Below are updates on our sixteen current high-conviction long and short ideas. Please note we have removed Papa Johns (PZZA) from 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
Click here to read our analyst's original report.
AMN
Those familiar with AMN Healthcare Service (AMN) know that the beginning of every month provides key data points for the nation’s largest health care staffing company. This week, the Hedgeye Health Care Team released two notes providing color on the results of the ADP and BLS Employment Reports.
On a year- over- year basis, Health Care Employment improved +2.5% and slowed slightly from +2.6% in November. While growth in December and for 4Q19 remained positive as it was in 3Q19 and in- line with a positive backdrop for consumption, under the hood there are both good and bad leading indicators.
We'll be discussing the impact of this and other US Health Care Macro updates on our longs and shorts on Monday, January 13th at 10 am EST.
CNQ
Click here to read our analyst's original report.
On a full-cycle basis, Canadian Natural Resources’ (CNQ) upgraded mining operations have one of the highest FCF profiles in North America. In 2018, the company earned ~C$5.5B in FCF paid ~C$1.6B in dividends, reduced debt by ~C$1.8B (net of USD gross up), and repurchased C$1.2B of stock. The company recently released its 2020 CapEx and production guidance, which calls for 9% production growth per debt adjusted share on a $4B D&C capital budget. After fulfilling the dividend obligation, the company will have ~$4.8B in adjusted FCF to allocate between share repurchases and debt reductions. By year end 2020, the company should be approaching a net debt/EBITDA ratio of 1.6x. By our estimates, CNQ is one of only a handful of oil-levered upstream businesses that generates FCF at $50 WTI.
DIS
We continue to be surprised by the level of investor skepticism surrounding Disney's stock in the face of rising subscriber expectations for Disney+. Our latest survey work (as of 12/31) suggests Disney+ finished the quarter with at least 20M paid subscribers worldwide. At the same time, early indications of churn are coming in better than we had anticipated post the airing of the last episode of The Mandalorian.
GH
Alongside our fundamental and sales force models, the Hedgeye Health Care team has sourced and routinely updates claims data for many of the names in the genetic testing space, both public and private. The outputs from this data include a claims index, patient index, and a bevy of forecasting methods in order to give our clients an intra- quarter look at volume trends. This data is presented in a weekly note and chart book.
For Guardant Health (GH), our claims index has shared a ~95% correlation with the company’s quarterly reported volume. Claims for the current quarter support an in- line to slightly above average volume number, providing additional support to our LONG thesis for GH.
MAR
Click here to read our analyst's original report.
We reiterate our Best Idea SHORT Marriott’s (MAR) and bearish bias towards hotel development. MAR is likely to miss NUG targets in 2020, RevPAR remains sluggish, stock is over owned and trading at a significant premium in the context of RevPAR softness and unit growth underperformance. See 20-25% downside from current levels.
GOOS
Click here to read our analyst's original report.
Luxury brands have to control their distribution and growth or they will lose their exclusivity. Canada Goose’s demand has exceeded supply to date. Previously, the company’s supply growth has been limited by raw materials and labor to make the jackets, not by management’s awareness and experience with luxury brands. With the addition of new owned capacity in the past year supply appears to be overtaking demand as we see inventories building at rates unseen in the company’s history. Now the company has a market flooded with product and needs to see it be sold, with the weather in the last month or two not really cooperating. When we see supply exceed demand which we think can happen in the next couple quarters, it will be evident that Goose is not a luxury brand with measured growth, but rather a single product company with a fashion fad that over accelerated sales growth.
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APHA
Click here to read our analyst's original report.
With new management estimates in Canada now fully dependent on strong store growth in Ontario and a successful rollout of Cannabis 2.0, both of which we put little faith in, we think there could be another leg down in Canada. That next leg down will shake out many of the weaker operators (bankruptcy cycle looming?) as they run out of cash and can’t participate any longer.
We remain SHORT Aphria (APHA) and believe large operators in Canada will continue to be under pressure.
BLL | CMI
Click here to read our analyst's original report on Cummins (CMI).
In considering the question of why cyclicals have performed pretty well so far despite downward revisions in estimates, we come back to the view that “stabilization” did not. Perhaps the reason that our commercial services shorts worked on weakening outlooks or even just more defensive names like Ball (BLL), was positioning for a quick stabilization in industrial activity. Why sell Cummins (CMI) if industrial production is about to scream higher? Why own expensive defensive names if cyclicals are about to start working?
With 4Q19 the first new industrial contraction since mid-2015, we see increasing evidence of an inflection in that performance trend. Factor exposures, as well as a Quad 3 Macro backdrop, may well lead to some unusual dispersion within a sector where valuations already imply divergent outcomes. In all, we see a clear, if utterly counter-intuitive, set-up into the new year.
MDLA
Medallia (MDLA) reported 24% Y/Y billings growth but the math on deferred revenue, using calculated deferred revenue rather than reported, implies billings growth of 19% Y/Y, 500bps slower. The difference between calculated and reported DR? M&A. The billings increase is a decel on % terms but more importantly is a reduction on absolute terms as well.
The core is slowing. We remain firm in the Short.
AXP
Click here to read our analyst's original report.
Pricing pressure continues to mount on American Express' (AXP) 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.
SQ
We continue to discount the Square's (SQ) 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
We see Dine Brands (DIN) missing the current same-store sales estimate of -1.5%. The current estimate suggests a 200bps deceleration in same-store sales. On top of that, the street has the concept returning to positive same-store sales in 2H20, which is an unlikely scenario. Additionally, several third-party data providers are pointing to slowing trends for the Applebee’s brand.
CHEF
Chef’s Warehouse (CHEF) is an over-valued foodservice 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
Hedgeye Communications analyst Andrew Freedman recently released his newest short idea, Altice USA (ATUS). He is calling for 30 to 60% downside for the cable provider.
In addition to missing their Q3 numbers, guidance and what Freedman calls a “churn problem,” he includes additional color fortifying his short call in the clip above.
Freedman highlights a number of issues adversely affecting the company including:
- A recent spike in negative Better Business Bureau reviews
- A rise in reported employee dissatisfaction, and
- The outage-plagued rollout of Altice Mobile in September
Nope, not good.
“We’ve seen two to three times increase in the number of complaints filed and is reaching the number of Comcast, which is remarkable given that Comcast is about four to five times the size of Altice,” Freedman explains.
“It’s a disaster to launch any type of new product and have this type of negative reaction because word spreads like wildfire. I think it’s a big risk to the long term MVNO strategy in general.”
USAC
Fundamentally, the natural gas compression industry is unattractive. The market’s structure is highly competitive & fragmented, pricing is very sensitive to changes in natural gas production, and returns on invested capital are mid single-digits throughout commodity price cycles. Add in USA Compression Partners (USAC) high, fixed distribution payout (~12.5% yield), 5.8x leverage including the preferred units, and significant ongoing capital needs, the result is substantial cash burn even during cyclical upswings, as in 2018. At peak margins, peak pricing, and peak utilization USAC will do ~$400MM in EBITDA and have interest, preferred distribution, and LP distribution obligations of ~$375MM, leaving little flexibility in the model.
