD) is beefing up their breakfast game in an attempt to gain back share. McDonald’s placed the Sausage McMuffin and $1 any size coffee on the $1 $2 $3 Dollar Menu in an attempt to revive its struggling breakfast day-part (see updated $1 $2 $3 Dollar Menu HERE). We reiterate our short call on McDonald's.
CCL
Click here to read our analyst's original report.
For the 1st time since 2013, there were no hurricanes formed in the Atlantic basin in August, contrary to the wild Pacific ocean. As a result, sentiment from agents is improving on forward Caribbean bookings and bodes well for 2019. But that could change in September, one of the busiest months for hurricanes, with some weather forecasters already predicting some active Caribbean hurricanes. As for Caribbean pricing, Carnival (CCL) continues to lag behind its peers for 2H 2018 and heading into 2019 while RCL gained strength the last few weeks lead by Symphony of the Seas which arrives in Miami in Nov 2018.
UNFI
Click here to read our analyst's original report.
Food distributors are the worst performing (and only negative) sub-sector in our consumer staples tracker over the last 3-months. Poor performance has been led by United Natural Foods (UNFI), which is down -25.3% over that time period. We continue to think this business, along with their acquisition of SVU, will be challenged.
ALRM
Click here to read our analyst's original report.
Alarm.com (ALRM) sits in the eye of market disruption as its leading position in interactive home security systems faces a torrent of new digital systems with innovative business models, customer acquisition, and technology. Meanwhile, the market opportunity for ALRM has exploded in the last few years, but ALRM has not. The stock is expensive on FCF…and OCF/EBITDA improvements in 2017 were mainly inorganic and not repeatable.
SGRY
Click here to read our analyst's original report.
On Surgery Partners (SGRY), we'd note management's 2018 guidance of at least $240M was before the impact of acquisitions, and we are modeling $234M including acquisitions and assuming COGS only increase 2% 2H18/1H18. Management's reluctance to quantify the cost savings from the new GPO contract during the earnings call, and commentary that their EBITDA guidance is "heavily weighted towards the fourth quarter," reinforces our view that 2H18 EBITDA estimates are at-risk.
TSLA
Click here to read our analyst's original stock report.
Very Initial Test Drive Data Signals Consumers Still Showing Up: Clearly, the corporate side of Tesla (TSLA) is a mess, but the brand may take longer. Tesla has called prospective Model 3 buyers to set up appointments, which is the likely a source of the higher August activity below (along with vacation schedules). Prior to the rebound, test drive activity did look to be slowing in response to negative press following Musk’s mid-July republican donation/Thai diver tweets.
This is a very preliminary chart - we will change the methodology as the data set fills out and we understand it better. That said, it does match our survey data which does not show the Tesla brand breaking…at least, not yet. The series is likely to prove most useful as tax credits expire in 2019.
SHAK
Click here to read our analyst's original Shake Shack report.
Shake Shack (SHAK) traffic has been declining for eight consecutive quarters, that’s not what we would call a growth concept! Traffic in 2Q18 was -2.6% vs. Consensus Metrix -2.1%. And yet the company talks about the health of the brand! The ultimate arbiter that determines brand health is customer traffic and they get a failing grade on addressing the declining traffic issue.
SHAK has managed to have negative traffic in one of the best economic times for restaurants in over a decade! What will happen if GDP rolls over in the back-half of 2018 and into 2019 when the tax-reform bump becomes a difficult lap?
SHAK continues to build an excessive number of new restaurants (system-wide restaurant count increased 33.6% in 2Q18, a 130bps sequential acceleration in the growth rate from 1Q18) sporadically around the country and world. This is a concept called ‘planned flags’ and greatly reduces supply chain efficiency and brand strength.
