Below are analyst updates on our twelve current high-conviction long and short ideas. Please note we added Green Thumb (GTBIF) and AMN Healthcare Services (AMN) to the long side of Investing Ideas this week. We also removed Canopy Growth (CGC) from the short 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.
The economics of Range Resources' (RRC) wells compete with those of Permian oil producers and its Marcellus peer COG. In the past, however, a combination of high debt leverage, disastrous capital allocation decisions, and macro headwinds weighed on profitability. The acquisition of Memorial Resource Development (MRD) compromised management’s credibility and destroyed sentiment. The RRC Board of Directors and management have done little to fix the credibility issue.
Unlike other gas producers, RRC has the assets to dial back CapEx and still grow, profitably. On a 1 – 3 – 10 year basis, RRC has proven again and again that it is a top-tier producer with quality rock and a long development bench in SW PA. The evidence is in industry leading (measured against both gas and oil E&Ps) proved developed F&D costs and organic recycle ratios. Yet, RRC trades like a tier 3 producer.
Range has been an exceptional operator of its Appalachia assets. Since the company started developing the Marcellus in earnest, organic Recycle Ratios have been in excess of 2.0x every year except 2015-16. Organic F&D costs are on par with COG, and head and shoulders above the rest of the group.
DFRG
Click here to read our analyst's original report.
Del Frisco's (DFRG) announced that it executed a Cooperation Agreement with Engaged Capital, Del Frisco’s third largest shareholder (click here).
Engaged Capital has been urging the company to explore strategic alternatives, with the end goal of selling the company. We think the company can create value through more appropriate capital allocation, as the current management team has proven to not be great stewards of shareholder capital. Look no further, then the Barteca acquisition as evidence of managements lack of discipline on capital allocation. Management leveraged the company up to 4.6x debt/EBITDA (plans to delever to <3.5x within 2-3 years) to purchase Barteca at a multiple of 2.5x sales or 15.7x TTM EV/EBITDA (10.6x FY18 run-rate adj. EBITDA of $31M) as compared to DFRG’s multiple of 8.3x TTM EV/EBITDA at the time of the deal.
We do agree that the stock is intrinsically undervalued. Our sum-of-the-parts analysis suggest if you bought the stock in the $6-$7 range you are essentially getting Del Frisco's Double Eagle for free!
GTBIF
Below is a note written by CEO Keith McCullough on why we added Green Thumb (GTBIF) to the LONG side of Investing Ideas this week:
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Looking to buy something on red today? Our Cannabis Research Team recently added Green Thumb (GTBIF) to their Institutional Research Best Ideas Long list. Here's a brief excerpt from their notes: We are adding Green Thumb Industries (GTII) to the Hedgeye Cannabis Best Ideas list as a LONG. It’s clear 2019 is full of potential catalyst for the cannabis industry, in particular for the U.S. operators. From particular states enacting medical and adult-use programs, to the potential for federal legislation such as the STATES Act (which is a blessing and a curse). Although most companies that are participating in the market will be winners in this environment, we are working to pick the winners that will be successful long-term. GTII is building a platform to solidify their current business while enabling efficient and repeatable future growth. KM |
AMN
Below is a note written by CEO Keith McCullough on why we added AMN Healthcare Services (AMN) to the LONG side of Investing Ideas earlier this week:
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We're into day 3 of people selling on red in the US stock market. Why they chased on green after the January highs is their problem, not yours. We like to buy things when they are A) Bullish TREND @Hedgeye Research and B) on sale towards the low-end of the @Hedgeye Risk Range. One of Tom Tobin's favorite Healthcare Stocks (AMN Healthcare) fits that profile. Here's an excerpt from one of his Institutional Research notes on AMN: "One of the key themes we discussed during our 1Q19 Health Care Themes presentation earlier this week was accelerating wage inflation in Health Care. It appears utilization is accelerating slightly, leading to increased demand for Health Care labor, but at a time when the labor pool is extremely tight, especially for RNs. For a temporary health care staffing company like AMN, the result should be decidedly positive." Buy on red, KM |
SGRY
Click here to read our analyst's original report.
Surgery Partners (SGRY) is a bad house in a great neighborhood. While we like the macro trend of inpatient surgeries moving to low-cost ambulatory surgical centers (ASCs), Surgery Partners is not the horse we want to bet on.
The easiest fix for SGRY is to buy high quality facilities and divest low quality ones. However, competition for deals continues to increase, as well as the multiples paid, and SGRY does not have the balance sheet to accelerate the pace of acquisitions after NSH. The company has a risky capital structure for equity investors with debt to equity at 319% and common equity 18% of enterprise value. Given the high debt levels the focus should be on deleveraging, however, doing so will come at the cost of growth and missed estimates.
MCHP
Click here to read our analyst's original stock report.
Microchip Technology (MCHP) CEO Steve Sanghi's latest gloss is that he buys good franchises that are mismanaged and makes them world class (by removing OPEX, writing down fab carrying values to drive up utilization and gross margin, taking ASPs higher, cutting inventory in distribution). But each step of buying a secular impaired company that doesn’t grow reduces the blended organic growth of the combined entity. His stated strategy used to be to buy world class analog sockets that can pair with his MCU. That one is gone. We have seen serial acquirers try out strategy themes like borrowed clothes (thinking AVGO).
So MCHP is a debt heavy balance sheet with dividend yield at a discount to peers buying crap assets and making changes. If we are right on the timing, he will need another major deal to close by year end 2019 (CY) to create growth in CY20 which means potentially announcing the next deal by June. Get the point? MCHP is on the revolving door of buying crap assets. This path will sustain a lower valuation range and peer group cycle to cycle.
AVLR
Click here to read our analyst's original report.
The secret sauce underlying the inside of the Avalara (AVLR) machine is…multiplication (tax % x quantity). The barrier to entry is the content, which are publicly available tax laws. There is a short-term accelerant in revenue which is mainly comps, and slower hiring creating better incremental fall through. But by 2H19 the growth falls off with tighter comps, and slower hiring will hasten that fall. Expect a lot more M&A to add inefficiency and lack of product clarity to an already inefficient and unclear product story and roadmap.
SPLK
Click here to read our analyst's original report.
Splunk's (SPLK) products are always benchmarked in big data as most expensive & most value; probably a good thing overall but in overcapitalized big data land, with tech innovation driving wedge between low priced storage and flexible/elastic computation, Splunk stands out a bit more on the pricey side, and there are more recent wins / anecdotes by competitors that have caught our attention.
DPZ
Click here to read our analyst's original report.
Domino's Pizza (DPZ) entities in Australia and the U.K. have crumbled under the pressure of slowing comps and franchisee unrest. Pressures are mounting on U.S. franchisees and SSS slowing (although still strong compared to competition) we think it is only a matter of time until the U.S. story starts to break.
As we have been alluding to for quite some time, the United States’ delivery landscape lags behind that of other economies across the globe, most notably the UK. Our research regarding Domino’s UK business led us to the discovery that the UK business was not only the portion of the Company feeling the squeeze. The slowdown can be seen in the SSS metrics for the Japanese, Australian and EU (ex UK) portions.
Most recently, Domino’s Pizza Enterprise (DMP.AU) reported FY17 financials and results were very disappointing, missing upgraded guidance figures. If DMP.AU is a glimpse of what is to come across the broader Domino’s business, we can expect to see other dominoes fall as competitive pressures continue to encircle the brand.
CCL
Click here to read the short Carnival (CCL) stock report Gaming, Lodging & Leisure analyst Todd Jordan sent Investing Ideas subscribers earlier this week.
TGT
Click here to read the short Target (TGT) stock report Retail analyst Brian McGough sent Investing Ideas subscribers earlier this week.
TSLA
Click here to read our analyst's original report.
In each example of electric vehicle subsidy/tax credit withdrawal, demand has subsequently declined and largely failed to recover. While Tesla (TSLA) management may not want to acknowledge a decline in activity, it has happened according to our data. Since our June 2017 “First Loser Disadvantage” launch, 2019 has been the key catalyst period. We built tracking tools to confirm the anticipated decline in demand, and those tools show a significant decline in activity. Spending billions to ramp capacity with a declining order backlog and subsidies does appear to have been an error.
Tesla’s price cuts – two on the Model 3 in recent weeks, as well as used prices and inventory trends, support a view that 1H19 demand is tracking well below 2H18. It only gets harder as competition likely increases during 2019, and the tax credit halves again July 1.
