Below are updates on our sixteen 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
AMN
Click here to read our analyst's original report.
Health Care employment growth began re-accelerating in September 2018. Heading into 2020, growth remains near recent highs at 2.5%, but is no longer accelerating. The lack of acceleration is not of immediate concern as it relates to US Medical Economy growth and utilization more broadly. Key constituents such as Diagnostic Imaging, Hospital, Physician Offices, and Laboratories all remain in a positive trend. Also, the AMN Healthcare (AMN) tracker is trending positively month over month and year over year.
CNQ
Click here to read our analyst's original report.
Canadian Natural Resources’ (CNQ) valuation is attractive. Current metrics are pricing in ~$40 WTI or $50 WTI with blown out differentials indefinitely. The dividend is safe, the yield is +4% relative to the S&P 500 at ~2%.
In our view, things cannot get much worse for CNQ and the current macro backdrop has created an opportunity to own one of the highest quality E&Ps in North America at its most compelling risk/reward in a decade.
DIS
Disney's (DIS) Disney+ continues to scale exponentially, with an estimated 18M (+/- 2M) U.S. subscribers per our 11/22 survey. Such strong adoption suggests a high paid conversion rate among the reported 10M+ "sign-ups" at launch on 11/12. While we expected Disney+ to launch with a bang, even we are surprised by the rapid pace of adoption. Our original estimate called for 15-30M Disney+ U.S. subscribers in Year 1, and the data suggests we breached the low-end of that estimate in under two-weeks post-launch.
The big test for Disney+ will be in F2Q20 after the hype surrounding the launch fades, and season 1 of "The Mandalorian" ended on 12/27. However, with only ~28% of U.S. Disney+ subscribers paying monthly, we believe retention will be higher than most expect.
GH
Guardant Health (GH) was one of the first few names our team highlighted when we began our thematic long thesis for genetic testing supplies and labs. While we see another health care active long, Illumina (ILMN), as the paramount opportunity in the space, our claims data pointed to revenue upside for GH heading into 3Q19. Complimentary to our view, Guardant did not disappoint posting a nearly $61 million total revenue number versus the Street’s $45.4 million expectation.
As evidenced by our initial success with this name, our team has continued to update and analyze new data and fundamentals as they become available. Our analysis shows that the correlation between revenue and enterprise value, and more specifically the expected change between these metrics, is the key fundamental driver of the GH share price. For a TAM story, a tight correlation to revenue should not be surprising. If consensus isn't wrong, forward estimate trends will resume an upward expansion, taking the shares with it.
MAR
Click here to read our analyst's original report.
On the surface, Marriott’s (MAR) Pipeline print is a solid one, and grew ahead of our expectations, but it’s curious to see that despite aggregate pipeline uptick, the construction pipeline barely budged, and MAR is likely to miss NUG targets in 2020. Even with the sequential uptick in aggregate pipeline, MAR continues to lag its peer set when measuring its pipeline against its existing base of rooms. The construction pipeline is what is most likely to drive NUG over the coming 2-3yrs, so movements in this bucket matter a great deal, and with it continuing to slow, we see no reason to think that MAR’s out year guidance for NUG is conservative.
GOOS
Click here to read our analyst's original report.
This week the International Fur Federation filed a federal lawsuit against the City and County of San Francisco over its ban on real fur products which took effect January 1. California passed a law in October to ban fur sales/production in the entire state of California starting Jan 2023. The bans themselves probably won’t be overly material to Canada Goose (GOOS), but it is important to note the way consumer sentiment is moving as the nature of its products could be limiting the TAM based on consumer preference. There are some copycat brands out there building on the fact that they do not use fur or down (ex. Save the Duck). We see GOOS as really being a single product company in terms of the current margin structure. Given the TAM constraints of that product, the growth targets seem too high. The company can expand into other categories to get the sales, but that would mean the margin expectations are too high. We think this mismatch of business growth and profit structure vs the expectations will be evident in the P&L over the next couple quarters.
APHA
Click here to read our analyst's original report.
Aphria (APHA) CEO Irwin Simon talks a lot about building a long-term sustainable company in the U.S. over the last 25 years. Hain Celestial, the company he built, was merely a roll-up story, that he eventually destroyed through cost cutting, lack of brand investment and an eventual dry up in the well of small fast-growing companies he could tack on top to maintain top-line growth profile.
We think the same will happen to his plan with APHA, but investors may have already figured it out given the “discount valuation,” APHA is likely going to be a supplier of raw materials to extraction and branding companies in the future.
CMI
Click here to read our analyst's original report.
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 (TNET, NSP, ROL) or even just more defensive names like 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 backlogs dropping and employment cuts, will capex cuts turn into something of a feedback loop? The backdrop isn’t like 2015/2016; the elevated comparisons created by tax reform and Chinese stimulus leave it more challenging. The drop in ISM readings has been sharper. Valuations are higher. No one knows how deep the cycle will be, but it has yet to stabilize in the data we see.
BLL
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 into 2020, 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).
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 and MDLA remains a Hedgeye Tech Best Ideas Short.
AXP
Click here to read our analyst's original report.
Consistent with our original short thesis, competitive pressures continue to drive American Express'(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.
Accordingly, American Express remains a Hedgeye Financials Best Ideas Short.
SQ
Square (SQ) issued adjusted revenue guidance for the fourth quarter of $571-$581, with FY19 guidance coming in at $2,095-$2,105. Management increased FY19 guidance, ex.Caviar, by +$35M and +$15M on the low-end and high-end of the previously given range, respectively. Relative to street expectations ahead of the print, the midpoint of management's new 4Q19 and FY19 guidance for the adjusted top-line of its core business (i.e. ex.Caviar) came in +2.4% and +0.8% higher, respectively.
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.
Longer term, the Applebee’s brand will continue to feel the pressure from changing consumer purchasing behavior, significant labor inflation and shortages that make operating traditional casual dining brands difficult. We think the long-term model of 2%-3% same-store sales and 2%-3% unit growth is an unlikely scenario.
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
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.
USAC
Click here to read the short USA Compression Partners (USAC) stock report that Energy analyst Al Richards sent Investing Ideas subscribers this week.
