Below are analyst updates on our thirteen current high-conviction long and short ideas. Please note we added Penn National Gaming (PENN) and Aphria (APHA) to the short side of Investing Ideas this week. 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.
A majority of apparel and much of the footwear imported from China will start to incur tariffs starting September 1.
About 40% of all clothing and 70% of shoes sold in the US are made in China according to the American Apparel and Footwear Association.
Many apparel retailers’ margins have already been pressured by e-commerce and competition and have little room to absorb higher costs.
A weaker Chinese Yuan will offset some of the impact while moving production to other Asian countries is the move most apparel companies will make.
However, it’s difficult to find enough capacity outside China for all it produces as Li & Fung (one of the largest apparel supply chain managers in the world) said last month that there is no more available capacity in Vietnam.
We believe this industry move out of China will benefit Gildan's (GIL) Central American production. Gildan is looking to grow its private label business and offers US companies closer production without any tariffs.
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.
TSLA
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From what we can see, US interest in Tesla (TLSA) is much lower. Across metrics, demand looks very soft. We’d expect more price cuts and substantial noise about the Model Y. Tesla will need to do ‘something’ in a core market. Seasonally in the US, summer is a big period for car sales. European activity looks surprisingly good, partly on shipments of RHD units to the UK, one of the last major markets to open. Given trade tensions, recent dependence on China and unfavorable terms for Gigafactory 3 must be a significant point of anxiety for longs.
ROL
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Rollins (ROL) reported the lowest 2Q margin in years, following the lowest 1Q margin in years, following the lowest 4Q margin in years. At some point, the market may well wonder whether this is a structural change in what had been a steady margin expansion. We think it is, partly driven by excessive pricing by ROL and increasing competitive intensity (e.g. Rentokil’s entry). This was the margin compression and decelerating organic growth that formed the catalyst for our short view.
Is July getting better? That’s apparently the message from management, but secondary indicators don’t show a trend reversal.
DVA
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We are still doing our work on calcimimetics, but were surprised no one asked about CMS’s proposal to terminate the TDAPA if the drug manufacturers failed to submit ASP data to CMS. Apparently some manufacturers have not been submitting data or not submitting it in a timely manner. Their delays result in CMS reimbursing dialysis manufacturers at Wholesale Acquisition Cost which does not include discounts, price concessions, etc.. When CMS pays the TDAPA on the basis of WAC, they are paying more than they should for calcimimetics. For that reason, Beginning in 2020, CMS will cancel the TDAPA for a drug for which there is no ASP data submitted or no data submitted in a timely manner.
It is unclear if DaVita's (DVA) main supplier Amgen is implicated in CMS’s new policy, but if they are, an end to the TDAPA would mean that DVA would not be compensated for any calcimimetics expense until the bundle is rebased in, presumably, 2021.
We agree with the Company’s rather sanguine view of home dialysis. As we have noted previously, it is a high mountain to climb given practice patterns, patients preference, education on options., etc.
The company appears to be anticipating a multi-state ballot effort by the SEIU in 2020 which could prove to be more expensive than the $60 million 2018 effort in California.
HQY
The primary thesis points on Health Equity (HQY) center on custodial cash yields, spend down, HSA adoption penetration, and recession risks in same customer growth. In addition to the core thesis, The Departments of Labor and Treasury announced an expansion of Health Reimbursement Accounts (HRA) which appears competitive to HDHP-HSA plans.
NFLX
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We added Netflix (NFLX) as a short on the belief that investors were overestimating NFLX's pricing power and ability to drive further adoption in key developed markets, especially given the looming competition from legacy media. Our conviction in the short grew following Q1, and the data we track intra-quarter indicated a material slowdown in gross subscriber additions in Q2. This evening, NFLX reported the largest net paid subscriber miss since 2016. The weakness was broad-based, with gross subscriber additions missing management's forecast "across all regions" and the U.S. paid subscriber base declining QoQ for the first time in the company's streaming history. Meanwhile, management's 3Q19 global paid net subscriber guidance of 7.0 million looks aggressive and likely sets the stage for another disappointment later in the year. Overall, we believe this is the beginning of the end for the NFLX growth story.
NSP
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The Insperity (NSP) earnings growth story requires leveraging sales growth, which didn’t happen. Gross Profit per Worksite Employee (GP/WSEE) declined slightly in an otherwise seemingly good employment environment – an indication that this business is not exclusively tethered to macro employment trends.
Revenue decelerated into 3Q, with web traffic generally supporting a muted near-term growth picture. Backend loaded guidance isn’t particularly credible. For longs that believe the penetration growth story, that has been the bull story for decades at lower valuations.
MAR
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Our featured chart for the key topic of RevPAR is one we first shared in our Marriott (MAR) deck. We crafted up our own RevPAR “indices” for HLT, H, and MAR and looked at the spread between HLT and H brands vs. MAR’s – for Limited Service only. Our RevPAR index does not factor in geography which could be impactful, but given the longer duration, these impacts should smooth out. Implications of losing Index share could negatively impact out-year unit growth and/or conversion opportunities.
GOOS
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We reiterate that Canada Goose (GOOS) is really a 1 product company. The core Parka is made for very cold temperatures. The competition is minimal here, because the addressable market is smaller, meaning the product can thrive on a small # of SKUs at higher prices given that low competition. The problem is the growth plan for the company is to branch further into lightweight and sweaters. This means many more SKUs, more manufacturing/supply chain sophistication, more fashion risk, more competition and ultimately much lower margins. The consensus estimates imply the company can continue its growth trajectory with similar gross margins which we don’t think is possible given the change in product assortment and competitive intensity.
APY
Click here to read our analyst's original report.
Apergy (APY) Capital Intensity Becoming Clearer to Investors…. One of the key callouts recently was that the current APY equity price underappreciates the ongoing capital needs of the business. For the first time since coming public, APY acknowledged additional capital spending needs associated with its leased asset program, which it tucks in the working capital line as the assets have estimated lives of less than one year.
The company sees 2019 spending for leased items at $60MM - $70MM total, $45MM - $50MM of which will land in the statement of operating cash flows. The key takeaway, aside from the company’s previous choice to not disclose this ~$50MM of incremental expenditure, is that it is recurring, it has always been recurring, and will be higher in a growth environment.
PENN
Hedgeye CEO Keith McCullough added Penn National Gaming (PENN) to the short side of Investing Ideas this week. Below is a brief note.
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Looking for more shorts? Look for best short ideas that are: A) Up on decelerating volume to Our veteran Gaming analyst Todd Jordan reiterating the bear call here on green, KM |
APHA
Below is a brief note written by CEO Keith McCullough on why we added Aphria (APHA) to the short side of Investing Ideas this week:
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After a 3-day (no volume) bounce to lower-highs, there's still plenty of FOMO in the US Equity market. That's why I'll stay with the #process, signaling SELL on my Independent Research team's Bearish @Hedgeye TREND short ideas. One of our favorite Cannabis Shorts remains Aphria (APHA). Here's an excerpt from Shayne Laidlaw & Howard Penney's recent Institutional Research note on the name: DECLINING MEDICAL REVENUES In 4Q19, gross revenue from medical cannabis was $10,855 versus $11,770 last year and $10,649 in 3Q19, representing a year-over-year decline of 7.7% and only 1.9% increase from 3Q19. Despite growth in gram equivalents sold, the company can’t maintain medical cannabis pricing as they are selling more of the lower quality Aphria brand. Short the bounce, KM |
