Below are analyst updates on our fourteen current high-conviction long and short ideas. Please note we have added Square (SQ) and Dine Brands (DIN) to the short side of Investing Ideas and removed Insperity (NSP), Penn National Gaming (PENN), Casey's General Stores (CASY) from the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
AMN
Click here to read our analyst's original report.
Our fundamental research has been reasonably accurate in calling for rising demand against a tight labor supply and what appears to be an ongoing recovery in AMN Healthcare Services (AMN)'s core business. Separately, we have also been studying the elements of stock performance that has nothing to do with fundamentals. This has been driven in part by our own frustration watching our favorite ideas react at random, unwilling to bend to our intellectual will. At times it has felt like one could have a data point so perfect it would make you want to call your compliance officer, and it still wouldn't matter.
AMN correlates tightest to forward consensus EPS. As consensus catches up to our internal estimates, we expect growth and acceleration to move higher, followed by the fundamentalists and the algorithms who will chase the stock higher.
BKNG
Click here to read our analyst's original report.
Booking Holdings (BKNG) continues to grind higher following a solid Q2 announcement. Yet, we think there is more to come as investors gain comfort with stabilized room night trends and come to appreciate the cash flow growth and inexpensive valuation. The sell side has been in downgrade mode but BKNG continues to hang tough. Following last week, BKNG is now 2/3rds ‘hold’ rated, which is two year high for the stock – doesn’t exactly sound like euphoria, in our view. Additionally, our gauge of buy side sentiment doesn’t appear much better, with many still worried about the anemic European macro recovery. Full disclosure, we too are worried about the slow recovery in Europe, but the data we track that correlates highest with room nights and bookings continues to maintain its resilience, and BKNG could also be gaining share.
ROL
Click here to read our analyst's original report.
Organic growth snapped back, most likely at the expense of Terminix which preannounced a weak quarter and some shift from weather. What this really SCREAMS is price based competition vs. Terminix and Rentokil – if so, the Rollins (ROL) valuation should come way down.
Look at what ROL removed from their fine print – that is no accident.
NFLX
Click here to read our analyst's original report.
The growth rate in Netflix (NFLX) mobile app downloads continued to slow world-wide in October 2019. The slowdown is across most major geographies, with notable weakness in the United Kingdom, Spain, United States, Brazil and Mexico. Japan, Taiwan, Turkey and the Philippines continue to post the strongest growth, although not enough to offset weaker trends in New Zealand, Australia and India.
We continue to believe that as competition intensifies and Netflix raises the price of their service:
- Rate of adoption (gross acquisition) will slow
- Churn will increase
- Quarterly subscriber metrics will become more volatile and hit-driven
The QTD growth rate of +1.7% YoY is down from 13.0% YoY in 3Q19 and below the +6.6% YoY growth rate in 2Q19. However, given how back-end loaded subscriber growth is in Q4 (November/December), it is too early to derive any meaningful conclusions.
MAR
Click here to read our analyst's original report.
Marriott (MAR) stock back up above $130 on the heels of 1) lowered RevPAR guidance, 2) lowered EPS/Adj. EBITDA guidance, 3) lowered net unit growth (NUG) guidance for 2019 and 2020, 4) effectively lower EBITDA guidance for 2020 driven by the lower NUG expectation, and 5) the potential for only flattish capital return in 2020 – we’re more than willing to pound the table on this Best Idea Short.
We get it, MAR is a quality company with a nice brand name and the stock / C-Corp group could be catching an extra bid in the wake of turmoil in other consumer verticals (restaurants and retail), but that’s unsustainable. The stock should always revert back to the true fundamentals and earnings power of the business, and with MAR, though the long term (5+yrs) looks “fine,” the next 12-24 months could be a lot rockier than the current valuation is implying. Don’t forget, MAR hosted their analyst day back in March and told nice stories about accelerating NUG, how they fixed underperforming brands, and how their IMF’s were more resilient than ever before – well, literally none of that has come true so far this year and won’t come true next year. All the while, the stock has maintained its resilience, though underperforming its closest peers by close to 600bps and the market by 200bps.
GOOS
Click here to read our analyst's original report.
Canada Goose’s (GOOS) success has launched another competitor in its home market of Canada. True Outliers recently launched its outerwear offering after considerable social media hype in Toronto. It’s interesting for a new competitor to go even more high end and luxury than Canada Goose. The offering currently includes a range of stylish warm parkas that feature ethically sourced real mink lining and collar as well as a cotton outer shell containing dense 650 ‘fill power’ down, which could make it the warmest jacket on the market. Founder Moses Mandelbaum, who is part of the family that owns Toronto based fashion manufacturer/distributor Gertex, spent three years developing the new line.
Canada Goose will report Q3 results next week we expect the results to be underwhelming. Fiscal Q2 is a sell-in quarter for the wholesale business as the weather had not turned cold yet, but wholesale customers were shipped their early orders. So the quarter will really be a read into what wholesale demand looked like before the winter season began, but won’t be much of a read of end market demand or reflect the competitive pressures increasing. The protests in Hong Kong will be a headwind for the China business in the quarter which has become a large percentage of the company’s growth. The key things we’ll be looking for are signs of slowing revenue or weakening gross margins to maintain revenue growth in the face of increased competition and dilutive category expansion.
APHA
Click here to read our analyst's original report.
Aphria (APHA) is likely going to be a supplier of raw materials to extraction and branding companies in the future. CEO Irwin Simon talking about “getting the best shelf space” and “branding” like cannabis is a traditional CPG industry today. It may be in the future, but that is not today’s game in Canada. For anyone that has walked into a legal Canadian dispensary they should understand Irwin is a little out of his element with these comments.
Irwin also maintained his thinking that dried flower would represent 60% of sales, vape would be 20-30% and then other derivative products would make up the remainder. Not exactly sure what is driving these assumptions in their model given what has transpired in developed US adult-use markets (flower trending closer to 30-40% of sales), maybe APHA’s lack of capabilities in alternative platforms.
CMI
Click here to read our analyst's original report.
The best case for the Cummins (CMI) long is if management kitchen sinks 4Q19 in an attempt to improve 2020 EPS. Since 2019 hasn’t been that bad, it may be tempting to chunk 2020 instead. If so, CMI will be a tedious ride for longs until early 2021. This $35 mil “Third quarter net income included expenses of $35 million ($0.23 per diluted share) related to one-time actions taken to cease development and production of certain products, which will benefit future financial performance” isn’t enough unless CMI just wants to improve 4Q19 and charge again in 2020. They also should be less transparent about it… CMI remains a top short idea for us on build rate cuts and the potential for a nasty electrification narrative.
MDLA
In line with last weeks update, Medallia (MDLA) remains a Hedgeye Technology Best Ideas Short. It’s important to note, MDLA sold the company’s 2011 vintage HQ and broke apart into satellite offices and WeWork office locations this year. In our work reading countless reviews we discovered that many employees note the only location of positive MDLA culture was at the HQ. Along with that, MDLA hired Leslie Stretch around a year ago to be CEO, newly minted from selling CALD to SAP for much more than it should have been worth. MDLA has also fired employees (despite having open recs) earlier this year to tidy up the OPEX line. Not a good look. The software hype with MDLA is becoming apparent, and we wouldn’t be surprised if the stock gets cut in half over the next year and a half. Be aware.
DXCM
Click here to read our analyst's original report.
Dexcom (DXCM) reported a blow out 3Q19 revenue number. Our claims data regression had forecast revenue of $295M for 2Q19 compared to the reported $266A, or ~30M lower. For 3Q19, the trend was reversed with the company reporting significant upside versus our estimate.The estimate for 4Q19 won't be available until there is more data available beyond what we have through October .
In the coming days we will add additional detail from the expanded fields. Additionally, we have recently conducted a series of studies searching for fundamental algorithms we believe account for a large percentage of a given stock performance and allows us to blend the Hedgeye Macro outlook with stock selection.
BLL
If can demand were wildly outstripping capacity and the Ball Inc (BLL) structural position were as robust as it looks in market share charts, margins would be at highs. Margins in Americas are instead down, and worse than a lower share rival.
BLL is *OBVIOUSLY* not a growth story this quarter – just look at revenue and operating income trends below; it looks more like noise or inflation than cans experience surging demand. At 38x, BLL is likely to reprice way down and enter ‘show me’ territory.
AXP
Click here to read our analyst's original report.
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.
Higher spend has driven greater card volumes and supported top-line growth in spite of increased pricing pressure but appears to be at the beginning of losing its potency.
Accordingly, American Express remains a Hedgeye Financials Best Ideas Short.
DIN
Hedgeye CEO Keith McCullough added Dine Brands (DIN) to the short side of Investing Ideas this week. Below is a brief note.
Looking for #Quad3 Shorts? Restaurants are core shorts alongside Consumer Staples (XLP), but only when they're at the top-end of their @Hedgeye Risk Ranges.
Dine Brands (DIN) is there currently...
And here's Restaurants analyst Howard Penney's recent comment on the name:
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"I would love to get another opportunity to SHORT this company. There is so much hot air coming out of this management team it’s hard to take them seriously. This quote from the CFO is a great example of what we are talking about “But in response to your question about what's going to take us to the next level for both brands, we see catering as the major opportunity because we think that space has been underserved.” Catering is not underserved and every restaurant company has a catering angle! If Chili’s sees accelerating revenues from delivery it’s going to come directly from Applebee’s." |
SQ
Below is a brief note from Hedgeye CEO Keith McCullough. He added Square (SQ) to the short side of Investing Ideas this week.
Our payments/processors research team consisting of Josh Steiner and Drago Malesevic have had me waiting on an entry point to short Square (SQ) against their Mastercard (MA) and Visa (V) Longs.
We think this is that entry point.
Can the company successfully diversify the composition of its predominantly physical merchant base and establish a meaningful presence online amid strong competition and first mover's advantage from the likes of PayPal and Stripe?
We do not think so.
Short the bounce.
