Below are analyst updates on our twenty-one current high-conviction long and short ideas. Please note we added Ball Corp (BLL) and American Express (AXP) to the short side of Investing Ideas along with Booking Holdings (BKNG), Pinterest (PINS), Tenet Healthcare (THC), and MasterCard (MA) on the long side this week. We have also removed Tesla (TSLA) and DaVita (DVA) from the short 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.
The busiest apparel import time is August to October. List 4A tariffs of 15% on apparel imports started on September 1. So the majority of new imports of Chinese apparel goods for the holiday season are subject to the tariffs. There was very little time for apparel importers in the US to change where the goods were sourced in order to avoid the tariffs for the fall/holiday season. Looking forward to the spring, companies should be looking for new capacity outside of China, particularly in Central America.
Gildan (GIL) manufactured products should look even more attractive, because it avoids the 15% and is relatively close to the US. The two weeks less shipping time could also be appealing for apparel importers to make some last minute changes this holiday season to avoid tariffs. We think there is an opportunity for GIL to win unit share in 2020 due to the Chinese tariff pressures.
v
Visa (V) posted another round of solid results in the third quarter of its fiscal year, highlighted by +11.5% Y/Y, above-consensus growth in net revenues and an expanded core operating margin.
Operating expenses were -18% lower Y/Y, driven entirely by the $600M litigation provision taken in the prior year quarter. Excluding the -99.8% decline in litigation provision, operating expenses grew by +10% Y/Y. Accordingly, core operating margin, measured as EBIT ex. litigation provision and irregular/infrequent items, came in at 52.92%, marking a +0.39% linked-quarter and +0.23% Y/Y expansion.
As a result, operating income increased by +35% Y/Y, with pretax income rising by +37.5% as a result of a lower interest expense, and net income rising by +33% following a higher tax provision.
All-in-all, 3QFY19 was very much a standard chapter in the greater Visa story: solid growth in payment volumes, processed transactions, and cross-border spending, driving further solid top-line growth with healthy, sustained operating margins, culminating in rich free cash flow generation enabling strong capital returns in the form of dividends and share repurchases.
VVV
Click here to read the long Valvoline (VVV) stock report that sent Investing Ideas subscribers this week.
AMN
Click here to read the long AMN Healthcare Services (AMN) stock report that Healthcare Analyst Tom Tobin sent Investing Ideas subscribers this week.
ROKU
We spoke with a 20-year veteran of the digital media and advertising industry whose background includes 7-years in OTT media sales and launching Roku's (ROKU) ad platform. These are some of his notes.
Leverage and momentum are shifting in Roku's favor; "The dynamics between Roku and publishers are very similar to that of a carriage dispute, but the power and momentum are rapidly moving in Roku's favor. The economics Roku is getting in the deals are getting better each year."
Most significant opportunity and risk is TCL; “TCL might do a Fire TV line, or they might not. Some of the TV OEMs prefer to offer both Fire and Roku models, so they are not overly reliant on a single third-party. Manufacturers are not making a ton of money off the TVs, so the question becomes, ‘Are they going to want a piece of the action?’ They might, but it is probably something that won't happen for years if at all. If that happened it would cut into Roku's overall margin, but I generally think fears of that happening and what it means to Roku are overblown.”
Roku stands to gain from escalating streaming wars; “I believe all these major media companies launching their DTC, Netflix-killer offerings, they are going to burn through so much cash, and they are going to be mildly successful in the beginning. However, it is going to raise the entire category of which all these devices are going to benefit. Roku is in a unique and strong position as an independent platform and partner. Roku is not competing with these companies, unlike Amazon, Apple and even Google to some extent.”
BKNG
Hedgeye CEO Keith McCullough added Booking Holdings (BKNG) to the long side of Investing Ideas this week. Below is a brief note.
After 2-3 days of a US stock market correction, I'm looking for longs my analysts like that are approaching the low-end of their respective @Hedgeye Risk Ranges.
One of those names is Booking Holdings (BKNG). Here's a summary excerpt from Todd Jordan's recent Institutional Research note on the name:
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"Set up for BKNG falls in our sweet spot here at Hedgeye GLL. Investor sentiment leans negative driven by global macro uncertainty and an over focus on room night deceleration. Within that mix of sentiment, we see a long run top line and earnings bar that has been reset over the last few years and is now beatable. BKNG is a company that packs the punch on scale, execution, and positioning within the travel ecosystem and poised to generate significant cash flow – cash flow that is undervalued by the investment community obsessed with the wrong metrics." |
pins
Hedgeye CEO Keith McCullough added Pinterest (PINS) to the long side of Investing Ideas this week. Below is a brief note.
Why are we getting buying opportunities in some of my Independent Research team's GROWTH names right now? Two words: #Quad Four.
On the other side of his epically timed short call on Netflix (NFLX), Communications analyst Andrew "Freebird" Freedman has been bullish on Pinterest (PINS). That said, "don’t call me a rookie” Freebird didn't like PINS at every time (#Quad4) and price.
For those of you who want to learn how to use The Quads to augment your "stock picking" #process, here's a Jedi of The Quads note that was well timed by the Freebird pre-this pancaking of Tech/Comms momentum:
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NAVIGATING THE FOUR QUADS We incorporate the Hedgeye Macro four-quadrant, growth and inflation (GIP) model into our research process as a risk management overlay to our fundamental positioning. Each quadrant has a combination of style factors that outperform or underperform based on whether growth and inflation are accelerating or decelerating. For example...
When the quads and our fundamental positioning are in alignment, our conviction often increases significantly and vice-versa. The Hedgeye Macro team held a call recently detailing their expectation for the U.S. to enter Quad 4 territory in 3Q19 followed by a move back into Quad 3 in 4Q19. Quad 4 is the same environment we experienced in 4Q18, which was characterized by sharp equity drawdowns and an increase in market volatility. From a fundamental perspective, the timing of Quad 4 lines up well with our Netflix (NFLX) short. NFLX is a high-beta, high-multiple, leveraged growth stock that we expect will report disappointing Q2 results and Q3 guidance in July 2019. Meanwhile, one of our favorite long ideas, Pinterest (PINS), is also likely to perform poorly in Quad 4 due to its high-beta, high-multiple and growth style factors (recent IPOs also don't backtest well in Quad 4). However, because we see upside to consensus estimates in 2019 and have confidence in the long-term growth narrative, we are okay with staying long through Quad 4 and look to get more aggressive on weakness. We also plan to take advantage of Quad 4 weakness by adding to our list of long ideas in anticipation of what the Hedgeye Macro team believes will be a buy-the-dip moment... |
THC
Hedgeye CEO Keith McCullough added Tenet Healthcare (THC) to the long side of Investing Ideas this week. Below is a brief note.
A little intraday #timespank for the FOMO chasers during the Trump speech, eh?
It's a good thing that what he says and tweets doesn't drive my decision making #process (see today's Early Look strategy note for details on what I do instead)...
I've been waiting, patiently, for immediate-term TRADE #oversold signals in names where my Independent Research team is bullish on my intermediate-term TREND duration.
Healthcare Analyst Tom Tobin still likes Tenet Healthcare (THC) and here's an excerpt from his Institutional Research note early this week:
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We received a few inbound questions on utilization given the commentary out conference appearances by ANTM and UNH and some providers such as THC, which has been a key theme of ours for 2019. We use Health Care labor data from BLS, JOLTS and ADP statistics in our Health Care Labor Demand model which overlays well to provider results. Good news for providers, less so for the MCOs |
ma
Hedgeye CEO Keith McCullough added MasterCard (MA) to the long side of Investing Ideas this week. Below is a brief note.
Looking to add some US Equity Beta to your book with SPY bouncing off the low-end of its @Hedgeye Risk Range?
Mastercard (MA) remains one of Josh Steiner's favorite long-term large caps. Here's his recap of what we thought was another great quarter:
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Mastercard recorded a strong set of results in the second quarter, highlighted by +12.2% Y/Y, above-consensus growth in net revenues and an expanded core operating margin. Domestic assessments, transaction processing, and cross-border revenues of $1.68B, $2.05B, $1.37B grew +9.3%, +12.19%, and +14.69% Y/Y, coming in -1.2%, -2.3%, and +2.2% relative to street estimates, respectively. Other revenues of $962M grew by +23%, surpassing street estimates by +7%. In addition, client incentives of $1.96B, up +16.1% Y/Y and +2.6 percentage points higher than gross revenue growth, registered in-line with consensus and accounted for 32.23% of gross revenues. Operating expenses were -0.75% lower Y/Y, driven entirely by the $225M litigation provision taken in the prior year quarter. Excluding the decline in litigation provision, operating expenses grew by +14% Y/Y. Accordingly, core operating margin, measured as EBIT ex. litigation provision and irregular/infrequent items as a % of gross revenue, came in at 39.50%, marking a +20 bp linked-quarter expansion, albeit a -90 bp Y/Y contraction. As a result, operating income increased by +24% Y/Y, with pretax income rising by +31% as a result of higher other income driven by gains recorded on the firm's equity investments in the period. Net income increased +30.5% Y/Y following a +33 bp Y/Y increase in the effective tax rate. In sum, diluted GAAP and Non-GAAP EPS of $2.00 and $1.89 grew by +33.6% and +13.7% Y/Y, aided by a -2.29% Y/Y reduction in the weighted-average share count and ahead of street estimates for $1.81 and $1.83, respectively. Furthermore, during the quarter, Mastercard returned $1.9B or 7.7MM shares to investors with dividends of $337 MM. |
rol
Click here to read our analyst's original report.
The current share price of Rollins (ROL) makes little sense to us, and we expect a significant downward revaluation by the market.
Margin gains have stalled amid increasing competitive intensity in a mature, slow growing market. Attractive markets for growth and acquisitions present less runway and higher transaction prices.
Competition is less of an issue when industry revenues are growing. We see cause for concern. Slowing from weather, housing, or a decelerating economy could bring greater competitive intensity. It won’t be perfect forever, and ROL is priced for perfection.
Acquisitions have filled in during periods of weaker organic growth. This is fine, as long as the acquisitions are reasonably priced and successfully integrated. However, smaller pest companies often have better relationships as acquisitions by larger players destroys culture and employee retention. We estimate that, across the pest control industry, the acquisition price relative to revenues has nearly doubled in the last five years.
nflx
Click here to read our analyst's original report.
Our below consensus estimates are very generous, and can easily see a situation where U.S. paid subscribers decline QoQ as Netflix (NFLX) faces the limitations of their addressable market, at the same time they are raising price as competition intensifies.
Meanwhile, we believe we are near the end of a positive estimate revision cycle for international sub additions, which was the primary driver of the stock doubling in 2018. With NFLX more than 50% penetrated in key international markets, we see limited upside to consensus estimates and expect net new sub additions to peak in 2019/2020 and begin to decline after that.
Furthermore, the Hedgeye Macro team held a call recently detailing their expectation for the U.S. to enter Quad 4 territory (i.e. an environment of U.S. Growth and Inflation slowing) in 3Q19 followed by a move back into Quad 3 in 4Q19.
Quad 4 is the same environment we experienced in 4Q18, which was characterized by sharp equity drawdowns and an increase in market volatility. When growth and inflation are decelerating (Quad 4), the backtested results suggest underweighting high-beta and momentum style factors. When the quads and our fundamental positioning are in alignment, our conviction often increases significantly and vice-versa.
From a fundamental perspective, the timing of Quad 4 lines up well with our Netflix (NFLX) short. NFLX is a high-beta, high-multiple, leveraged growth stock that we expect will report disappointing Q2 results and Q3 guidance in July 2019.
For more detail on our Netflix call, check out Communications analyst Andrew Freedman's 49-minute presentation outlining his NFLX short thesis. CLICK HERE to watch.
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.
Economic growth appears to be slowing. The Hedgeye Macro team sees an environment of U.S. Growth Slowing throughout 2019. As we move from US Macro Quad 3 into Quad 4 (both real growth slowing) and Insperity faces more difficult comps, we think shares re-rate downward.
Why? Many of NSP’s cost items are pro-cyclical and may increase in a weakening economy. Insperity unit metrics track broader employment trends. A tight labor market pulls workers off the sidelines, while driving the need for better benefits. NSP gets a profit benefit if the estimated benefits cost change imbedded in pricing is less than the experienced cost increase.
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. We see greater than -50% downside in the shares, with catalysts positioned through 2020.
MAR
Click here to read our analyst's original report.
Owing to slower unit growth and underperforming RevPAR growth, our model suggests MAR is likely to grow its bottom line at a slower pace for the out-years. Sure, given the sheer size and lack of any real financial leverage, MAR will be able to buy back plenty of stock, but we do believe the capital return premium MAR should receive will be offset by its inability to grow as fast as its competitors. With a high rate of capital return already expected by investors, core growth will become more of needle mover on valuation, in our view.
Gaming, Lodging & Leisure analyst Sean Jenkins appeared on The Macro Show this week to discuss Marriott (MAR) and Booking Holdings. Click here to watch this entire edition of The Macro Show.
Jenkins reviewed...
- The core MAR model driver and valuation driver (RevPAR) continues to slow and is actually worsening in the Q3-TD, globally
- As a result of weaker RevPAR, unit growth expectations should be the next shoe to drop, which would be a net negative for earnings / valuation
We still see downside to the low $100’s for MAR.
GOOS
Click here to read our analyst's original report.
At its investor day this past week VF Corporation outlined the growth plans for each of its brands. Men’s apparel is one of Timberland’s (owned by VF Corporation) three growth pillars. Timberland said its plan is to attack men’s apparel by leading with outerwear. The slide depicted a new parka that closely resembled Canada Goose’s (GOOS) core parka.
The price point for the jacket was not announced, but it will likely be less than half of the price of the Canada Goose jacket. Canada Goose is targeting a more affluent customer, so the threat from Timberland isn’t direct. However, consumers paying that much for a jacket prefer not to have the look of the jacket to be commonplace. Scarcity is a common attribute of luxury items and the look of the Canada Goose parka will not be scarce this winter.
PENN
Click here to read the short Penn National Gaming's (PENN) stock report that Gaming, Lodging & Leisure (GLL) analyst Todd Jordan sent Investing Ideas subscribers.
APHA
Click here to read our analyst's original report.
Having followed APHA’s 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.
Irwin likely has one or two more quarters in which he can find low hanging fruit in order to provide an upside surprise, hence us keeping it on the SHORT bench. But as he continues to sink his teeth into the company we don’t believe it will be a sustainable business model. Looking past the launch of derivative products we think APHA will shape up to be one of the best shorts among the Canadian LP’s. We believe APHA will be a farmer/supplier to more strategic brand focused cannabis companies long-term.
CMI
Click here to read the short Cummins (CMI) stock report that Industrial Analyst Jay Van Sciver sent Investing Ideas subscribers this week.
MDLA
Staying with the SELL Software (IGV) view and looking to send SELL signals on Ami Joseph's favorite shorts (on bounces) which includes Medallia (MDLA).
Remember, the underlying theme of the MDLA IPO was trying to convince investors that all of a sudden this 18 year old company was something nobody thought it was. Leslie (successfully) dressed up Callidus in exactly the same way and sold it to McDermott at SAP. If you are a bull, and you’re playing for an acquisition, just remember there are only so many McDermotts out there who will sign off an $8B acquisition with less than 6 weeks of due diligence.
DXCM
Dexcom (DXCM) revenue beat consensus by 10% and $30MM and management raised 2019 guidance by $75MM. The increase in guidance leaves growth in the second half of 2019 at 17% to 25.3% versus consensus of 23.3%. Management acknowledged the difficult G6 launch compares in the second half, but we suspect consensus will lean bullish and assume guidance is low. Based on our forecast, it looks like the beat-and-raise trajectory has come to an end.
Pricing headwinds cost DXCM $20MM in 1Q19 and $25MM in 2Q19 leaving an incremental $55MM in the second half. "We've talked very clearly around our intent to allow price to come down a bit to open up that channel." The significant price differential between Libre and G6 will need to close over the coming years.
BLL
Hedgeye CEO Keith McCullough added Ball Corp (BLL) to the short side of Investing Ideas this week. Below is a brief note.
Looking for Industrials Shorts ahead of what will be a #Quad4 in Q3 Earnings Season? Industrials Analyst Jay Van Sciver's latest Best Idea Short (Institutional Research Product) is Ball Corp (BLL).
Here's the invite to the call Jay just hosted:
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The production of aluminum cans is a low/no growth, reasonably consolidated industry that used to be rated an ‘Okay, I guess’ by investors. Over the past 18 months, however, shares of Ball have moved to an excessive valuation, leaving behind other packaging companies. We’ll explore the reasons for this, like freight costs, and misperceptions about the plastic substitutions, input costs, labor, liabilities, and catalysts for revaluation this Friday, September 27th at 10AM. Packaging, like commercial services, can seem an attractive hiding place in an industrial slowdown, but we think it is in fact risky at these levels. Shares of BLL could well underperform peers by 50% as capacity, Rexam accruals/charges, and unrealistic estimates finally impact investor expectations. |
AXP
Hedgeye CEO Keith McCullough added American Express (AXP) to the short side of Investing Ideas this week. Below is a brief note.
A natural pair I like right now is MA Long vs. AXP Short. That means I'd buy MA on red days and short AXP on green days (which it is having today).
Here's Josh Steiner's recent summary point on AXP fundamentals:
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Pricing pressure continues to mount on AXP's core business as it bids to gain favor with merchants and defend its target market of affluent, high-income earners from the entrance of large issuers with capital to deploy and greater abilities to compete on rewards. |
