Below are analyst updates on our ten current high-conviction long and short ideas. Please note that we added Redfin (RDFN) and Gap Inc (GPS) to the short side this week. We removed Tesla (TSLA). We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
RRC
Range Resources (RRC) remains the only long on Investing Ideas.
Front month natural gas prices closed at ~$4.50 per MMbtu this week. Inventories drew by 59 Bcf during the week ended 11/13 and now sit 19% below the 5-year average. The 2019 Henry Hub strip is currently sitting around $3.15.
We continue to like the near-term macro set up for natural gas equities and think RRC is the best way to play that view.
The equities have discounted the rise in natural gas prices, but we think eventually the macro will sync with the securities – at ~$3.15 natural gas and $50 oil we value RRC at $25 - $30/share.
At ~15/share, RRC today is pricing in $50 oil and $2.50 Henry Hub.
UNFI
Click here to read our analyst's original report.
United Natural Foods (UNFI) is down 50% since we recommended it as a short in Investing Ideas on June 28th. It fell approximately 5% today.
Our analyst has no additional update this week.
SGRY
Click here to read our analyst's original report.
We see more than 50% downside in Surgery Partners (SGRY) and believe they are poised to miss street estimates in 2019 despite the recent capital raise to keep the roll-up machine running.
Leverage is running near an all-time high at ~9x Adjusted EBITDA in the last quarter and free cash flow remains elusive despite a significant acceleration in same-unit growth to 11.4% in 3Q18, which also makes us skeptical that the same-unit number is even real. Meanwhile, weak guidance and utilization commentary out of the major labs DGX and LH, suggest that the seasonal utilization pick-up into year-end may fall short of the lofty assumptions embedded in management’s 4Q18 guidance.
AVLR
"Something is amiss in the case of Avalara (AVLR)," writes Hedgeye Tech analyst Ami Joseph. "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."
The chart below shows a strange annual reversal in the source of incremental revenue. In the beginning of the year, it appears that revenue from new customers dominates the mix, but by year end, revenue from existing customers dominates the full year mix.
While we think we understand the boost to ‘existing’ based on year-end pricing and year-end transaction tallies that re-state backward contracts, why would implied revenue from new customers plummet in 4Q or even maybe partially reverse?
RDFN
Below is a note from CEO Keith McCullough on why we added Redfin Corp (RDFN) to the short side of Investing Ideas this week:
Every once in a while we get lucky and the Old Wall slaps a "buy" on something we didn't think would bounce back...
That's what happened this week with one of Josh Steiner's favorite US Housing Shorts of 2018, Redfin (RDFN).
Here's Steiner and Drake's Institutional Research take on the recent quarter (that rightfully crushed the stock!):
- Core top line growth has slowed considerably since the IPO and is projected to slow further in 4Q18.
- Loss guidance for 4Q is 3x what the Street was expecting (18-20 cents vs expectations for 6 cents).
- The Housing market weakened further just recently with bookings growth for Nov/Dec down from what was seen in Sep/Oct.
- The company plans to quadruple ad spend in 2019, up from $12mn in 2018 to $40-60mn in 2019.
GPS
Below is a note from CEO Keith McCullough on why we're adding GAP (GPS) to the short side of Investing Ideas this week:
I guess consensus concern is that the low-quality Retailers are going to "not go down again"...
After going down hard earlier in the month, our Retail Sector Head Brian McGough and his team remain in the camp that these stocks can and will go down.
On Gap Inc (GPS) in particular, he doesn't think GPS's Q4 numbers are doable, and they'll be setting up for a round of store closures.
DE
Click here to read our analyst's original stock report.
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.
Foot Locker (FL) has continued to trade up week-over-week, adding $3 after the positive stock reaction on the 3Q18 earnings release.
Nike and Adidas got better in the US in 3Q, so we saw FL comps improve, but EBIT was still down 13%.
The big issue here is the long term trajectory of earnings. There is still rising SG&A pressure, from a decade of under-investment as higher Nike penetration drove its traffic.
And there is gross margin pressure from rising ecommerce penetration, and flat to down Nike penetration. That means to grow earnings in 2019, FL will likely have to comp about 5%+. We don’t think that is a reasonable assumption given how the brands are growing around the traditional wholesale channels like FL doors.
In the coming years Nike’s DTC growth will accelerate, and FL will see more and more comp pressure which means continued downside in earnings.
MCHP
Click here to read our analyst's original stock report.
No update this week on Microchip Technology from our Tech analyst Ami Joseph.
GWW
Click here to read our analyst's original report.
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."
