Below are analyst updates on our twelve current high-conviction long and short ideas. Please note we added Deere (DE) and Lamb Weston (LW) to the short side this week. We removed Extended Stay America (STAY) from the long side and Starbucks and Shake Shack from the short side.
We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
GIL
Click here to read our analyst's original report.
One of our Retail analysts had a call with Gildan Activewear (GIL) earlier this week. The company thinks we’re being aggressive with our $800mm revenue estimate because it's not in the bank yet. These guys won't set a target they can’t beat. They’ll catch up with us, and they’re going to be taking up revenue expectations in the coming quarters unless our thesis is flat-out wrong.
One notable point is that they commented that tariffs are making potential customers look outside of Asia for manufacturing capacity. GIL is in Honduras and low cost by a country mile.
Our Retail Sector Head Brian McGough likes this one even more than Restoration Hardware.
CACC
Click here to read our analyst's original report.
Credit Acceptance Corp (CACC) Management: Great Operators + Seasoned Veterans: Publicly traded since 1992, the only unprofitable year in the firm’s 25-year history of being public was 1999. Even more remarkably, GAAP EPS grew +23% and +113% Y/Y in 2008 and 2009, respectively. Also notable is the fact that in the last 25 years, CACC has only had EPS decline in 4 years.
CACC’s 28-member management team, averaging 15 years of experience/person, has proven to be good stewards of capital. CACC has spent roughly $1.5 billion over the last 13 years buying back shares, roughly cutting the diluted share count in half.
In addition, incentive compensation is determined by economic profit: earnings produced in excess of the imputed cost of capital. At Encore Capital Group, a business not dissimilar from that of Credit Acceptance Corp., the management team earn a short-term, cash incentive based upon adjusted EBITDA targets –a firm-level performance metric. That is, management at Encore is rewarded in the short-term for taking on leverage. In refreshing contrast, executive officers at CACC have their compensation tied to the ROIC that they generate. This should not be looked over.
In sum, CACC’s management is a tried, tested, and proven asset to the firm.
CMG
Click here to read our analyst's original report.
In a recent "Black Book" presentation, our veteran analyst Howard Penney (who used to be a raging bear on Chipotle) wrote to Institutional Subscribers:
“We hosted a Black Book presentation to discuss our LONG case for Chipotle (CMG). We hit on the singles and doubles CMG plans to hit, before they turn on the marketing machine, which is CEO Brian Niccol’s specialty.
We believe consensus is far too bearish on the outward looking margin profile of the business! In the Black Book we take you through line by line how we see the next three and a half years unfolding for CMG, getting to 2021 where we have EPS roughly 50% higher than consensus.”
MD
Click here to read our analyst's original report.
Here are key thesis points on our Mednax (MD) long call:
1. Maternity Stable to Improving:
- Birth trends appear likely to stabilize and inflect higher throughout 2018 due to Zika compare
- Demographics of marriage and maternity deferral turning positive as 30-39 age cohort accelerates
- A recovery in maternity is a positive tailwind for 50% of MD revenue and margins
2. Activist Pressure/Take-Out:
- Activist investor Elliott Management has taken a 7% stake near $43/share which is driving take-out speculation
- The activist is addressing productivity in anesthesiology helping to recover 100s of basis points of lost margin
- Company has hired BofA to explore private equity interest
3. Physician Consolidation and Atrium Lawsuit:
- Consolidation among physician groups is accelerating, likely allowing MD to reaccelerate acquisition growth
- Irrational competition for deals appears to be abating; EVHC is under stress and appears to not be competing for deals as aggressively
- Atrium, while a negative outcome for MD revenue, validates the model and is margin positive
ZBH
Click here to read our analyst's original report.
As a reminder, one of the Top-3 US Equity Sector Styles in Quad 4 (growth and inflation slowing) is Healthcare (XLV).
Zimmer Biomet Holdings (ZBH) remains one of our veteran Healthcare analyst Tom Tobin's Best Ideas. Here's a good summary point his team makes about ZBH:
"We believe ZBH’s current valuation and consensus estimates do not reflect the potential for a turnaround under new management and resolution of self-inflicted manufacturing problems."
TPR
Click here to read our analyst's original report.
Fundamentally, our Retail analyst Brian McGough thinks investors are underestimating how this new Tapestry (TPR) story will mimic the Ralph Lauren license takeback/renegotiation story circa 2003-2006. The sell-side is likely to upgrade in around 12 months at $70. Pushback is fierce. That increases McGough's conviction.
DE
We added Deere to the short side of Investing Ideas earlier this week.
Our Industrials analyst Jay Van Sciver remains bearish on the stock, fundamentally, for the intermediate to long term.
"Deere is facing a challenging market with rising input costs, lower US crop prices, and elevated expectations," says Van Sciver. "Wholesale sales have tracked ahead of retail, and pricing has been flat in recent quarters."
LW
We added Lamb Weston to the short side of Investing Ideas earlier this week.
"With Lamb Weston (LW) up on a rope this week," writes Keith McCullough, "Howard Penney is giving me the green light to send out the SELL signal.
Per Penney's Institutional Research note, "LW put up a strong quarter, but all the drivers of growth will continue to slow and the issues that are impacting its European JV’s are only just beginning."
CCL
Click here to read our analyst's original report.
Several sell-side firms (once again) defended Carnival (CCL) shares after its earnings reports. Many analysts used words such as “garbled” and “optical misperceptions” to describe CCL’s report and management commentary on its conference call. They described the “positive demand” dynamics as unchanged and one analyst, incredulously, “was not modeling solid yield growth in 2019 but raised his price target to $85”.
To us, it’s the sell-side that is muddled, not CCL management.
2018 is going to be a year of yield deceleration and 2019 may be another one. Yes, blame the Caribbean, with its higher supply growth and the hurricanes comp. However, no one mentioned that a lack of Caribbean hurricanes this summer has helped demand. So, it works both ways but the no-hurricane boost, so far, has not been enough to accelerate 2019 demand.
UNFI
Click here to read our analyst's original report.
We continue to think this business, along with their acquisition of SVU, will be challenged.
United Natural Foods (UNFI) is facing long-term structural headwinds to gross margin, headlined by the customer mix shift to lower margin customers, Whole Foods and Conventional. This business is truly falling apart across the financial statements. UNFI is turning into a long term structural short in which margin upside will prove very difficult given the customer mix shift and pricing pressure headwinds.
SGRY
Click here to read our analyst's original report.
Our view is that Surgery Partners (SGRY) will have a challenging time recruiting docs and improving case mix, which is heavily Medicare.
While management has said they have recruited "slightly" more physicians year-to-date compared to last year and the productivity of those physicians has "more than doubled," the continued decline in same-unit volume suggests it is not enough to offset ongoing attrition.
TSLA
Click here to read our analyst's original stock report.
A word of advice from Hedgeye Industrials analyst Jay Van Sciver to Tesla CEO Elon Musk (whose crazy outburst on Twitter against the SEC this week has left investors in a state of disbelief)
"Only the fragile fear the shorts. The best engage critics."
Van Sciver adds, "All you have to do is make a reasonable return on capital, and the shorts evaporate."
On a related note, in June 2017 (the same month Van Sciver issued his original short call on Tesla), Wall Street Journal columnist Charley Grant prophetically wrote:
"Tesla Inc is one of the hottest stocks on the planet, thanks to investor belief in Elon Musk. Paradoxically, that might be the biggest risk investors face."
Incidentally, Van Sciver and Grant will be sitting down together next week to discuss Tesla during our first annual online Investing Summit.
