Below are analyst updates on our eleven 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.
WMT 2nd quarter was solid. Headline EPS beat of 5 cents on a 40bps comp beat. Comps slowed 60bps from 3.4% last Q to 2.8%, but against a tougher compare that was a 90bps 2 year acceleration. Ecommerce at +37%, same as last quarter against a tougher compare for 350bps 2 year acceleration, contribution 140bps, or half of the comp. The bigger read for us is what WMT’s results mean for the rest of the industry, and our top ideas like Gildan (GIL). We like the traffic and comp performance at WMT as it relates to sales of the GIL George private label line. WMT also noted one tailwind to margins this Q was strength in Private label brands. This was the first quarter of the New George program which is likely a strong relative margin business for WMT. All reads are that the program has performed well to date and there are some planned expansions for 4Q. We think there is opportunity for GIL to get further private label programs in other categories inside WMT as George underwear proves to be a success.
ANTM
In the most recent quarter, Anthem (ANTM) missed consensus MLR and guided higher for 2019 and is the central issue causing today's negative price reaction. The rationale given was an unfavorable mix of patients in the Medicaid book of business. This explanation we find plausible because of our research on federal guidance on re-determinations of eligibility.
We have previously highlighted the over-enrollment in Medicaid that was a hangover from the ACA and lax re-determination of membership by states. In extreme cases, as in California, Medicaid enrollment exceeds the population at qualifying federal poverty levels. As federal matching dollar percentages fall, determining a beneficiary's eligibility has become more important to state budgets. The federal government has supported stricter enforcement through the availability of additional funds. The result seems to be an adverse selection and it is highly likely ANTM receives incremental payments in 2019.
The MLR dominated the Q&A with management largely reiterating "stability" in both the commercial and Medicare books. Medicaid as a sole source of the MLR problem is reasonable and their assertion that they will receive relief in the second half of 2019 believable.
TSLA
Click here to read our analyst's original report.
Never in the pursuit of disruption has so much cash been incinerated by terribly managed firms to so few investor protests. Uber and Lyft are, in many respects, just taxi companies with automated dispatch. Tesla (TSLA) makes electric cars, a clever 19th century innovation. WeWork rents office space. Would these businesses be even modestly disruptive without investor willingness to tolerate and subsidize losses? We doubt it. That these companies can grow by selling a dollar for ninety cents should surprise no one. In just the first half of 2019, these four companies reported combined net income of negative $10 billion. They are valued at only 15.5x half year losses, a bargain for ‘absolute value’ investing if not Full Cycle Investing.
Of course, we may hear about how Amazon succeeded. And who knows - maybe these companies won’t compete each other to death in pursuit of scale or network effects or whatever KPI defines winning this quarter. But public markets can be moody, impatient, and, at times, brutal; these growthier names haven’t performed well in recent volatility. And one issue with these absurd companies is that they make other market absurdities seem tame by comparison.
We reiterate our short call on Tesla.
ROL
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Rollins (ROL) is the owner of the Orkin pest control service and a late 2018 best ideas short addition. ROL was trading north of 60x earnings heading into its 1Q19 earnings report and is still at 47x after two earnings misses. That’s an extremely high multiple for a mature, GDP-ish growth business facing competitive entry and other structural problems. For many, however, it just didn’t look so bad, at least relative to the really bad stuff.
DVA
Click here to read our analyst's original report.
We recently interviewed a former dialysis operator who managed a large number of facilities and a home dialysis program. Our belief is that home dialysis uptake is structurally impaired by physician incentives.
We also took a look at the OIG request from Rep. Katie Porter (CA-45) recently. The headwinds of labor cost, Medicare mix, and commercial payment pressure persist. With the sale of DMG and the balance sheet recap behind DaVita (DVA) and a catalyst calendar heating up, we remain bearish.
HQY
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 Health Equity's (HQY) growth since passage of the ACA.
The final rule would:
- Permit employers to fund Health Reimbursement Accounts for employees for the purpose of purchasing health insurance in the individual market
- Create an “excepted benefit” HRA that can be used to fund health related expenses not generally included in a health plan like short-term duration insurance and COBRA costs
What the administration refers to as “individual coverage HRA” will have certain restrictions. For example, an employer must offer all similarly situated employees the same individual coverage HRA, provided they are not also offered a traditional health plan. The final rule also stipulates payments into HRAs cannot vary more than 3 times between the youngest to the oldest employees, consistent with the ACAs age band. Finally, the final rule establishes minimum sizes for categories of employees that are similarly situated, like part-time or hourly employees.
The “excepted benefit” HRA has a limit of $1,800/year and can only be offered to employees in a traditional employer health plan.
HRAs offer employers an opportunity to shift from a traditional defined benefit health plan to a defined contribution plan similar to the way in which employers moved from traditional pensions to 401(k)s. The administration estimates that about 11 million employees will move from traditional employer plans to individual coverage HRAs as a result of the rule change.
This presents 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 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.
NSP
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Insperity (NSP), a 1H19 best ideas short addition, was similarly overvalued into 2Q19 earnings despite slowing employment growth and decades of volatile results following tax legislation. As we understand it, three years of accelerating GDP growth let these divergences widen and fester; in recent months, decelerating growth has been cleaning them out, often abruptly.
MAR
Click here to read our analyst's original report.
As we expected, Q2 RevPAR finished at the low end of Marriott's (MAR) 1-3% guide and also below Street expectations of 1.3%. MAR outperformed in international markets, particularly the AsiaPac region. MAR also did outperform our Street low expectations for North America, as Full-Service RevPAR was better than expected, but growth was not exactly “off the charts” at 1.2% YoY. Broader RevPAR weakness continues for MAR as their Limited Service brands put up another soft quarter – with growth coming in at +0.1% YoY. Despite easier comps in 2H 2019, we’re modeling only a slight uptick in Limited Service RevPAR growth as supply continues to eat away at pricing power and slower Macro growth should only make matters worse for Limited Service owners. RevPAR guidance cut of 50bps at the midpoint (range now 1-2% vs. 1-3%) was inevitable for MAR, but we still think the low end of the range is most probable. A cut to 0-2% would’ve been more appropriate.
Like other C-Corps, MAR is not immune to the impact of softer RevPAR. In fact, we have proven that historically RevPAR matters greatly to the underlying valuations of these businesses and then over the long run. RevPAR matters for future development.
GOOS
Click here to read our analyst's original report.
Our short thesis on Canada Goose (GOOS) hinges on our view that that there’s 1,000bp margin risk to this model as it transitions from a consumer durable model into a markdown driven non-durable model with increased fashion risk and chases less profitable distribution. While I don’t want to make a huge deal out of a seasonally-weak quarter (that accounts for only 6% of annual sales), the reality is that this quarter was a thesis validator.
Yes, it beat top line, but that was driven by early shipments to low margin international distributors as it works off its excess inventories --- which had been running 80% above last year on a 20% annual revenue guide. Moreover, receivables were up 153% on the revenue beat – looks like the orders were pushed hard by the company. In addition, GM% was down 650bp vs last year – its biggest decline since before it went public – just happens that it coincided with lower margin non-parka revenue hitting 1/3 of the mix – something that should only increase.
All in, the company put up 59% revenue growth (up C$26mm yy) and lost more money on both a GAAP and adjusted basis versus last year. The quality of earnings was terrible, and hardly worth a 5.5x revenue multiple and 30x p/e for a company that’s likely never to see $2 in EPS – over any duration.
APY
Click here to read the short Apergy (APY) stock report Energy analyst Alec Richards sent Investing Ideas subscribers earlier this week.
