Below are analyst updates on our fourteen 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.
Gildan (GIL) is still our go-to horse on the Long side.
Biggest beneficiary of the exodus to Western Hemisphere manufacturing and stepped up private label contracts by mass retailers. In ‘capacity growth mode’ to facilitate much more robust top line, which plays out starting in 2H.
Walmart presented at an investor conference this past week. Walmart has made a big push into private label in the past two years. Management distinguishes private label with private brands, the latter describing their current efforts. Private brands are not just an effort to have the lowest price, but to offer an exclusive brand with a better customer proposition. Management said, “we do an incredible basics business inside of apparel at the same time. So when it comes down to basics of socks, underwear, we sell an incredible amount of that product. Some of it branded, some of it private-label. So we want to hold on to that while we surround it with additional new brands. And that's worked pretty well.
So we're going to continue to do that and continue to look for new opportunities to leverage brands.” Gildan currently makes men’s underwear bottoms and tops for Walmart’s George brand. Due to Walmart’s size winning additional private brand contracts would have an outsized impact for Gildan. For example we estimate Walmart’s undecorated men’s fleece program to represent $300mm at retail. We believe Gildan is well positioned to win further contracts in the future with Walmart and other retailers.
ANTM
Our labor data accurately forecast increased utilization of health care services. The accelerating labor trend of 12% in July v. 9% in June means not only higher same store adjusted admissions at THC and HCA but it also higher medical costs at Anthem (ANTM). That creeping realization got a little boost last week from JPM's regular hospital survey that suggested a similar conclusion. We prefer to rely on labor data than surveys so we will revist our algorithm, how and why it effectively predicts changes to medical care utilization.
TSLA
Click here to read our analyst's original report.
Tesla (TSLA) cut prices for its highest-end inventory S &X models – the P100Ds. Is it better to sell more vehicles at larger losses? Musk seems focused on the demand deficit short thesis, judging by comments at the shareholder meeting. Price cuts seem like a ‘least worst’ option.
Of course, that misses what the demand deficit thesis is: insufficient demand for Tesla to produce sustainable profits.
ROL
Click here to read our analyst's original report.
Rollins (ROL), owner of the Orkin pest control service, was a late 2018 best ideas short addition for our Industrials analyst Jay Van Sciver. ROL was trading north of 60x earnings heading into its 1Q19 earnings report and is still at 47x after two earnings misses.
As you may have surmised, we think that’s an extremely high multiple for a mature, GDP-ish growth business facing competitive entry and other structural problems.
DVA
Click here to read our analyst's original report.
We took a look at the extraordinary decline in per treatment costs in 2Q19 for signs it was associated with the deceleration in de novo center openings. We understand new centers are typically “seeded” with commercially insured patients to absorb overhead and labor costs as capacity utilization grows over time. Based on our analysis, it does not look like DaVita (DVA) management's recent shift to slower de novo activity has been a big driver of the per treatment cost trend.
NFLX
Click here to read our analyst's original report.
We believe we are finally at the point where Netflix (NFLX) subscriber growth in the U.S. will see negative effects of market saturation.
Net U.S. sub-additions of 4-5 million per year will decline to 1-3 million a year faster than what consensus is expecting. Recent and likely future price increases, and increased competition will accelerate this slowing trend. Additionally, we believe our estimate of end-market growth in the number of U.S. internet households may prove optimistic.
NSP
Click here to read our analyst's original report.
Insperity (NSP), a 1H19 best ideas short addition for Jay Van Sciver, 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.
Slower growth at a high price – still see risk/reward skewing negative as slower RevPAR growth and pipeline deceleration impacts valuation.
Looking past just 2019 unit growth, Marriott's (MAR) pipeline is showing some cracks in its foundation – a potentially big blow to the bull thesis. The bear case could already be accelerating as MAR will be under a microscope to deliver EBITDA beats and incrementally more positive forward looking commentary with regards to the pipeline and RevPAR outlook. We see longer term top line and EBITDA growth as likely to disappoint with more negative evidence to emerge over the next several quarters. Our call is less about near term EPS, but more about multiple contraction as growth decelerates.
GOOS
Click here to read our analyst's original report.
Over-earning by 1,000 basis points, which should unravel amidst SKU proliferation in its non-core knitwear business and lower margin growth outside the US. While our Retail team is modeling this margin slide over a 3-year period, the reality is that it is likely to happen sooner and more violently.
Canada Goose has done a solid job penetrating Canada and the US, but much of the incremental growth is expected to come now from international growth and opening international stores. An important aspect to consider is that many cold international countries already have established brands at multiple price points when it comes to jackets/parkas including premium ones that blend form and function. You can see some of the corresponding brands in the chart below.
We suspect GOOS will continue to grow, but the incremental revenue will be harder to win and will come at lower margins than what is in the street expectations. That will mean EPS revisions down and a lower multiple on those lower numbers.
APY
Click here to read our analyst's original report.
Energy is one of the best shorts during #Quad4 (see the month of AUG for details)... and Apergy (APY) remains one of our Energy analyst's Al Richards' best SELL ideas.
Here's a summary excerpt from him on the name:
"The company touts itself as a diversified, fast-growing business whose product lines are technologically advantaged, high margin, capital light, and less sensitive to oil field cyclicality. In our view, APY is just another cyclical, commoditized OFS company."
PENN
Penn National Gaming's (PENN) remains a top short idea for our Gaming, Lodging & Leisure (GLL) analyst Todd Jordan.
Demographic headwinds will keep same store revenues flat at best in most regional gaming markets. With cost cutting and marketing efficiencies mostly met, profits will likely decline.
Not good for a very leveraged small cap.
APHA
Having followed Aphria's (APHA) interim CEO very closely during his tenure as CEO of HAIN, we are very familiar with his ability to make things look better than they appear. For years, Irwin claimed to be building a business, yet everything was more hype than substance. We would also note that on the recent earnings call the interim CEO referenced building “a large US packaged good company.”
For background, Mr. Simon was early in organic food growth, but he did not build a company that has lasting value. Operating profits for HAIN have declined 50% over the last 5 years and the future for the company looks bleak. In the end, HAIN was nothing but a classic roll-up story that failed miserably. So why should Mr. Simon have any credibility when he say’s “If we look to the future, Aphria will be a consumer packaged goods company with plenty of options in the U.S. market.”
In its current form APHA is basically a Canadian cannabis farmer.
BYND
Here are some of Hedgeye veteran analyst Howard Penney's concerns about Beyond Meat:
- The excitement of early movers will wane quickly (vegans represent less than 5% of the population). Other consumers may try the product once, but converting meat consumers will take longer if it even happens at all.
- It's Operationally complex for restaurant to add the product to the menu (McDonald’s said it's operationally complex and will take its time understanding the opportunity). The ex-CEO of MCD is on the board of BYND, but he was fired by the company for poor performance. For this reason, it’s not a given that MCD will test the BYND product.
- The product is not healthy to eat (see above).
- The BYND plant-based meat product will sell at a premium versus other menu items in restaurants, limiting consumer demand.
CMI
Here's a summary excerpt from our Industrial Analyst Jay Van Sciver:
While we get the bull arguments for Cummins (CMI), from aftermarket to emerging markets, we see too many business and narrative headwinds going into 2020. Cyclicals have a way of genuinely looking ‘cheap’ when in fact expensive; we think shares of CMI are pricier than longs believe.
A deceleration in activity may adversely impact the profitability of suppliers to capital equipment makers. Added to short-term and long-term structural headwinds, as well as fewer emission-related content opportunities in CMI’s key North American market, the next couple of years may prove unusually challenging for CMI.
We think the shares have >40% downside risk... with catalysts ranging from truck order backlog drawdowns to high decremental margins in key engine markets.
