Below are analyst updates on our fifteen current high-conviction long and short ideas. Please note we added Melco Resorts & Entertainment (MLCO) to the long side and Rollins (ROL), DaVita (DVA) and McDonald's (MCD) to the short side. We also removed Domino's Pizza (DPZ) from the short side of Investing Ideas this week. 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.
There have been meaningful steps forward on the Range Resources (RRC) governance front. Management, which remains little trusted by the investment community, has stayed on course, investing in its highest return locations, creatively solidifying the balance sheet, and protecting the value of its premier asset base by letting the results speak for themselves. It’s been nearly 3 years since the company first announced its acquisition of Memorial Resource Development, but the skeletons of the transaction still haunt the RRC narrative.
We believe guardrails are in place to prevent such an event from happening again should management attempt to veer of track; management hasn’t been paid in three years, the CEO was stripped of the Chairmanship, the COO and CFO have turned over, the stock is off more than 80% its pre-acquisition levels, and an activist (who owns 17% of the outstanding equity) controls 1/3rd of the Board. We believe the narrative deserves a second look.
DFRG
Click here to read our analyst's original report.
Del Frisco's (DFRG) reported positive comparable restaurant sales during Q4. The numbers showed weaker trends in November than October but accelerated in December and carried over into 2019 across all four brands. While management’s decision making process has been a bigger concern for the stock, the brands are healthy and the stock is trading at a significant discount to the value of the brands.
GTBIF
Click here to read the long Green Thumb (GTBIF) stock report Cannabis analysts Howard Penney and Shayne Laidlaw sent Investing Ideas subscribers earlier this week.
AMN
There continues to be a good long thesis with AMN Healthcare (AMN) despite the disappointing 4Q18 results and 1Q19 guidance. We'd be more concerned if the market dynamics were not as strong as they are; health care wage growth is accelerating, health care hiring and job openings are accelerating, and our model continues to forecast improvement in utilization.
Pricing improved in Nurse and Allied sequentially on a one year and two year basis in 4Q18 as the premium placement trend continues to stabilize. Net of the single client, 1Q19 guidance would have been better than consensus even with the flu comp. When comparing the guidance for Nurse and Allied before and after the problem client, the negative 600 bps swing resulted in 1Q19 revenue forecast to $333M, lower than consensus of $342M. Without the headwind management quoted a +5% growth rate (versus down 1% to 2%) in Nurse and Allied which would have driven guidance well ahead of consensus and our forecast would have been spot on.
Other Workforce Solutions (OWS) and Locum Tenens businesses are the biggest risk to our positive outlook. We are assuming the stronger demand back drop for Nurse and Allied eventually translates to better results for OWS and Locum Tenens. Nevertheless, the issues with Locum Tenens, which are being couched as a self-inflicted mismanagement of a sales software deployment, are deeply concerning.
We think the stock pulls back on the immediate reduction in 1Q19 estimates, but expect consensus to leave the remainder of 2019 estimates intact given the temporary impact of the single client and flu compare.
MLCO
Below is a note written by CEO Keith McCullough on why we added Melco Resorts (MLCO) to the long side of Investing Ideas earlier this week:
|
Yes, we buy the damn dips in things we like (like Treasuries)... With Gaming stocks getting hammered today on MGM's quarter, we're getting an immediate-term #oversold signal in one of Todd Jordan's favorite longs right now, Melco Resorts (MLCO). Here are a few bullet points from Jordan's recent Institutional Research note on Macau:
Buy on red. Don't chase charts, KM |
SGRY
Click here to read our analyst's original report.
We thought Surgery Partners (SGRY) consensus EBITDA estimates were too high when we went short in July 2018, and looked for a guidance cut to be a catalyst on the short side. The timing and thesis played out well, but we still think 2019 EBITDA estimates are too high and many elements of our short thesis are still in play such as:
- Low quality assets / poor case mix and
- Overleveraged balance sheet.
The company has shown a remarkable inability to generate free cash flow as they continue to take on more debt to fund their acquisition strategy. At the current rate, they will have to tap capital markets again later in 2019.
From a valuation perspective, we can get to a $8 stock or 30% downside from here in 2019 if we are right on the fundamentals and catalysts. In our bear case scenario, we can see the stock going to $0. We expect the company to release 2019 guidance when they report Q4 earnings in February.
MCHP
Click here to read our analyst's original stock report.
Microchip Technology (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, CEO Steve Sanghi 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.
Our bearish view of Avalara (AVLR) is reaffirmed by, among many other things (like sales inefficiency and lack of tech prowess), the company’s M&A strategy – which sort of reveals the whole joke. On the one hand, AVLR bought an alcohol license company and claimed that many of its own customers (who by the way, are mostly won thanks to an ERP refresh cycle) are naturally demanding help with obtaining their alcohol licenses. And its other recent acquisition of Indix, which management touted has “changed the game” – clearly has not, having been shut down as a product after once boasting to having revolutionized the state of retail… But more important is that Indix’s technology is something that AVLR should have built from the beginning, that is, if they were actually a technology company – and whose existence (in droves of similar startups) shows that the arbitrage of taking publicly available tax laws and running “multiplication” for clients will not be a high dollar draw forever. In other words, if new generation companies can do this with automation, they will get there faster, cheaper, and a heck of a lot more efficiently than Avalara. If all else fails, at least AVLR can help customers apply for their liquor license.
SPLK
Click here to read our analyst's original report.
Splunk (SPLK) is still priced on go-go growth but multiple recent tailwinds begin to fade on a forward basis. Accelerations that drove the stock higher will not repeat next year including ~600-700bps benefit from the shift to ASC606, a big data center spending bump, plus the Machine Learning and Analytics splurge in the last year.
The company also faces secular headwinds on the margin with its tools always among the most expensive in its peer group, but also providing the most value. A recent pivot in the industry to separate expensive compute costs from cheap storage costs means there are some deflatable costs in the SPLK model, which bundles both at the higher price.
CCL
Click here to read our analyst's original report.
Generally, investors like cruisers when yields are accelerating and avoid them when they are decelerating – historically, this is very evident when comparing yields and valuation multiples. Different environments lend themselves to different valuation ranges (as shown below). Carnival (CCL) trades at a premium to its peers given its lower leverage profile, more stable business model and top global positioning. But that may start to change if CCL is falling behind its peers on growth.
TGT
Click here to read our analyst's original report.
When all is said and done, I think that 2019 will go down as the year where Brick & Mortar pushes back against pure-play online – most notably Amazon – which will ultimately be to the detriment of margins across the board. This is not an overnight phenomenon – as it’s been building for the past two years, but it’s been simply masked by two factors – 1) a multi-year acceleration in US Retail sales, and 2) an 18-month period where incremental dollars broke a long-term trend and accrued particularly to high-margin B&M as opposed to online. In other words, there’s been more than enough growth to go around – and more of that occurred at the (highly profitable) store-level than the consensus thinks, and more than most management teams will admit. If you talk to the CEOs of Walmart and Target, they’ll tell you that leveraging the store as de-facto DC infrastructure while layering on home delivery tops the list of strategic initiatives by a country mile – and we’re seeing the capital deployment back that up. Their mindset isn’t about hitting numbers in a given year – but is about long-term survival in #retail5.0 and should ultimately lead to tempered margins for particular pockets of retail.
The biggest loser here is Target (TGT). We’re getting a taste in 4Q as to how leverage cuts both ways with TGT, as it comps ~5.5% and still likely won’t put up positive EBIT growth. In fact EBIT in 4Q will likely be down 2-4%. On top of that, TGT is the most aggressive retailer with using free shipping as an incremental promotional driver, and is relying on (dilutive) Shipt to accelerate its home delivery initiative – charging $99 per year for an asset-based service that WMT will ultimately employ an outsourced (variable cost) network to do for free. All in, we’re looking at 18% earnings downside for TGT this year and 34% over a TAIL duration. Additionally, the worst macro Quadrant for staple-like multiline retailers like TGT (and WMT) is Quad 3, where we should be for at least 2Q and 3Q 2019.
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 proprietary data trackers.
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 are indeed inflecting 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. TSLA 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 at the same time competition increases during 2019, and the tax credit halves again July 1.
Tesla may try to shift sales to Europe, but Europe’s more competitive market limits the scope relative to Tesla’s dominant US presence. International sales also likely come with higher costs. Even rapidly built factories take longer than a year to bring online – three years would be mighty fast, even in China.
ROL
Below is a note written by CEO Keith McCullough on why we added Rollins (ROL) to the short side of Investing Ideas earlier this week:
|
With Industrials (XLI) up this morning, I'm still hunting for shorts into the Q1-Q3 of 2019 #EarningsSlowing period. One of our Industrials analyst Jay Van Sciver's Best Ideas (Institutional Research product) remains Rollins (ROL). He thinks it is grossly overvalued. It has recently bounced to lower-highs on #decelerating volume. Here's an excerpt from Jay's summary SELL note: "The current share price of Rollins makes little sense to us, and we expect a significant downward revaluation by the market. Margin gains have stalled amid increasing competitive intensity in a mature, slow growing market. Attractive markets for growth and acquisitions – those where route density offers cost advantages – present less runway and higher transaction prices." Sell on green, KM |
DVA
Below is a note written by CEO Keith McCullough on why we added Davita (DVA) to the short side of Investing Ideas earlier this week:
|
Looking for some of my research team's Best SELL Ideas on this market bounce to lower-highs? You should be. Inasmuch as consensus wasn't looking for longs in late December, they're not looking for shorts in mid-February. DaVita (DVA) remains one of Tom Tobin's SELL ideas (Institutional Research product). Here's an excerpt from one of his recent notes on the name: "The company suggested a number of headwinds other than the demographic headwinds we discussed in our Black Book presentation. Management cited rising opioid deaths as a driver of available organ donors and subsequently a reduction in commercially insured patients who disproportionately receive available kidneys. This may be true, but we have not heard any anecdotes suggesting an uptick in transplants. Second was a reduction in out of network and subsequently high reimbursement patients, something we have heard from facility operators, but assumed DVA was bringing more patients in network at lower rates." Sell the bounce, KM |
MCD
Below is a note written by CEO Keith McCullough on why we added McDonald's (MCD) to the short side of Investing Ideas earlier this week:
|
I've been waiting for the US stock market to have another big #cowbell or Trump #tweet bounce before laying out more of my Research Team's Best SELL Ideas. I'm getting that opportunity with the ECB ringing the central market planning cowbell this morning! McDonald's (MCD) has moved from a Best Idea Long over the years to a Short by Howard Penney. Here's a taste of why he's not lovin' it: "I (Howard Penney) have now listened to nearly 100 MCD earnings calls, spanning 7 CEO’s. I was a big fan of the changes Steve Easterbrook was making in the early days of his tenure as CEO. In the nearly 4 years he has been CEO there have been a significant amount of positive changes at the company. There have also been some changes that have sent the company down the wrong path, leading to significant disappointments. The most obvious disappointment was the hiring of Chris Kempczinski, the head of MCD USA. Chris’s inability to understand how important the franchisees are to the company has led to the formation of the National Owners Association. An organization the company has never needed in its 50 year history. Over the years there have been issues with the franchisees, but nothing like what we are seeing today. These are extraordinary times for the company, and it appears the current CEO is in denial of the realities of the business. Until changes are made at the top, MCD’s operating performance will continue to disappoint." Sell on green, K |
