Below are analyst updates on our eighteen current high-conviction long and short ideas. Please note that we added Starbucks (SBUX), Wayfair (W), Uber (UBER), Insperity (NSP) and Marriott (MAR) to the short side of Investing Ideas this week. We also removed AMN Healthcare Services (AMN), Waitr Holdings (WTRH) and Dollar Tree (DLTR) from the long side and removed Texas Roadhouse (TXRH) from the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
SNE
Click here to read our analyst's original report.
The Sony (SNE) Long is not about the current earnings season; our thesis is about multi-year improvement across a broad range of their businesses, both on product/content positioning in the market, but also about the company's improving ability to harness profits, its' newfound unwillingness to tolerate losses, and growing cash flow.
The key tenets of the long thesis are as follows...
EXP
Click here to read our analyst's original report.
We were surprised by the speed with which Eagle Materials (EXP) decided to split the business, but we do think investors would have preferred to see more details on the Proppant business, as well as a sale or RMT for the wallboard unit. Still, it was an incremental piece of favorable news. With prior smaller cap break-ups, like MTW, the event has needed to actually happen before the value unlock is realized. Shareholders may need to be patient. That said, the share price weakness recently may relate to some pressure on wallboard pricing, as opposed to the activist agenda.
GIL
Click here to read the long Gildan Activewear (GIL) stock report Retail analyst Brian McGough sent to Investing Ideas subscribers earlier this week.
TSLA
Click here to read our analyst's original report.
Recent reports that JB Straubel is stepping back from Tesla (TSLA) match well with the demand deficit most of our indicators are showing. Somewhat better than expected data out of Europe and Asia point to more like 70,000-75,000 units for 2Q19. Tesla was again pushing free supercharging and generally being accommodating on pricing to stimulate interest. We don’t think it is working, at least not in the US. SG&A costs of delivering to markets with small fleets, like India, may not flatter profitability. Memorial Day weekend through June is peak car buying season, and we are not seeing much pick-up for Tesla.
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. Pricing trends in the industry suggests rates have been stretched and may now be facing competitive pressures based on our work. Customer counts have stalled, while revenue per customer has ramped significantly over the past five years following ROL’s pricing study. Combined with other growth and competitive headwinds, we expect market recognition of pricing and ancillary service limitations to drive a revaluation in ROL shares. ROL remains a Best Ideas short, as we see the shares again offering >50% downside.
We reiterate our short call on Rollins (ROL).
DVA
Click here to read our analyst's original report.
Blue Cross and Blue Shield of Florida sued DaVita (DVA) over its use of the American Kidney Foundation's premium assistance program and the dialysis giant's frequent waiver of beneficiary cost-sharing. Consensus estimates are embedding a significant share repurchase, but as the DMG sale process drags on, that may change. Meanwhile the company faces a June 30, 2019 deadline to either lower its leverage ratio to 4.5% or extend its agreement with creditors to keep it at 5.00%.
EAT
Click here to read our analyst's original report.
Knapp-Track (KT) released May sales estimates this week that showed continued weakness in both sales and traffic. Bad weather may have caused some weakness, but not enough to call-out as a major problem.
KT reported casual dining comp sales for May 2019 of 0.9%, although positive on a 1-year basis, represented only a 30bps acceleration in the two-year average. KT comp traffic in January was (1.8%), representing (2.1%) and a 10bps sequential decline in the two-year average.
For the first two months of 2Q same-stores sales are flat and traffic is (2.0%). This compares to the first two months of 1Q19, where same-stores sales were 0.9% and traffic was (1.1%)
Three of our top four shorts in the Restaurant Sector are in the Casual dining sub-segment. We reiterate our short call on Brinker International (EAT).
PENN
Click here to read our analyst's original report.
Penn Gaming (PENN) | STILL WAITING FOR MINI-CASINO LICENSE
None of the five PA mini-casinos have been green lighted by the Pennsylvania Gaming Control Board (PGCB). Despite concerns of ‘delays’ in the licensing process by the media, when we reached out to PGCB, the spokesperson said it’s part of the normal, due diligence process. Local community feedback and job, revenue, and tax projections will be considered in the licensing investigations. PGCB expects to vote on each of the 5 licenses in the next few months on a staggered basis. The license decisions should be done by the end of the year. PENN said when they receive the license, they will begin construction as soon as possible, with an estimated timeline of 12-18 months for completion. We have argued that considering all the factors involved, the additional competition will outweigh the incremental benefit for PENN.
UNH
Click here to read our analyst's original report.
As we explained in last week's Investing Ideas, 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.
Healthcare analyst Tom Tobin explained in more detail on HedgeyeTV recently why he thinks these trends are bad for UNH and good for ANTM. Click here to watch this brief video.
HQY
HealthEquity's (HQY) core market has experienced rising penetration of high deductible health plans (HDHP) by employer plan sponsors, and to HQY's benefit, often accompanied by health savings accounts (HSA).
For some time we have believed peak penetration is approaching and growth for the industry is slowing. While slowing member growth has indeed occurred as we expected, HQY enjoyed several additional benefits that continued to push growth, guidance, and consensus higher through 2018, carrying the shares to a peak of $100, the EV/EBITDA multiple to a peak of 44X, and the P/E to a peak of 80X. As of June 2019 and a $64 share price, the shares still carry EV/EBITDA and P/E multiples of 25X and 45X, respectively.
With headwinds gathering momentum, we believe it is time to press the short.
NFLX
Click here to read the short Netflix (NFLX) stock report Communications analyst Andrew Freedman sent to Investing Ideas subscribers earlier this week.
LYFT
Click here to read our analyst's original report.
Lyft (LYFT) bulls will point to 95% y/y revenue growth and cheap valuation at ~4x on EV/R for 2019. That’s what they have and that’s it.
We think the Bears have just about everything else:
- A model is landlocked on growth,
- Taking share has to be the game plan consistently to drive outperformance,
- Back and forth on pricing will keep losses a regular item for investors,
- View from inside Lyft that they are NFLX pre-streaming shows how existential autonomous tech is to this company which is a bear case today given how far they are from any decisive path,
- Unit penetration curve for North America is fairly steady,
- Lack of near-term path to profits,
- Lack of disclosure,
- Untested management team
WSM
Williams-Sonoma (WSM) pulled the SG&A goalie this past quarter. Big $0.11 beat by WSM…but by my math, a dime of it was that it held SG&A flat – pulling the goalie on the cost side. Can’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. The stock rallied on this print, but this was not a beat due to a sharp acceleration in the business. There’s top line risk to 2H as we hit Quad4 and slowing US consumer. Add on the competitive intensity heating up in home furnishings, and we think WSM will struggle to hit earnings expectations this year.
SBUX
Below is a brief note written by CEO Keith McCullough on why we added Starbucks (SBUX) to the short side of Investing Ideas this week:
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Wait on it ... It's not like Starbucks (SBUX) wasn't a "short" in Howard Penney's eyes prior to today's Fed #Cowbell Day. It's just that waiting and watching for our Best SELL Ideas (Institutional Research product) takes time and patience. Here's a summary excerpt from Howard's Institutional Research note on Luckin (LK) that applies to his SBUX thesis: "Make no mistake, the emergence of Luckin into the coffee market in China is a binary event for Starbucks. Luckin has a better than 50% chance of causing significant disruption in the China coffee market. The implication of this will be significant pressure on Starbucks China profitability and growth rate. On the other hand, Luckin could just be a one hit wonder and disappear in a few years. I suspect the latter is not the case!" Sell the bounce, KM |
W
Below is a brief note written by CEO Keith McCullough on why we added Wayfair (W) to the short side of Investing Ideas this week:
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Still looking to broaden your net SHORT exposure to HIGH BETA stocks during USA’s Quad4 #GrowthSlowing? Wayfair (W) is signaling immediate-term TRADE #overbought within our Retail analyst Brian McGough's Bearish TAIL Risk research view here. Here's an excerpt from McGough's recent Institutional Research note on W's quarter and outlook: "The quarter was decent enough by Wayfair’s ‘will never turn a profit’ standards, but fell far short of what a nosebleed $165 stock needed to see. Rev beat, but it was the smallest in 6 quarters, with upcoming Q guided just ‘in-line’ with investors used to having the growth trajectory pushed higher. You are unlikely to hold a peaky EV/sales multiple doing that. Also, the profit miss this quarter was not expected – as the guide looked very beatable (particularly given management’s borderline cocky confidence on last quarter’s conference call). Oh yeah, W followed it up with a profit guide down for 2Q too. All this is right in line with our Best idea Short thesis that growth is slowing..." Like the US Equity market overall, sell the bounce, KM |
UBER
Below is a brief note written by CEO Keith McCullough on why we added Uber Technologies (UBER) to the short side of Investing Ideas this week:
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Is your day filled with the emotions of chasing high and freaking out lower? Sounds like you might be trialing our product. No worries, I used to be that way too (sort of, and a long time ago). Now that all the super duper UBER Old Wall bullish "initiations" are out (this week), the stock is signaling immediate-term TRADE #overbought. Here's an excerpt of Jay Van Sciver's initial research on the name (i.e. well ahead of the Old Wall's panic in the name):
Sell on green, KM |
NSP
Below is a brief note written by CEO Keith McCullough on why we added Insperity (NSP) to the short side of Investing Ideas this week:
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In reviewing Jay Van Sciver's inventory of best LONG and SHORT ideas (the man is good!) into a green US stock market close, Insperity (NSP) is signaling immediate-term TRADE #overbought within a Bearish @Hedgeye TREND. Here's a summary excerpt of Jay's view vs. the conflicted and compromised one of Old Wall "research": "The industry has enjoyed exceptional tailwinds in recent years, while limited Street coverage, arcane business metrics, and a move up in index membership have left the shares untethered to underlying business realities. With steep comps, intensifying competition, slowing growth, and a lack of incremental tailwinds, investors will likely be just as surprised by the cyclical downside as they were by the post-GFC recovery." Short the no-volume bounce, KM |
MAR
Below is a brief note written by CEO Keith McCullough on why we added Marriott (MAR) to the short side of Investing Ideas this week:
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Since I have 25-30 high quality short ideas coming out of my Independent Research team (we have SELL ideas, the Old Wall doesn’t), I'm just getting started here in adding back shorts on Day 3 of the Counter @Hedgeye TREND bounce in US Equity Beta. Marriott (MAR) is a new name for Todd Jordan, Sean Jenkins, and Felix Wang (our Gaming, Lodging & Leisure Research team) on the short side (it should be a new name because you don't short hotel stocks and/or pro-cyclical REVPAR expectations until The Cycle starts to slow!). Here are 3 bullet points on why:
Sell the bounce, KM |
