Below are analyst updates on our seventeen current high-conviction long and short ideas. Please note that we added Gildan Activewear (GIL) to the long side and Williams-Sonoma (WSM) to the short side of Investing Ideas this week. We also removed Pinterest (PINS), iAnthus Capital (ITHUF) and Canadian Natural Resources (CNQ) 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 recently, 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.
With demand currently accelerating, registered nurse unemployment around 2%, and nurse wages accelerating, we believe upside for both volume and pricing is likely for AMN.
WTRH
Click here to read our analyst's original report.
Waitr Holdings (WTRH) is new to many people:
- Acquisition of BiteSquad gives them access to 300 more cities of which they only have overlap with 5 cities, so very complimentary footprint.
- Haven’t seen any major disruption from the entrance of larger national third-party delivery providers. First mover advantage is real in this industry.
- Waitr is more focused on mom and pop restaurants so they look to build a more equitable partnership with them.
- The money drivers make driving for Waitr versus others is very similar.
- Tight labor market does create some issues, monthly turnover around 30%.
- Waitr also does carryout fulfillment through their platform that they still get a 15% take-rate on, can be as high as 15 to 20% of sales currently depending on the market.
- Building dashboard of data to provide for restaurants with additional data that will be for sale which provides them an additional revenue stream in the future.
DLTR
Click here to read our analyst's original report.
Though the absolute Dollar Tree (DLTR) earnings algorithm was a solid ‘meh,’ I like what I saw and what I heard out of this DLTR event. While comps missed slightly at the Dollar Tree Banner (2.5% comp vs Street at 3%.), the company is being more proactive on rolling out the multi-price point test than I’d have expected at this stage in the game. Interesting to see it's going as high as $5 in certain categories (if you own Five Below – you don’t want to see this).
Management’s tone on the conference call sounded like this test is the real deal – not like it was strong armed by activists and bitter shareholders. I’m confident that once the merchandising organizations are merged under the same HQ this fall, the benefit of the test will become more apparent and accretive to comps and margins. Without a successful go at this initiative, there’s no fundamental reason to own this stock if you’re looking for big upside.
But to that end, Family Dollar beat comps. Yes, you heard that right. It put up a +1.9%, and while under-comping Dollar General’s 3.8% level, this was the best comp we saw out of FDO since the deal was consummated over four years ago. Store remodels appear to be working for comps, but are they the right fix for the long term business vs improved merchandising and management? I’ll take both…These two initiatives – turning Tree into a multi-price point retailer and fixing FDO – are each worth $2-$3 per share in EPS.
There’s a double from the current earnings run rate. This story is going to take time and patience to play out, but today’s report was a meaningful step forward to unlocking one of the biggest value disconnects that exists in retail today. DLTR remains on our Best Idea List as a Long.
SNE
Click here to read our analyst's original report.
If this were OLD Sony (SNE), we would be dealing with the disaster of tough comps, weakening profits, bad balance sheet, weak CF characteristics, and a host of lame excuses from management. Instead, today NEW Sony reports continuous improvement across almost the entire business. Sony products and segments continue to show revitalization, a path to winning, and a roadmap of improving profits. The stock is ~11x trailing FCF...with cash flow rising, revenue improving, balance sheet increasingly richer, and overall group quality moving higher.
EXP
Click here to read our analyst's original report.
In terms of Eagle Materials' (EXP) 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.
We continue to see EXP as one of the best longs in Materials (or Industrials for that matter).
Not only are the shares cheap relative to peers, transactions, and likely cash flows, but the company is exposed to several potential upside scenarios. These options include:
- An accretive sale to a competitor
- Substantial buyback, or
- Restructuring by shuttering/selling proppant business
Critically, activist Sachem Head is now involved and pursuing a break-up strategy to unlock value that we previously identified. We expect others to join in to Sachem Head’s reasonable efforts to improve value creation. Management felt embattled on both the money-losing proppant business and market valuation. The break-up value could easily be worth north of $120/share, as we see it.
GIL
The new Gildan (GIL) private label underwear program hit Walmart stores in mid-May. Walmart is using the George label for the men’s underwear (tops and bottoms) products that used to be Gildan branded. There is no indication that Gildan is the manufacturer on the packaging just like with the new product at Costco. In this case the indication that Gildan is the manufacturer is the “made in Honduras” signage. The importer of record is Walmart. So far the Gildan products include A-shirts, pocket tees, V-neck shirts, crew neck shirts, men’s boxer briefs, men’s long leg boxer briefs, and men’s briefs. While the products do not have the Gildan brand the amount of shelf space is considerably larger as is the revenue opportunity. The most common question we get about the new private label initiative is on the profit margin to Gildan for the private label vs. the branded product. We believe the margins to Gildan are similar, but the incentives for Walmart to grow the George products are far greater. The price points are as much as 50% higher per unit and 25% higher per package while the product cost does not look meaningfully different. The size of the private label opportunity for Gildan can be seen from the fact that a single product program at Walmart can represent 5% of Gildan’s revenue.
TSLA
Click here to read our analyst's original report.
This is not an encouraging sign for Tesla (TSLA) bulls. Asia and Europe delivery trajectories have slowed markedly since the 1Q19 end (“save the quarter”) push. Order backlogs for Model 3s are likely to be depleted in some key regions.
ROL
Click here to read our analyst's original report.
We continue to expect a significant downward revaluation on Rollins (ROL) 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. Acquisition spending targets customer contracts, with acquisition spending likely best viewed as an alternative to advertising or other expensed means of growing the customer pool. With GDP-type organic growth rates, housing headwinds, competitive entry, and a feuding family with a controlling stake, one would reasonably expect ROL to trade at a discount to the market. We expect a growth deceleration, consolidation of leases, a host of yellow/red flags, and broader coverage to generate additional downside, as the S&P 500 addition premium fades from the share price.
DVA
Click here to read our analyst's original report.
DaVita (DVA) has been sued many times for many reasons. What makes the recent filing by the Blue Cross Blue Shield Plan of Florida worth a read is that it provides a first-hand account of the dialysis giant’s practices, long rumored and sometimes verified.
For the most part, Florida Blue’s complaint details activities with which we have all become familiar. Davita allegedly donated $120 million to the American Kidney Fund to provide premium support to the commercially insured and received about $450 million in operating income through benefit payments from non-government plans.
This practice has raised the ire of the California State legislature. It has given rise to a federal securities law class action lawsuit.
We reiterate our short call on DaVita.
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.
Brinker International (EAT) management has done what it can to return cash to shareholders over the past three years. The balance sheet has the appropriate amount of leverage, so it is unlikely that another big share repurchase program is in the immediate future.
PENN
Click here to read our analyst's original report.
REGIONAL GAMING | MARKET SHARE PICTURE THROUGH APRIL 2019
While 2018 was mostly a sea of red (in terms of market share losses) for the public regional gaming operators, there are some green shoots so far in 2019. BYD is a standout with more share gains than losses in its relevant markets. The PNK acquisition has helped market share, but as we noted before, the incremental lift has been less than expected. Penn Gaming (PENN) and ERI continue to give away revenue market share to focus more on improving margins through identifying and targeting only profitable customers. This strategy should produce fewer bottom line benefits over time as we appear to be in the later innings if its effectiveness.
We reiterate our short call on Penn Gaming.
UNH
Click here to read our analyst's original report.
Our Healthcare team sees the Safe Harbor rule change coming in 2020 as a problem for UnitedHealth Group (UNH). The Safe Harbor rule change eliminates current safe harbor for rebates, which applies to Medicare Part D and Medicaid Managed Care but not ACA exchange plans or other commercial. These changes will put ANTM on level playing field as they have ceded Medicare advantage share to UNH fueled by rebates. Normalizing the rebates through the changes of the Safe Harbor rule should normalize enrollment. This is also more than just a rebate story as Medicaid rises as economy slows, and our Macro team is forecasting growth to continue to slow on a 2nd derivative level for the foreseeable future. The next catalyst will be the 3Q 2019 rebate rule being finalized, which is currently scheduled for November.
HQY
As the macro outlook continues to deteriorate, there a number of headwinds to the HealthEquity (HQY) business model we are working on and we've moved HQY into the top short position. First is the potential for the Federal Reserve to cut interest rates and the subsequent pressure on Custodial yield income. Second, medical utilization on a per capita basis typically accelerates into a downturn, which is likely to lead to spend down of existing AUM balances. Third, same client hiring is likely to turn negative putting pressure on member growth. While there may eventually emerge increased interest in an HSA offering as a cost savings tool for US companies, its more likely to emerge after the first 3 headwinds emerge.
NFLX
We believe investors are overestimating Netflix’s (NFLX) pricing power and ability to drive further adoption in the U.S. with looming competition from content goliaths Disney (DIS) and WarnerMedia (T).
We surveyed 1,000 U.S. consumers, and 40% of Netflix subscribers said they were either 'likely' or 'extremely likely' to subscribe to the Disney+ service. With only so much time in a day and wallet share to be had, an increase in the number of streaming video options will dilute NFLX's relative value, resulting in increased churn and slower subscriber growth.
One of our original thesis points on Netflix is that U.S. subscriber growth will slow faster than what consensus is modeling. We were modeling U.S. net new paid subs of ~400k for 2Q19, below consensus of ~800k and more or less in-line with management's ~300k guidance. Domestic subscriber estimates have come down following the disappointing Q2 guide. We believe our below consensus estimates are very generous, and can easily see a situation where U.S. paid subscribers decline QoQ as NFLX faces the limitations of their addressable market, at the same time they are raising price as competition intensifies.
LYFT
Click here to read the short Lyft (LYFT) stock report Technology analyst Ami Joseph sent to Investing Ideas subscribers earlier this week.
WSM
Below is a note written by CEO Keith McCullough on why we added Williams-Sonoma (WSM) to the short side of Investing Ideas this week:
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With our call for a Quad 4 Scare in motion and an ongoing Bearish @Hedgeye TREND signal in SPY, I'm not looking to buy dips. I'm selling rips (and bounces to lower-highs) in names that we don't like - we're getting a rip in Williams Sonoma (WSM) to sell into today. Here's our Retail analyst Brian's McGough's note to our Institutional Research subscribers on WSM today: WSM Pulls the SG&A Goalie. Big $0.11 beat by WSM last night…but by my math, a dime of it was that it held SG&A flat – pulling the goalie on the cost side. I don’t fault them for it, as the furniture business is riddled with uncertainty around the tariff situation. To management’s credit, they got the job done. Only raised the year by $0.05 on an $0.11 beat – conservatism given tariff movement. This was not a beat due to a sharp acceleration in the business. There’s top line risk to 2H. Sell the rip, |
