Below are analyst updates on our nine current high-conviction long and short ideas. Please note we removed Kohl's (KSS) from the short side of Investing Ideas this week. We added short Avalara (AVLR). We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
RRC
As we highlighted last week, we helped Investing Ideas subscribers steer clear of this recent market meltdown by moving to no longs before the selloff. Range Resources (RRC) was added following the selloff and remains the only long on our list. That fact alone ought to reveal something about what we think about this current market setup.
So, why exactly did Hedgeye CEO Keith McCullough add Range Resources to the long side of Investing Ideas?
Here's an excerpt from a recent Institutional Research note: "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." |
avlr
Below is a note from CEO Keith McCullough on why we added Avalara (AVLR) to the short side of Investing Ideas today.
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On holiday shortened trading days you'll often see stocks moving disproportionately to the market on low-volume. That's what we're seeing in one of our favorite Tech Shorts, Avalara (AVLR) +3% today, trading on fumes. Here's an interesting excerpt from our Tech analyst Ami Joseph's Best Idea Short (Institutional Research product) report on AVLR: "We are typically bullish on stocks like this. We like being LONG small software companies that are automating a manual process. Over time we think that process wins. We like stocks that have a large potential addressable market, even if growth is slow and steady. We featured BL (BlackLine Inc.) on this trend just a few months ago. But something is amiss in the case of Avalara. We found so much hair in this process that we couldn’t stomach being LONG a stock like this even though it typically falls right into the sweet spot of our Long idea generation." |
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, our Healthcare analyst Andrew Friedman recently reviewed the Healthcare team's SGRY short thesis on The Macro Show. Click here or the image below to watch.
TSLA
Click here to read our analyst's original stock report.
Our Industrials analyst Jay Van Sciver believes Tesla (TSLA) longs are 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.
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. "One of our favorite shorts 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.
(Editor's Note: This is an excerpt from a recent note written by our Retail analyst Brian McGough.)
At face value I’m initially surprised by the 14%+ market reaction given the weak magnitude of the beat. But in fairness, the company comped 2.9% -- a clear improvement sequentially. Gross margin looked solid, trends got better throughout the quarter, Europe still promotional – but getting less bad, inventory looks like it’s in check, and quite frankly – management sounded more confident than it’s been all year.
But even with the strength, it still put up a 13% EBIT decline vs last year. This is even worse than TGT and KSS. It’s gonna take at least a msd+ comp (ergo 6-7% comp) to get this name some respectable earnings growth, and I can’t get there. No way, no how.
My biggest concern being short here is that Nike needs FL more now that its partnership with FLEX evaporated. Without a draw-down in FL’s Nike ratio from 68% to something closer to 60% -- the BIG short call won’t work. That’s the key area I’m researching. Nearly every other factor is a rounding error to me.
MCHP
Click here to read our analyst's original stock report.
A brief update on Microchip Technology from our Tech analyst Ami Joseph:
- Short-term positive of better October orders likely figures prominently in the reason Shorts have covered recently and Longs have added, that plus the stock had dropped ~40% in a hurry.
- The long-term view is unchanged:
- MCHP is in transition from an HPA-like model to an ON-like model, with different valuation and holders lists
- The company’s pitch is no longer high-quality growth and FCF, but rather, ‘we like buying crap semis’
- What if Jimmy P (former MSCC CEO) is right in his defamation lawsuit and Steve has to recuse himself from running the company?
- On the bounce we think MCHP is back to the high end of the range of valuation for ongoing FCF (~15x), so we think that is Shortable into 2019.
GWW
Click here to read our analyst's original report.
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If you are in the market hunting for single stock short ideas to add alongside your Industrials (XLI) short position, look no further. Hedgeye Industrials analyst Jay Van Sciver remains The Bear on Grainger (GWW) As Van Sciver recently wrote: "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." |
