Below are analyst updates on our nine current high-conviction long and short ideas. Please note we removed Zimmer Biomet (ZBH) from the long side and Lamb Weston (LW) from the short side of Investing Ideas this week. We also added Foot Locker (FL), Microchip Technology (MCHP) and United Continental (UAL) to the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
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.
Surgery Partners' (SGRY) ASC portfolio is low quality compared to peers USPI/THC and SCAI/UNH, and it does not have the balance sheet capacity to make the acquisitions necessary to improve payer and case mix. Meanwhile, we are several years from total joint procedures being a large enough percentage of total ASC case volume to have a meaningful fundamental impact, despite the favorable policy environment. From a valuation perspective, we question how much common equity value there is given SGRY's indebted capital structure and lack of free cash flow after minority interest obligations. The company is not earning cost of capital, has limited liquidity and looming debt obligations.
TSLA
Click here to read our analyst's original stock report.
Tesla (TSLA) Test Drive Utilization: Since quarter-end, we have seen a bounce back in test drive utilization. It seems Tesla stores diverted personnel to facilitating deliveries to hit quarter-end targets, even cancelling some test drive appointments. While the snapback may look bullish, we would caution that it should overshoot as delayed appointments are loaded into early October.
Used Prices Still Declining: We expect this to continue into year-end.
DE
Deere (DE) is facing a challenging market with rising input costs, lower US crop prices, and elevated expectations. Wholesale sales have tracked ahead of retail, and pricing has been flat in recent quarters. In recent quarters, equipment sales price realization has been flat.
Heading into 2019, DE will likely need to reverse pricing trends. In addition, while total inventories are down from peak, relative to current sales inventories remain elevated. Notably we think DE is artificially inflated – as investors fled from General Electric, DE and other large, liquid industrial sector constituents tended to rally.
We continue to see evidence that Deere Financial has offered accommodating lease terms and payment terms, supporting volumes during the industry downswing with costs potentially recognized on a lag.
All in, we expect shares of DE to reprice downward as the company is pinched between sales volume pressure and higher input costs amid weak pricing.
DRI
Click here to read the short Darden Restaurants (DRI) stock report Restaurants analyst Howard Penney sent Investing Ideas subscribers this week.
FL
Click here to read our analyst's original stock report.
This is a note from CEO Keith McCullough on why we added Foot Locker (FL) to the short side of Investing Ideas:
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Staying with high-quality SELL ideas that have bounced to lower-highs on #decelerating volume, here's what Brian McGough had to say about Foot Locker (FL) in a recent Institutional Research note (post the Nike conference call): "I have not heard a more bearish conference call for Foot Locker since 2002 when both companies where at each other's throats. All Nike talked about were new digital capabilities designed to reignite Direct-to-Consumer growth for Nike – which already grew at an impressive 36% this quarter (12% including company retail). Digital demand sensing, consumer data and analytics, connected inventory, digital product design and creation, a digital content engine, and a new enterprise resource platform. This is end to end and the initiatives were so numerous I could almost not keep track. SNKRS app launching globally, sounding bullish about the new jet.com (WMT) curation initiative, and how (my interpretation) Amazon is going to have to play catch up with jet.com on such a holistic approach to sourcing product across multiple price points (that I think will overlap with those sold at FL). There was almost no mention of initiatives that will drive consumers to a mall to buy kicks at a Foot Locker, and certainly nothing that will lead FL to accelerate its own ecomm business." Sellem on green, KM |
MCHP
This is a note from CEO Keith McCullough on why we added Microchip Technology (MCHP) to the short side of Investing Ideas:
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My macro team remains Bearish on Semis (SMH). Meanwhile, my Tech Research Sector Head -- Ami Joseph -- still has Microchip (MCHP) as his favorite short idea in the semiconductor space. KM |
MCHP is watering down growth and levering up the balance sheet with the next acquisition likely already in the queue. There's not a ton of industrial logic for the group of assets in terms of manufacturing or R&D integration... a model of ‘buying stuff’ that differs from the primarily organically driven industrial technology models who drive organic growth via innovation and share gains in traditional and new markets.
UAL
This is a note from CEO Keith McCullough on why we added United Continental (UAL) to the short side of Investing Ideas:
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With one of our favorite sectors to be short in Quad 4 (Industrials, XLI) imploding on their own earnings expectations again this morning, I'm looking to Industrials names that haven't yet collapsed. One of those is United Airlines (UAL). The Old Wall loves it! Jay Van Sciver, on the other hand, does not. His view is really a Quad 4 in Q4 view for UAL vs. management guidance: "While we have Thanksgiving travel fares in our PRASM model for UAL, we limit the view to 3mo out. That excludes end of year holiday travel, which could introduce some noise. Still, what we do see is enough to raise concerns about high expectations fading from the current robust demand environment." Sell the bounce to lower-highs, KM |
KSS
Below is a note from CEO Keith McCullough on why we're adding Kohl's (KSS) to the short side of Investing Ideas:
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Good short selling Friday to you! The bulls are having a heck of a time maintaining the 3rd "up" day for the SP500 in the last 12. NASDAQ is rouge. Looking for good shorts that are green today on #decelerating volume to lower-highs? How about coming back to where insiders made sales in SEP, Kohls (KSS)? Here's a great excerpt from Brian McGough's most recent Institutional Research note on KSS: "Tops are processes, not points – and the end of the 12-month KSS financial model acceleration and subsequent stock rip to new all-time highs is nearly complete. You just saw the best KSS has to offer, and it still did not even outcomp Wal-Mart. Now we’re in the back half, top line compares get meaningfully more difficult starting this month, cost pressures just accelerated, it’s gonna miss 2H EPS, and and we’re looking at the last time KSS is likely to earn over $5 per share ever again." Sellem on green, KM |
