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Takeaway: EXP, GIL, ANTM, TSLA, ROL, DVA, UNH, HQY, NFLX, SBUX, NSP, MAR, GOOS

Investing Ideas Newsletter - z34

Below are analyst updates on our thirteen current high-conviction long and short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.

IDEAS UPDATES

GIL

Click here to read our analyst's original report. 

Cotton prices have fallen 7% YTD and 15% since the highs of the year in mid-April.

One of the reasons cotton prices have fallen is China retaliating against the US tariffs. From August 2018 to January 2019, China imported only 11% of its cotton from the United States, down from 45% in the same period in the previous year. To the extent that a trade deal is reached between the two countries cotton demand and prices should increase.

Another notable aspect of the current decline is the lack of a spike in cotton before the decline. Cotton spikes tend to encourage forward demand buying by distributors looking to buy inventory ahead of price increases. Currently inventory levels look to be in line with demand.

We do not expect Gildan (GIL) and the other t-shirt mills to hold on to the recent price increases as cotton prices fall. We expect the mills to use cheaper priced cotton to increase promotions or volume rebates to customers rather than cut list prices. It is easier to remove promotions and rebates if cotton prices were to increase again.

It takes about three quarters for the current cotton prices to be reflected in the cost of goods sold. A $.10 per pound change in the price of cotton has about a $.02 impact to Gildan’s EPS. Although we’re not going to model in a gross margin tailwind, expect a benefit to sales and gross margins in the next couple of quarters.

Investing Ideas Newsletter - zbo

EXP

Click here to read our analyst's original report. 

We view Eagle Materials (EXP) as one of the best longs in Materials (or Industrials for that matter). 

As we've mentioned previously, activist investor Sachem Head is involved and pursuing a break-up strategy to unlock value we previously identified. We expect others to join in to Sachem Head’s reasonable efforts to improve value creation.  

The break-up value could easily be worth north of $120/share.

ANTM

Below is a note written by CEO Keith McCullough on why we added Anthem (ANTM) to the long side of Investing Ideas:

With Healthcare being a long in Quad 4, and one of our Best Ideas (Institutional Research product) on sale today, it's a good time to review why Healthcare analyst Tom Tobin went bullish on Anthem back in May.

This is what he wrote:

The volatility of the last several weeks surrounding #M4A and a host of other bipartisan attacks on the Health Care Industry have opened up an opportunity to get long the other side of our rebate trade and short in UNH. Anthem has long suffered at the hands of the large PBMs, whether it was their partner (supposedly) ESRX, or a competitor like UNH. Aggregating drug spending and extracting rebates was a never a core competency that ANTM developed, until now. With changes in policy that governs rebates coming in 2020, Anthem should finally be on a level playing field. Our view is less rebates for others will lead to greater market premium parity and incremental enrollment share gain for ANTM.

Looking back, ANTM enrollment has tread water while UNH accelerated. In our view, ANTM is starting IngenioRx, their new in house PBM, at exactly the right time. Assuming premium differences narrow and ANTM can take Medicare Advantage +/- PDP enrollment, every point of share is worth ~$1.00 to ANTM EPS.

GOOS

An important one-liner from our Retail analyst team:

"There is a severe disconnect between the ultimate earnings power of Canada Goose (GOOS) and its current Enterprise Value – to the tune of 50%."

Keep an eye on your inbox. We will be sending a full note outlining the bear case next week.

TSLA

Click here to read our analyst's original report.

If 1H19 Was Weak, How’s 2H19 Shaping Up?

Terribly, we think. 

To the extent 2Q looks ‘good’ on sequential delivery growth, it will be because 1Q19 was so surprisingly weak.  We don’t see a surge in interest or demand for Tesla (TSLA) vehicles, and regardless of what is reported for 2Q19 deliveries, 1H19 is indicative of slack demand.  As soon as 2Q is reported, the focus should shift to 3Q19 deliveries.  With the tax credit step-down, no new model or variant introductions, and international order depletion, the market should be able to anticipate 2H19 weakness clearly enough, especially if the macro backdrop softens. Uber IPOs and BTC rallies probably can’t fund purchases every quarter. 

That said, we do see strength in the App data and weakness in used metrics and our own test drive data.  App data has been notoriously difficult in forecasts, mostly because of growth in used fleets and other data nuances that force downloads higher over time as the total population of Tesla vehicles grows.

Investing Ideas Newsletter - zjay

ROL

Click here to read our analyst's original report.

Downgrade & Share Loss + April/May Showers

We perused the recent downgrade of Rollins (ROL); despite a series of odd weather charts, we thought the thesis seems decent.  It misses lack of organic customer count growth and over-reliance on pricing, we think.  We also think the survey came back too strong on customer pricing sensitivity – we actually get a stronger brand for Terminix.  Nonetheless, word seems to be spreading.  Web traffic suggests share loss to a resurgent (well, using normal business tools now at least, like salesforce) Terminix.  A wet May, which disrupted farming, also shows up clearly in the traffic series for ROL and Terminix. 

Investing Ideas Newsletter - zjay2

DVA

Click here to read our analyst's original report.

An important event on our DaVita (DVA) short thesis is the movement of AB 290 through the California Legislature and the Third Party Payment rule under consideration at the White House.

Having cleared the California Assembly and been referred to the Senate, AB290 is set for Senate Committee hearing on July 3rd, following more or less the same path to approval as last year’s identical but vetoed legislation. This bill, if enacted singles out Large Dialysis Organizations for Medicare level reimbursement when a third party, like the American Kidney Fund, pays commercial insurance premiums for ESRD patients. Depending in the federal response, the California solution may spread to other states.

There is also an ongoing lawsuit in Florida where Florida Blue has accused DVA of similar practices highlighted in California, among other things. With the ~10% of patients who are commercially insured  accounting for 110-115% of DVA’s profit, the increased regulation and prohibition of third party payments will be a much bigger deal to DVA than the baked in sale of DMG. 

UNH

Click here to read our analyst's original report.

Earlier than expected, the CMS sent to the White House for review and approval the final rule that would require manufacturer rebates to be shared with Medicare beneficiaries at the point of sale. We expect the rule to delay implementation until mid-2020 instead of the proposed Jan. 1, 2020. UnitedHealth Group (UNH) has aggressively used rebates to manage medical cost trend and keep Medicare Advantage plan premiums consistently low. ANTM on the other hand has not had the benefit of rebates and ceded market share in Medicare Advantage. The playing field will level under the new set of rules.

HQY

Sooner than expected, the Trump administration released its final rule expanding the use of Health Reimbursement Accounts to permit integration with individual health insurance. The proposal, which really just represents a return to guidance in place prior to 2015, presents employers with an alternative to the HDHP-HSA combination that has fueled HealthEquity's (HQY) growth since passage of the ACA.

As we pointed out in Best Ideas Short on HQY, small businesses are disproportionate users of HDHP-HSAs relative to their larger peers. For that reason, some of the shift of enrollment from traditional employer-sponsored plans to HRAs is bound to take a bite out of HSA-eligible HDHP offerings, presenting HQY with yet another policy headwind, in addition to the planned repeal of the Cadillac Tax and waning interest in expanding the HSA program.

NFLX

Click here to read our analyst's original report.

We see risk to 2H19 consensus subscriber estimates as the growth rate of Netflix (NFLX) mobile app downloads worldwide has slowed materially in recent months.  

The slowdown is occurring as the company works through a series of price increases in the U.S., Latin America and Europe.  We believe NFLX mobile app downloads are a good proxy for gross subscriber additions based on the high absolute correlation to NFLX's reported metrics.  The deceleration in growth is consistent with our view that price increases will slow the rate of adoption, especially in developed markets where NFLX is > 50% penetrated.

SBUX

Luckin (LK) is looking to raise up to roughly $560M with a price per share in the range of $15 to $17, at a roughly $4B valuation. The company has been given a license to lose money in an effort to gain market share – Starbucks (SBUX) is a big loser with this dynamic. Luckin’s coffee costs on average 25% less than the equivalent SBUX cup. Whether this strategy is sustainable or not, it will last for at least a couple more years, and during that time SBUX will have to compete against someone that doesn’t care about losing money.

SBUX has invested billions of dollars in growing the coffee culture in China, now start-up companies such as Luckin have a paved path in which to jump on the coffee train and undercut Starbucks on price. Luckin, with lower prices, more appealing occasion and local branding, has likely already and will continue to impact Starbucks business in China.

NSP

Click here to read our analyst's original report.

Insperity (NSP) is a highly cyclical company. Shares of Insperity are trading as though the PEO (i.e. Professional Employer Organization – providing comprehensive HR solutions for small and mid-size businesses) industry isn’t cyclical and increasingly mature. The cyclical elements extend beyond employment trends to costs, regulations, and marketing. Unit metrics track broader employment trends. A tight labor market pulls workers off the sidelines, while driving the need for better benefits.

The Hedgeye Macro team sees U.S. GDP growth slowing over the next three quarters, not an environment beneficial to NSP. The team's dynamically re-weighting 30-factor predictive tracking algorithm for US GDP growth is at 2.53% YoY/1.53% QoQ SAAR for 2Q 2019. The latter figure compares to 1.80% for Bloomberg Consensus and 2.05% for the Atlanta Fed’s GDPNowcast.

MAR

Click here to read our analyst's original report.

The hotel industry, and investors therein, once again find themselves at a critical juncture.  At the same time the RevPAR cycle shows signs of old age, owners are battling the onslaught of higher construction and operating costs and consequently slower, or even declining profits.  

As the RevPAR growth slow down became more apparent in April and May, Hotel REITs began to materially lag their C-Corp counterparts. Generally, the move in the REIT space is justified and there could be more downside, but we see the relative strength in the C-Corps as more than overdone, as they too will be affected by the industry’s broader slow down. Many factors are in place to suggest fee pressure but also potentially disappointing unit growth for the Brands.

The Brand companies, such as Marriott (MAR), are not immune and not just because of the direct RevPAR effect on fee growth.