Below are analyst updates on our seven current high-conviction long and short ideas. Please note that we removed GAP (GPS) and Redfin (RDFN) from the short side of Investing Ideas this week. We also added Altria Group (MO) to the long side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
RRC
Click here to read our analyst's original report.
With short interest still hovering at ~15% of the float, boring prints are good prints for Range Resources (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.
For a detailed overview of our long call on Range Resources, click here to watch Energy analyst Alec Richards' appearance on The Macro Show this week. (Richards' updated commentary on RRC begins at 4:27.)
MO
Below is a note written by CEO Keith McCullough on why we added Altria Group (MO) to the long side of Investing Ideas this week:
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I've been waiting on an immediate-term #oversold signal in Altria (MO) as Howard Penney and Shayne Laidlaw just added it as a new Long Idea in our Institutional Research product. Here's a fun excerpt from Howard, contextualizing his history with this stock and what's changed recently: "25 years ago, in the Spring of 1993, I was a tobacco analyst at Morgan Stanley, when Philip Morris, the maker of Marlboro cigarettes, announced a cut in the price of Marlboros to stem the brands market share losses to generic cigarettes. MO dropped 26% that day, wiping $10 billion off its market cap, and the company’s change in strategy altered the value equation for many premium brands. Marlboro Friday was a memorable event in my career, and I believe another Friday in late 2018 will be another significant event in the Cannabis industry. Recently, Altria which is now the maker of Marlboro cigarettes, purchased a 45% equity position in CRON for C$2.4B, our only Best Idea LONG in the Cannabis Industry. Given the events of last Friday (and certain nostalgia around coming back to my research roots) we are adding MO the Hedgeye Consumer Staples LONG Bias List." With the stock down -3% today, the signal says buy some on red, KM |
SGRY
Click here to read our analyst's original report.
We think what’s really fascinating about Surgery Partners (SGRY) pre-announcement is that in the press release the company said Same Store Revenues were 9-11%. That’s significant same store growth particularly with where the company has been trending, in the low single digits. At the same time the company isn’t generating any type of operating leverage or free cash flow so their margins are continuing to come under pressure.
If Same Store growth was going to save the day this would have been the quarter we were going to see it. That’s part of the reason why the stock has traded down since the announcement.
You can see on the slide below the story on operating leverage. What the company reported based on their guidance implied adjusted EBITDA margins relative to consensus having a hard time showing any expansion, in fact being down in the back half of the year. So the back half of the year continues to be back end loaded. We just have a hard time getting there with the company showing 9-11% same store growth. It’s probably not going to get much better at the same time that they’re lapping the big acquisition of NSH.
We’ll see what happens but we still think there is significant downside in SGRY.
MCHP
Click here to read our analyst's original stock report.
Below are some notes from Technology analyst Ami Joseph on our Microchip Technology (MCHP) short call:
- 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.
While growth in the industrial economy is slowing, we don’t see a similar trend in our sample of Grainger's (GWW) web traffic. This is a problem – disconfirming evidence – for our bearish view. We are working on ways to dismiss the offending data but may be looking at a decent quarter if the data continues to be positive for GWW.
AVLR
Click here to read our analyst's original report.
Below are some notes from Technology analyst Ami Joseph on our Avalara (AVLR) short call:
- Employees had been promised an exit for several years prior to the IPO (including a full IPO prep in 2015). Based on our reviews of employee comments, we expect a fair bit of pent up selling.
- Some very mixed currents in the company culture with the company requiring outside lawyers to fix sexual harassment charges, and a number of (persisting) other problems that we surfaced in our deep dive.
- Employees know that the category they are in will not make AVLR the next HUBS; there are deflationary elements in the marketplace like Intuit charging a low monthly price for similar functionality, or Amazon performing the service to its selling base off internal tools, and even the upside drivers like the beginning of the march into a high ARPU range of large enterprises will require an elongated sales cycle and a forklift upgrade to the company’s struggling support teams.
- Employees see that the company has struggled with efficiency historically, and now must pivot towards profit and cash flow at a time that the growth rate is likely to deflate; for investors this may mean that middle of the road software EV/S rates of 5-6x may be a shallow trough with real bedrock value only when the company can transition fully to FCF.
All of these are factors could be very tough for the stock.
TGE
Click here to read the short Tallgrass Energy (TGE) stock report Energy analyst Alec Richards sent Investing Ideas subscribers earlier this week. For a detailed overview of our short call on Tallgrass, click here to watch Energy analyst Alec Richards' appearance on The Macro Show this week. (Richards' updated commentary on TGE begins at 13:07.)
And here's a note from CEO Keith McCullough sent to Real-Time Alerts subscribers on Tallgrass this week.
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Tallgrass (TGE) rumors present a great short-selling opportunity. On said rumors, here's an excerpt from an excellent Institutional Research note written by Al Richards this morning: "TGE was up ~14% yesterday on a rumor that Stonepeak Infrastructure Partners and Brookfield Asset Management were in talks to take the company private. The idea has been floated in the market before, but largely discounted due to the risk associated with the 2019-2020 contract cliffs. We are modeling run-rate proportionally consolidated 2H20 EBITDA to decline 25% from 2018 levels. Rather than speculate on the depths on the takeout discussions or the source of the leak, we will instead focus on our attention on the boxes that must be checked during the due diligence process – mindful that the backdrop of what looked like a constructive environment in October has completely evaporated." Short lower-highs, cover-some lower, KM |
