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Takeaway: AMN, CNQ, ITHUF, WTRH, DLTR, SNE, EXP, PINS, TSLA, ROL, DVA, TXRH, EAT, PENN, UNH, HQY, NFLX, LYFT

Investing Ideas Newsletter - 05.21.2019 bear ambush cartoon

Below are analyst updates on our eighteen current high-conviction long and short ideas. Please note that we added HealthEquity (HQY), Netflix (NFLX) and Lyft (LYFT) to the short side of Investing Ideas this week. We also removed Green Thumb Industries (GTBIF) and Tenet Healthcare (THC) from the long side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.

IDEAS UPDATES

AMN

Click here to read our analyst's original report. 

We have been optimistic that trends are improving for Health Care Employment, particularly at General Medical and Surgical Hospitals, and even more so for the Women cohort within this time series.  As ADP indicated earlier this week  (and likely be confirmed this morning by BLS employment report), it appears Health Care employment continues to accelerate offering indirect evidence that utilization is improving as well.  If true, AMN Healthcare's (AMN) positive  commentary will continue to accelerate and the negative revision cycle will turn positive.

We have been iterating a forecast method for AMN using machine learning. The 1Q19 result and 2Q19 guidance indicate we are on the right track. We will update the model inputs and algorithm today and publish next week.

Investing Ideas Newsletter - womenhosp

CNQ

Click here to read our analyst's original report.

Canadian Natural Resources (CNQ) is the largest non-integrated E&P in Canada by market capitalization and the second largest oil sands miner by capacity. The company is also the 2nd largest heavy oil producer in Canada and the largest natural gas producer in Canada.

After a 10+ year investment cycle, CNQ’s asset base is extremely efficient, high margin, and diversified with a solid balance sheet. It generates free cash flow in nearly any commodity price environment. At normalized differentials CNQ’s oil sands mines have better economics than nearly all shale oil-levered E&Ps.

ITHUF

Click here to read our analyst's original report.

The U.S. has roughly 330M people, of which roughly 73% (236M) of them are over the age of 21. California represents the largest opportunity in the country with 39M people, of which 29M people are over 21 years old (California > Canada).

With the U.S. boasting a cannabis usage rate of 17%, it makes it an ideal market from an addressable population perspective to invest in as long as you are focused on the more advantageous states. A state such as California, and other more established states can operate a legal cannabis industry within their own border but not all states are capable of doing this. There are vastly varying wholesale prices across the country, so people building business models around a price of $2,500 to $3,000 will be in for a rude awakening if/when cross border trade opens up.

In the early innings of this industry having a sound management team and corporate governance is of the upmost importance, you are buying management teams and the promise of huge sales growth at this point, so you have to have faith in execution. We liked iAnthus Capital (ITHUF) before the MPX deal, but really like it after with the addition of Beth to the team, she will likely prove invaluable over time. We think the Gotham Green investment speaks to a broader role that iAnthus could play in cannabis, and think this entity could become part of a cannabis conglomerate that operates across the global spectrum of cannabis.

WTRH

Click here to read our analyst's original report. 

We believe the growth of delivery globally in the restaurant industry will be significant, and there are going to be several ways to play the space.  Internationally, we like Just Eat and Takeaway.com, while in the USA, GRUB has a significant advantage over its rivals. Today, we like Waitr Holdings (WTRH) as a LONG to play this trend.

We continue to believe that Restaurant Delivery is going to reshape the restaurant industry in a meaningful way.  What that looks like exactly is still to be determined, while some changes will take years to manifest. Nevertheless, massive change is coming to the restaurant industry. 

Our initial conclusion that delivery is going to be bad for casual dining is unchanged, but it could also make some operators stronger as they work through the issues of profitability on delivery orders. The shifting change will lead to significant growth in chains or companies where the delivery order is not incremental.  Meaning, there will be a significant number of “purpose built” concepts that have delivery costs built in to the model.  Said another way, this implies that there will be a significant shift away from concepts that were not “purpose built” for delivery.  To put it bluntly, I would not want to be Applebee’s right now with 1,700 stores in the market averaging $2.2 million in average unit volumes. 

WTRH has about 2.0 million active diners across Waitr and the newly acquired Bite Squad.  WTRH has an EV of $800 million and revenue estimates of $250 million for 2019. When we look at the future of chain and independent restaurant operators, it will be important for delivery providers to be a single vertically integrated service that can fulfill all the needs of its restaurant partners. WTRH has a strong start with a tablet in every restaurant and local teams on the ground to focus on the convergence of services. 

DLTR

Click here to read our analyst's original report. 

Dollar Tree (DLTR) has been stuck at the $1 price point ceiling for so long (more than three decades) that management has acted as if it were written into the company’s bylaws. Over that time the purchasing power of a buck has eroded considerably. Early on in the company’s history management changed the name of the store from “Only $1” to “Dollar Tree” to provide future flexibility around price points. Management’s biggest argument for maintaining the $1 price point being its long history goes against its own founding from a “Five & Dime” franchise. After some pressure from an activist investor Dollar Tree announced last quarter that it will test items over $1 in a number of stores. Introducing price points above $1 while maintaining its value proposition for customers would result in a 10-year accelerated comp story, it broadens store opening opportunities, and adds $2-3 per share in Tail earnings.

Investing Ideas Newsletter - dltr2

SNE

Click here to read our analyst's original report. 

Sony (SNE) held a meeting overnight with investors in Tokyo. The company raised its 3 year cumulative FCF target by 10% and said gradual dividend increases would continue as part of it. But in Q&A it appears the CEO also defended the current conglomerate structure, likely for obvious legal/HR/PR necessity to not confirm he has hired bankers etc and we don’t think it is because he really believes smartphones and insurance should be part of the future of Sony. The CEO will do the right thing but for obvious public reasons he had to defend the conglomerate last night and the stock will be down today on that defense. I think this is noise.

EXP

Click here to read our analyst's original report. 

Eagle Materials (EXP) wouldn’t take any questions about the strategic review/activist engagement, but we continue to see significant value to unlock. The large buyback is encouraging, sure. Could EXP do an RMT with Continental, to prevent tax leakage? Could cement be sold at a high enough price that the taxes don’t matter?  Could a cement buyer take the whole thing, and sort out wallboard later?  IDK, but there are ways that EXP could do this well beyond evasive answers to direct questions on the tax basis of the proppant business.  In fairness, we think this is the rare management team that will try to execute well.  In terms of the operations, expect the market to get excited about wallboard PPI in a couple of months.  Prices have firmed, from what we see, with improving housing activity.  The cement side is basically sold, but it is worth noting that road construction is an area of construction growth.

PINS

Click here to read the long Pinterest (PINS) stock report Communications analyst Andrew Freedman sent Investing Ideas subscribers earlier this week.

TSLA

Click here to read our analyst's original report.

Since our launch, we have thought it would be “intellectually dishonest” not to expect a step-down in tax credits to negatively impact Tesla (TSLA) sales. Our data suggests that the sales downswing will continue, and that Tesla may have excess capacity.  So far, activity corresponds to a 60,000-65,000 unit run-rate, and maybe lower if ex-US continues to decelerate.  That sales rate is well under guidance of 90,000 – 100,000; no one discusses ramping Model 3 production to 10,000/wk anymore.  Test drive activity should have shown a seasonal bounce, but store closures and sales confusion are not helping.  Neither is Model 3 leasing so far, although we’ll keep watching for a benefit.

Investing Ideas Newsletter - tsla

ROL

Click here to read our analyst's original report.

Our work continues to show signs that the tailwinds behind the pest control industry are fading while pricing trends in the industry suggest rates have been stretched and may now be facing competitive pressures. Combined with other growth and competitive headwinds, we expect market recognition of pricing and ancillary service limitations to drive a revaluation in Rollins (ROL) shares.

DVA

Click here to read our analyst's original report.

The next catalyst for DaVita (DVA) is likely to be a positive one with the closing of the DMG sale to UNH. However, the outlook is sufficiently negative to maintain the short.  We believe the challenges for DVA are structural in a post roll-up era.

Key drivers of our thesis are declining to flat growth in commercially insured population on which DVA is disproportionately dependent. Meanwhile the Quad 4 environment of accelerating labor costs is putting pressure on total patient expense, while the pool of acquisition targets has largely been depleted. We are at the end of a 20 year roll up in dialysis with 2 large competitors, very little unconsolidated, and excess capacity overall.

TXRH

Click here to read our analyst's original report.

We believe irrational promotions by some competitors will also negatively impact Texas Roadhouse (TXRH) in the near to medium term. Instead of discounting, TXRH has opted for an everyday value menu. But what will happen once consumers start to see steak show up on Applebee’s 2 for $20 menu, and then they realize they have $1 Long Island Iced Teas? It’s hard to see how some consumers won’t shift to Applebee’s at least temporarily to take advantage of the extreme value, especially as wallets are weighed down by increased gas prices and rent.

EAT

Click here to read our analyst's original report.

We have been saying for months now that the aggressive discounting at Applebee’s is disrupting the Casual Dining industry.  One quick example of how the value discussion has changed over the past 12-months occurred on a Brinker International (EAT) conference call.  During the 2Q18 conference call, the word ‘value’ was mentioned 11 times, and now 12-months later on the 2Q19 call ‘value’ was mentioned 38 times.

Driving the value proposition for Chili’s is the 3 for $10 platform and we heard yesterday that the program “is a relevant and compelling offer that's sustainable into the foreseeable future.”  If this is to be true, what will the margin structure of the company look like going forward? 

We reiterate our short call on Brinker.

PENN

Click here to read our analyst's original report.

A key point in our Penn Gaming (PENN) short thesis was the potential negative impact of new competition on Plainridge.  Even before Wynn opens near Boston this summer, we estimate Plainridge’s market share of the MA-RI-CT region is already under pressure at 8.5%, down 120 bps YoY.  With ~70% addressable market overlap, we estimate that Plainridge will account for 1/4 of the 20% market cannibalization once Encore opens.  This is a big impact for such a small property and hence, we estimate a ~10% reduction in slot revenues for 2019 and 2020, significantly below the Street.

UNH

Click here to read our analyst's original report.

One news outlet that we know of has reported that White House adviser, Joe Grogan, has been in talks with Speaker Pelosi’s staff to delay imposition of the Part D rebate rule. The deal, as reported by Biocentury but, as far as we know, not corroborated by any other news organization, would establish a Part D out-of-pocket maximum and impose some form of arbitration-like negotiation for single source Medicare drugs in exchange for elimination or deferral of the Part D safe harbor drug rebate rule.

We believe that the rebate horse is probably too far out of the barn at this point. Medicare Advantage bids are due in weeks. Under guidance released last month, bids are to be submitted using the rebate rule in effect at the time. Plans may then enter a demonstration program in which the federal government will absorb 95 percent of losses during a two-year transition period.

The Medicare spending cap will also be controversial as it is not clear who will pay the difference between actual costs and the cap. The answer, of course, makes the difference between whether the pharmaceutical industry or the insurance.

Our Healthcare team maintains its short call on UnitedHealth Group (UNH) based on rebate rule changes, structural headwinds to Medicare Advantage enrollment growth, near term risks of accelerating utilization, and an unfavorable economic growth and stock market environment. 

HQY

Below is a note written by CEO Keith McCullough on why we added HealthEquity (HQY) to the short side of Investing Ideas earlier this week:

Do you look to make sales on green, or do you freak out alongside the crowd and sell lower on red? 

We sell on green and we sell short when names we don't like bounce to the top-end of their @Hedgeye Risk Range. One of those Bearish @Hedgeye TREND names (and a great way to play lower-for-longer on bond yields) remains Health Equity (HQY).

Here's a summary excerpt from our Institutional Research product of our Healthcare analyst Tom Tobin's short thesis on the name:

"Now that economic growth is slowing and Fed is now firmly dovish on yields, we expect the consensus narrative to weight the growth deterioration in the core HDHP business.  There is a longer term possibility that HDHP plan penetration resumes an upward trajectory after several years of stalling growth, but we believe this upside risk will remain theoretical until unemployment rates, now at historic lows, tick up significantly."

Short the bounce,

KM

NFLX

Below is a note written by CEO Keith McCullough on why we added Netflix (NFLX) to the short side of Investing Ideas earlier this week:

I've been waiting, patiently, for a Netflix (NFLX) bounce to send you a SELL signal on, and we're getting one this morning. 

Our new Communications Analyst, Andrew Freedman, is one of the few NFLX public bears who is "in the money" on timing the NFLX short.

Here's an interesting excerpt from one of his recent Institutional Research notes on the name:

"We spoke with a former Content Director at Netflix and Amazon Studios to better understand the economics of licensed versus original content, the competitive landscape and where the market is headed. 

Our contact detailed Netflix's long history of paying 30-75% above market for licensed content and a competitive landscape that has quickly turned against them.

In the case of the pay one deal with Disney, NFLX was willing to outbid anyone else, in a transaction ultimately costing NFLX $350 - $500 million per year."

Sell the bounce,

KM

LYFT

Below is a note written by CEO Keith McCullough on why we added Lyft (LYFT) to the short side of Investing Ideas earlier this week:

LYFT has lifted on low volume to lower-highs this week but remains a SELL idea @Hedgeye.

Here's how Ami Joseph characterized LYFT's first reported quarter as a public company:

"This is one of those EPS reports where even the good stuff is bad. LYFT’s share gains in Lyft Enterprise, for example, just make an Uber response in that area inevitable considering the significance of the categories’ future EBITDA."

Sell the bounce,

KM