Below are analyst updates on our fifteen current high-conviction long and short ideas. Please note we added Owens Corning (OC) to the long side of Investing Ideas this week. We also removed Range Resources (RRC) from the long side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
DFRG
Click here to read our analyst's original report.
The best asset Del Frisco's (DFRG) has (and a very attractive PE asset) is Del Frisco’s Double Eagle Steak House. Depending on how you want to value the Double Eagle we think that asset is worth between $7-$10 per share alone.
In the analysis below, we are valuing the Barteca concepts at less than what DFRG even paid for them, and they still support a case for owning the stock and essentially getting the Double Eagle for free! The management team definitely needs some help, and we are glad to see an activist has become involved to push them in the right direction.
GTBIF
Click here to read our analyst's original report.
Green Thumb (GTBIF) announced recently that they have acquired California-based Success Holding Company, owner of Beboe Brand in a 100% stock deal, the deal is expected to close in 1Q19 pending customary closing conditions (press release HERE). After speaking with the company to get a better sense of the deal and what they expect to achieve with this high-end brand, we think this is a great addition to their portfolio to elevate the price protection of their portfolio long-term.
Beboe Brand has distribution into 125 California and Colorado retail locations as well as through home delivery across California. The partnership with an MSO will allow their brand name to spread beyond their current boundaries. In addition to THC based products, Beboe has launched a direct-to-consumer hemp-derived CBD line of products, which we are particularly excited about for what this acquisition means for GTBIF – they didn’t have access to this growing market before.
AMN
Click here to read the long AMN Healthcare (AMN) stock report Healthcare analyst Tom Tobin sent Investing Ideas subscribers earlier this week.
MLCO
Morpheus is finally ramping and that’s great news for Melco Resorts & Entertainment (MLCO). In its Q4 release, the higher mass luck factor at City of Dreams, who owns Morpheus, suggests a greater level of premium mass play at the property. We expect Morpheus and MLCO to outperform this year in Macau and take market share from its peers, particularly on mass. Positive momentum is still on MLCO’s side. Stick with this name.
OC
Below is a note written by CEO Keith McCullough on why we added Owens Corning (OC) to the long side of Investing Ideas earlier this week:
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"Looking for more ways to be long of US Housing (ITB) and Falling Interest Rates as US #InflationSlows (i.e. the research call we made back in late SEP when consensus thought rates were heading higher and housing doomed because the "charts" looked bad)? One of Jay Van Sciver's Top 3 Long Ideas in terms of ways to play US Housing remains Owens Corning (OC) and it's on sale today. Yep, we like to buy on red ... so that we're not forced to chase on green. It's just a #process thing. 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.
From a valuation perspective, we question how much common equity value there is given SGRY's indebted capital structure and lack of free cash flow after minority interest obligations. The company is not earning the cost of capital, has limited liquidity and looming debt obligations.
MCHP
Click here to read our analyst's original stock report.
Each step of buying a secular impaired company that doesn’t grow reduces the blended organic growth of the combined entity. Microchip Technology (MCHP) CEO Steve Sanghi's 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, 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. We have previewed some midsize targets in a previous deck. 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'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.
The CEO sees a path forward on functionality but it will involve ramping up the ‘M&A’ machine, already ~120bps of growth in F19 YTD. Companies who pivot from go-go organic to M&A plus slowdown tend to transition from EV/S to EV/FCF and those transitions are rarely smooth; in this case SBC is an extenuating factor without which there really wouldn’t be any OCF.
We see the company’s path forward but we think a digestion period would reset valuation
CCL
Click here to read our analyst's original report.
2019 could be the year where yield growth ends up below 2%, which is less than half of the average growth from the previous 4 years and substantially less than the growth that its competitors will likely report in 2019. Europe, particularly their European sourced brands, and Alaska are the biggest drivers of the deceleration but Carnival’s (CCL) new ship premiums are also not enough to lift yield growth substantially higher.
TGT
Click here to read our analyst's original report.
Walmart (WMT) reported earnings this week. Results were strong indicating an acceleration in sales for the 4th quarter.
There are several key insights from the WMT print as it relates to Target (TGT).
- First, even great comps (+4.2%) can’t push gross margin positive in an environment where growth is coming from clearly dilutive ecommerce.
- Second, WMT was able to leverage expenses, and even grow EBIT in the US despite the ecommerce dilution. TGT meanwhile is doing 5%+ comps and can’t grow EBIT. To us that shows how much farther along WMT is in its investment cycle vs TGT (~2.5 years).
- Lastly, there are signals in this print around the success of pickup/delivery to change the consumer experience/behavior. WMT had its best 2 year stack in grocery in 9 years, and even though its competing aggressively on price, avg ticket was up 3.3%, meaning customers are adding more items to the basket. With pickup and delivery being expanded, this could mean long term share gain for WMT.
TGT 4Q results will be released on March 5th.
TSLA
Click here to read our analyst's original report.
Below are two important charts and analysis regarding our Tesla (TSLA) short thesis:
In each example of electric vehicle subsidy/tax credit withdrawal, demand has subsequently declined and largely failed to recover. While Tesla 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.
ROL
Click here to read the short Rollins (ROL) stock report Industrial analyst Jay Van Sciver sent Investing Ideas subscribers earlier this week.
DVA
We think trends in commercial patient volume, reimbursement, and margins are coming under pressure alongside regulatory problems. We see significant downside over the next 12-months for DaVita (DVA), which has little flexibility and apparently no plan except for repurchasing stock.
We are skeptical that when DVA closes its sale of DMG to UNH’s Optum unit, the plan for “significant stock repurchases” and debt repayment can overcome the secular headwinds. Assuming the buybacks and debt paydown associated with the sales of HCP to UnitedHealthcare, DVA trades at ~7X EV/EBITDA post-deal. We think the market will pay an even lower multiple for declining EBITDA and negative policy headwinds.
Downside from commercial enrollment and reimbursement mix, high fixed costs, and few opportunities for margin expansion gives us high conviction with DVA as a Best Idea Short.
MCD
Click here to read the short McDonald's (MCD) stock report Restaurants analyst Howard Penney sent Investing Ideas subscribers earlier this week.
