Investing Ideas Newsletter

07/27/19 07:02AM EDT

Investing Ideas Newsletter - 07.25.2019 Fed ready aim print cartoon

Below are analyst updates on our eleven current high-conviction long and short ideas. Please note we removed Eagle Materials (EXP) from the long side and Starbucks (SBUX) of Investing Ideas this week. We also added World Acceptance Corp (WRLD) to the long side. 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. 

Gildan (GIL) took advantage of a trade treaty called the Central America Free Trade Agreement (CAFTA) to establish a manufacturing hub in low cost Honduras to ship duty free into the US. The treaty allows the duty-free importation of apparel from Central America into the US as long as it was made with US cotton.

Gildan used the savings from the lack of duties and lower shipping fees (compared to Asia) to create its low cost advantage. The company then reinvested its cash flow into building a manufacturing base with significantly greater scale in screen printing basics than all of the competition combined.

Despite the broader concerns over Trump tariffs we see low risk for CAFTA because the US enjoys a trade surplus with Honduras. Gildan is also the largest employer in Honduras and the largest buyer of US grown cotton. 

Investing Ideas Newsletter - gil

ANTM

Our bullish view on Anthem (ANTM) is centered on their Medicare Advantage book of business.  Our view is that Medicare Advantage penetration into the fee for service book is nearing peak. Incremental membership will be more difficult to secure in the coming years. 

In addition, based on a review of statutory filings and the rebate offsets, we believe ANTM has been at a relative disadvantage with MA premium levels given the lack of an internal PBM. With the launch of IngenioRX this MA premium disadvantage is now, in part, eliminated. Our thesis is that in combination with superior non-pharmacy unit costs, IngenioRX can now drive Medicare Advantage share gains. The company is targeting additions of 200,000 MA lives by the end of 2019 which appears to corroborate this view, although more substantial gains are likely in 2020 and beyond.

WRLD

Below is a brief note written by CEO Keith McCullough on why we added World Acceptance Corp (WRLD) to the long side of Investing Ideas this week:

Patience is a big part of the research and risk management #process. The epic correction from World Acceptance Corp's (WRLD) highs yesterday is a good example of that. 

Here's the concluding paragraph from Josh Steiner's Institutional Research note from this morning:

"We expect loan growth to stabilize and return to the trend present prior to the days of the CFPB and the recent Mexican standoff. At this stabilized, achievable level, evidenced by crisis-era comparables, we do not expect the share of new borrowers to increase further."

Buy the correction,

KM

TSLA

Click here to read our analyst's original report.

We think life for Tesla (TSLA) gets worse from here.  Lowering ASPs helped to stimulate deliveries but at a sizeable loss. 

Capital intensive growth stories typically require Capital Investment, not running the business to conserve cash.

Record unit deliveries combined with the lowest unit SG&A (a metric we thought would be meaningfully higher, and drove 2H18 profits), and yet Tesla still posted a loss.

Investing Ideas Newsletter - tsla

ROL

Click here to read our analyst's original report.

Reviewing the Rollins (ROL) 2Q19 earnings call, the company struggled to explain why profit was down YoY despite efficiency + retention improvements, and acquisitions that should all drive profit higher.  The consolidation story isn’t working, and the pricing gains that had driven margin expansion do not look to be working anymore, wither, as we see it.  We see ROL on its way to being valued like a normal GDP-ish organic growth business.  ROL shares looks to be riding out a growth-to-value conversion, with a style air gap to something like high teens. 

DVA

Click here to read our analyst's original report.

We are staying short DaVita (DVA) on the recent announcement. 

DVA announced they are refinancing the credit facility ($575M) and the 5.75% Senior 2022 notes ($1.25B) with the addition of $5.25B in new debt and a $1.2B .  With the addition of the DMG sale proceeds and new financing totaling $5.25B, leaves DVA at a total debt level very close to the $10.5B held as of 1Q19. 

The company guided to substantially higher share repurchase of 19-22 million shares versus our estimate of ~10 million and what was embedded in consensus. Treatments volume for 2Q19 was better than our forecast at 7,520,587 by ~300,000 treatments but this appears paired with weaker than expected revenue.

Our view has been labor cost pressure would be a negative and suspect productivity gains are modest and temporary.

HQY

Health Equity (HQY) is facing a confluence of events that suggest the company is facing peak penetration and growth.

HQY’s 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. 

We think growth is at risk across a number of drivers including member growth, penetration of HDHP-HAS, Republican-driven policy, yields on custodial assets, investment account balances and fees, and interchange revenue. With headwinds gathering momentum, we believe it is time to press the short. If yields remain flat from here (an optimistic scenario), we expect flat to down core earnings, and with WAGE accretion, a stock down significantly from here.

NFLX

Click here to read our analyst's original report.

Following the print, we ran through the Netflix (NFLX) quarter, adoption model, and latest updates to the data and assessed the achievability of Q3 guidance. We think it is stretched at best. We have been highlighting a multitude of tools to track intra-quarter business trends that provided us with the confidence to be one of the very few analysts with a short on NFLX into the most bullish expectations in over 5 years.

In short, our call has incorporated increasing competition, domestic growth slowing faster than expected, international nearing the end of its positive revision strategy, and a current content strategy that’s not sustainable. Even after last week’s -10%+ move, we see significant downside from current levels.

NSP

Click here to read our analyst's original report.

Shares of Insperity (NSP) are trading as though the PEO industry isn’t cyclical and increasingly mature – we see growth slowing. The cyclical elements extend beyond employment trends to costs, regulations, and marketing. 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.

MAR

Click here to read our analyst's original report.

Despite the generally tepid RevPAR environment, Hilton Hotels (HLT) put up another solid quarterly beat, driven by strong unit growth and better performance out of their owned and leased segment (vs. Hedgeye). RevPAR too, was solid, particularly in the US, where we believe they outperformed Marriott (MAR) and other competitors. 

However, sluggish growth in the International segments (mostly AsiaPac), put a lid on RevPAR growth in quarter, forcing HLT to miss consensus estimates.  Given the strong run that stock has had into the print, we don’t see enough in the release for the stock to trade up materially from here, but for the most part the quarter and guidance is fairly in line, with full year RevPAR guidance serving as the lone incremental negative. 

HLT’s struggles to simultaneously accelerate pipeline production and unit growth gives us confidence that MAR is likely struggling even more in this department.  Note MAR’s pipeline, though bigger in absolute numbers represents a smaller portion of its current room base, and has been slowing at an even greater clip + MAR’s brands continue to lag on RevPAR. We’d look to fade the recent C-Corp optimism and the aggressive valuations, but MAR remains our preferred exposure on the short side.  

GOOS

Click here to read our analyst's original report.

Strong earnings out of Moncler this week.  Some think it’s a read on Canada Goose (GOOS). GOOS shouldn’t be mentioned in the same sentence as MONC – and yet bulls tell us its Moncler 2.0. 

Moncler is real luxury brand; GOOS is a single, high quality product, not a fashion trend setter.  Moncler controls its product distribution with measured growth and brand investment.  GOOS has grown too fast to preserve a luxury perception, there is no scarcity/exclusivity. 

This quarter Moncler showed balanced growth in regions and in its own doors vs. wholesale. Revenue grew 13% at constant exchange rates in the 1H. Retail comps grew 9%. Revenue accelerated in Q2 +18%. That balanced and measured growth is a hallmark of a brand driven company looking to control its growth and distribution. (Only opened three stores in the first half of 2019.)

GOOS is taking on category expansion without the right brand profile to be doing so, and it is now growing inventory for sales we don’t think will be there in the end.  Both of those elements mean big margin risk in the model.

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