Editor's Note: Happy Holidays! Due to the shortened trading week, the only update to Investing Ideas is the addition of Disney (DIS) on the long side. We will return next week with updates from our analysts for each ticker.
Below are updates on our sixteen current high-conviction long and short ideas. Please note we have added Disney (DIS) to the long side of Investing Ideas. 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 Health Care Labor Demand model remains in a solid growth trajectory, but the underlying trend is beginning to decelerate with implications for consensus growth expectations and company results heading into 2020. In the short term, expectations remain subdued and revisions have only recently begun to inflect higher, so our long bias remains. With the massive upward inflection in wage growth, our Healthcareteam remains firm with AMN Healthcare Services (AMN) a top long in the sector.
CNQ
Click here to read the long Canadian Natural Resources’ (CNQ) stock report that Energy analyst Al Richards was sent Investing Ideas subscribers.
dis
Hedgeye CEO Keith McCullough added Disney (DIS) to the long side of Investing Ideas this week. Below is a brief note.
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Having the discipline to wait and watch takes a lot of time and reps. While I still make plenty of mistakes, at this stage of my career I make less of the mistakes that I used to make. Patience and #process are the top 2 reasons for that. I've been waiting & watching for Disney (DIS) to correct towards the low-end of my @Hedgeye Risk Range... and at -1.5% here into the close today, I'm getting my pitch. As a reminder, longer-term, Hedgeye Communications analsyt Andrew Freedman remains Bearish on Netflix (NFLX) (he had a bearish Institutional Research update on that today) and Bullish on Disney Plus. Buy on red (don't chase charts on green), KM |
MAR
Click here to read our analyst's original report.
For 2020, Marriott (MAR)’s guidance of 0-2% is in line with our current modeling assumptions and likely in line with the broader consensus. However, it’s interesting to see MAR open up their range to 0-2% vs HLT who went with a range of 0-1% - is MAR being aggressive? We think 2% is well out of reach if current industry momentum persists, but ~1% isn’t unattainable, though we’ll take the under.
GOOS
Click here to read our analyst's original report.
One of our concerns for Canada Goose (GOOS) is that supply of the $1,000+ parkas is now exceeding demand. Luxury brands have to restrict supply to create exclusivity. In Canada Goose’s case it wasn’t management strategy to restrict supply, it was due to its manufacturing.
Supply constraints from factory capacity and raw materials (down and coyote fur) stepped in to be a governor on growth. On the demand front it appears that it has cooled for the brand this winter. Google trends show interest in the brand is below last winter in the US (and Canada). At the same time inventory levels at the end of the quarter were up 62% year over year. A supply vs. demand mismatch should lead to margin pressure in the future.
APHA
Click here to read our analyst's original report.
Ontario, where Aphria (APHA) is based, has just 24 stores open out of 576 stores in Canada – 4%, while the province represents 38% of the population. We feel like a broken record at this point saying that it’s a province that can support 1,200 stores in order to get to the same penetration levels that well-established US adult-use markets have. CGC commented on their call that they are estimating Ontario will open 40 stores per month starting in January 2020 and running through the end of the year.
Their estimates are based off the rollout in Alberta, but our biggest problem with that is, Ontario has not shown the ability to act quickly when it comes to their cannabis industry rollout. Jury is still out on whether this time is different. CGC basically said if the 40 stores/month doesn’t happen there will be more turbulence ahead. We remain firm on our initial short thesis.
CMI
Click here to read our analyst's original report.
What is better? A relationship selling an engine to OEMs as OEMs need fewer engines (and would rather sell their own), or a dealer network/brand/national service footprint (beyond engines). Cummins (CMI) faces vastly more competition from MTOR, Dana, others in electric MD trucks. In addition, CMI quarterly engine shipments vs. imports are are down. October orders of heavy duty trucks were down 51% from the from the same month last year and hit a three year low, according to data from FTR Transportation Intelligence. We see no indication to divert from our initial short thesis.
MDLA
Always remember, the underlying theme of the Medallia (MDLA) IPO was trying to convince investors that all of a sudden this 18 year old company was something nobody thought it was. CEO Leslie Stretch (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. We continue to remain firm with our initial short call.
BLL
We repeat. Aluminum cans are not a growth industry. Can sales continue to be lower than a year ago, starting from the first half of 2018. Few cans were shipped, so in 2019 we saw against an easy comp what looks like mid single digit volume growth that kind of confirmed the idea of “cans are a growth industry.” They’re not. Over the 4th quarter and continuing further, we have very tough comps that make the growth story very difficult. Trucking rates are down. Marginal cans have been shipped and on a sequential basis we think it will be shown that it will not be a growth industry for Ball Inc. (BLL).
AXP
Click here to read our analyst's original report.
Consistent with our original short thesis, competitive pressures continue to drive American Express's (AXP) core pricing power lower, and with slowing growth in its global billed business, the company is increasingly drawing earnings growth from its lending business, thereby augmenting its risk profile in the face of late-cycle phenomena such as weakening consumer confidence, greater market volatility, yield curve inversion, and sluggish luxury goods consumption.
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.
Accordingly, American Express remains a Hedgeye Financials Best Idea Short.
SQ
We continue to discount Square's (SQ)'s TAM story, limiting its penetration to smaller merchants with slow international uptake amid heightened competition from new entrants across in-person, online, mobile, and commerce payments solutions. In addition, we see diminished growth tailwinds from the Cash App as the appeal of the company's rewards program flattens out, with user growth inevitably decelerating as competition in the P2P space limits market share gains.
Accordingly, we view the confluence of these factors as highly detrimental to the company's elevated valuation.
DIN
Per Restaurants analyst Howard Penney: "I would love to get another opportunity to SHORT Dine Brands (DIN). 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."
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"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. We remain firm on our short thesis.
CHEF
Chefs Warehouse (CHEF) is an over-valued food service distribution roll-up story who’s better days are in the rear-view mirror. Since the beginning of 2012, CHEF has acquired 10 businesses and operating margins have gone from 6.0% to 3.2% over the same period.
The central tenant of our CHEF short has always been the sustainability of margins, especially EBIT margins. There is more clarity around that theme after the company reported 3Q19 earnings, which was yet another disappointing quarter. There is no change to our conviction, that given the optimism baked into consensus numbers for CHEF the stock remains a core SHORT.
ATUS
We have had a long bias on Altice (ATUS) since March 2019 as management's strategic initiatives were bearing fruit at the same time growth comparisons were easing, and the company was initiating an attractive capital return program. However, much of what we liked is now becoming a risk to the company's growth algorithm (2-3% revenue growth / 4-5% EBITDA) as we head into 2020. Therefore, we are switching sides and moving ATUS to an active short targeting 20-30% downside in the next 6-9 months.
PYPL
While Paypal (PYPL) has certainly managed impressive payments volume and revenue growth over the last five years, and while the global payments opportunity remains undoubtedly large, we believe that the focus of the company's growth story, its dominant and growing position in the P2P sphere and the ecosystem synergies implied by the company's existing merchant network, is both highly ambitious and riddled with uncertainty when the transaction economics of the company's varying sources of payments volume are taken into account.
USAC
Hedgeye CEO Keith McCullough added USA Compression Partners (USAC) to the short side of Investing Ideas this week. Below is a brief note.
Looking for new Energy Shorts to have on against your core Energy (XLE) Asset Allocation in #Quad3 (which is the best Sector Style in the SP500 for December)?
Energy analysts Al Richards and Jesse Root went bearish recently on USA Compression Partners (USAC). Here's a summary excerpt from their Institutional Research notes: USA Compression Partners, LP is a ~$4B enterprise value Master Limited Partnership that provides natural gas compression services to midstream and E&P customers. The company has been one of the best performing names in the energy ecosystem for the past 3 years. Despite high and increasing leverage, a deteriorating fundamental backdrop, and overdistributing to its partners, USAC trades at a 2.5x - 3x EV / EBITDA premium to the largest competitor in the space with a healthier balance sheet, Archrock Inc. (AROC), as well as smaller competitors CSI Compressco, LP (CCLP) and Natural Gas Services Group (NGS).
