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Takeaway: RRC, UNFI, SGRY, TSLA, DE, FL, MCHP, KSS, GWW

Investing Ideas Newsletter - 11.13.2018 nesting bull and bear cartoon

Below are analyst updates on our nine current high-conviction long and short ideas. Please note we removed Darden Restaurants (DRI) from the short side of Investing Ideas. We also added long Range Resources (RRC) and short Grainger (GWW). We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.

IDEAS UPDATES

RRC

Editor's Note: Noteworthy addition this week. We helped Investing Ideas subscribers weather the recent market meltdown by going to no longs prior to the selloff. This makes adding Range Resources back to the long side of Investing Ideas all the more notable.

Below is a note from CEO Keith McCullough on why we added Range Resources (RRC) to the long side of Investing Ideas:

Literally the only Commodity in our Quantitative Signaling Product (Risk Ranges) that's been Bullish @Hedgeye TREND for the past few months is Natural Gas (UNG).

So that's another place to be looking for longs when they're on sale (Gas Stocks).

Al Richards and Jesse Root's favorite Gas Stock remains Range Resources(RRC).

Consensus hates it. And I love that.

Here's an excerpt from Al's recent Institutional Research note on Range:

"There isn’t a whole lot of new information in RRC’s 3rd quarter print. But with short interest still hovering at ~15% of the float, boring prints are good prints for RRC. We continue to believe that Range offers one of the best risk/rewards in all of E&P, given the relative valuation for an asset base that has produced best in class recycle ratios and full-cycle margins for years. The balance sheet is in much better shape with leverage on 3Q18 EBITDA annualized at 3.0x; 2.8x pro forma the $300MM asset sale."

Buy'em on red,

KM

UNFI

Click here to read our analyst's original report.

We think there is increased execution risks following the United Natural Foods (UNFI) merger with SUPERVALU. Additionally, the SVU acquisition was a strategic mistake, and the recently reported results for SVU were worse than expected.  Why management bought this company remains a mystery, but maybe the investor day (on January 19th) will shed some light on that subject. 

As a side note, we are also watching for any potential moves in Washington that may relieve the significant financial stress associated with multi-employer pension plans.  With the acquisition of SVU, UNFI took on the multi-employer pension liabilities of SVU!  This issue alone was reason not to buy SVU!  Currently, several sponsors of underfunded multiemployer pensions are demanding an expensive, taxpayer-financed bailout.

SGRY

Click here to read our analyst's original report.

We are more bearish on Surgery Partners (SGRY) after the preliminary 3Q18 release and news of incremental capital raise (which was successful). High-beta, high-leverage, no cash flow makes for a great Quad 4 (i.e. U.S. growth and inflation slowing) short, and the stock remains significantly overvalued.

In case you missed it, last week Healthcare analyst Andrew Friedman reviewed the Healthcare team's SGRY short thesis on The Macro ShowClick here or the image below to watch.

Investing Ideas Newsletter - Healthcare SGRY AF 11.9.2018play

TSLA

Click here to read our analyst's original stock report.

We see Tesla (TSLA) longs mistakenly celebrating the reported 3Q18 profit, with likely unsustainable results generated in part by depleting high-end demand.  Our short thesis looks increasingly robust, with the share price rebound providing another opportunity just seven weeks from the U.S. tax credit stepdown.

Interest in the Tesla brand is fading on the metrics we track. Regulatory investigations and concerns about quality are very negative for demand, while falling used car prices, declines in subsidies, and reported service challenges increase ownership costs. We continue to see significant downside in shares of Tesla, with key catalysts in 1H19.

Investing Ideas Newsletter - tsla

Investing Ideas Newsletter - tsla2

Investing Ideas Newsletter - tsla3

DE

Click here to read our analyst's original stock report.

"I like selling more Industrials (XLI) exposure on green," writes Hedgeye CEO Keith McCullough this week. "One of our favorite shorts in our INVESTING IDEAS product (weekend research from my analyst team) remains Deere (DE)."

We expect total North American agricultural equipment sales to drop roughly 2/3s from peak to trough. Newer downside drivers appear likely to come from tightening credit, decreasing land values, declining farm equity, and lower crop prices. As those factors influence equipment sales, we expect FY18 estimates to move downwards and FY19 estimates to move below FY18. 

FL

Click here to read our analyst's original stock report.

Nike opened its new flagship in NYC yesterday. Based on everything I’ve seen/read/heard, this might be the most innovative retail concept in the world (even more than an Apple store – you don’t design your own iPad in an Apple Store). If you are long Foot Locker (FL), I beg you…PLEASE check out the store, look at the brand presentation, customization, personalization and customer service options. Then ask yourself if the 3,300 Foot Locker stores can compare. Nike cares about selling more shoes and shirts, and is pushing the needle in its own DTC. FL hasn’t deployed the capex or SG&A to even compare to what Nike is doing on its own. FL is one of the best structural shorts in retail.

FL reports earnings on Tuesday after the market close. It likely won’t be a quarter that makes or breaks the bear thesis, but given the pressure on this model over the long term, we’re short into the print.

MCHP

Click here to read our analyst's original stock report.

Microchip Technology (MCHP) is becoming an acquirer of garbage and that isn’t worth much but we accept the short-term order signals create some confusion.

Orders re-accelerated in October after the September quarter cleanout of inventory, although some of the October strength might be excess shipment ahead of the feared increase in tariffs from 10% to 25%.

On the long-term side, no one asked about the lawsuit or the risk that Steve might have to recuse himself from the CEO role. The company is fixing MSCC operationally but the ongoing evidence of excess inventory (over 8 months for high-reliability products) only buttresses our view that real growth for MSCC was even worse organically than the feeble numbers we had scrubbed to.

In other words, the point of buying MSCC… is to hurry up and buy another semi company. Steve even noted that his strategy is to buy underperforming semiconductor assets, which is a fine strategy, but does not come with a premium or high performance analog multiple. 

KSS

Click here to read our analyst's original stock report.

Kohl's (KSS) reports earnings on Tuesday before the open.

We’re actually expecting a pretty good quarter from KSS (points on why below), but so far this earnings season “pretty good” has not been good enough for the market with fundamentals simply looking worse on the margin as we face macro slowing pressures of #Quad 4 in Q4 against some of the toughest comparisons for retail in a decade.

On the 3rd quarter:

  • The CEO has been out at Q end touting the business on multiple media outlets, it’s not likely the company tanks the print on that.
  • Her PR campaign came after weather inflected to cold, whereas the company was “reminding” investors that it’s business is weather sensitive back before the weather changed. We agree that KSS is one of the most weather sensitive seasonal retailers. Which means sales were likely strong in cool October.
  • Macy’s put up a decent sales quarter with 3.3% comps, noting an acceleration late quarter when the weather changed.
  • And Macy’s saw strong credit card results, we expect KSS to see strength as well and are modeling an acceleration in credit revenue growth in 3Q which helps margins flowing through at 100%.

Ultimately we see the 4Q bar as tough to clear, yet there is no reason for the company to guide down yet, when it can hold on to hope of hitting high expectations.

But here’s a few considerations on the next couple quarters.

  • The calendar shift will hurt in 2H 2018. Given the shift seen in 1H, and the cadence we saw back in 2013, we see about 140bps hit to comp in 3Q, then 250bps hit in 4Q.  4Q revenue growth has another ~250bps hit from losing the 53rd week.
  • We’re lapping a ramp in Active category sales growth at KSS which was aided by year 1 of Under Armour.  It accelerated from mid teens in 2Q17 to 30% in 4Q17.
  • In 4Q we’ll be lapping the only positive traffic quarter for KSS in last 10.

The setup over a trend duration is very bearish for KSS.

GWW

Click here to read our analyst's original report.

Below is a note from CEO Keith McCullough on why we added Grainger (GWW) to the short side of Investing Ideas this week:

Looking for single stock short ideas to go along with your Industrials (XLI) short position? 

Grainger (GWW) has bounced back to the top-end of my @Hedgeye Risk Range and Jay Van Sciver remains The Bear.

Here's a recent update from Jay's Institutional Research notes on GWW:

"Grainger remains a remarkable example of a company whose core problem, price compression leading to margin compression, somehow became the solution.  Cutting prices to a ‘relevant’ level likely just pulls forward some of the erosion that would otherwise have set in more gradually."

Sell on green,

KM