Investing Ideas Newsletter - 03.15.2018 just trust my gut cartoon  1

Below are updates on our fourteen current high-conviction long and short ideas. Please note we have added Fastenal (FAST) and Discover (DFS) to the short side of Investing Ideas. We have also removed Canadian Natural Resources (CNQ) from the long side of Investing Ideas, along with American Express (AXP), and Ball Corporation (BLL) from the short side . We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.


Click here to read our analyst's original report.

AMN Healthcare Services (AMN) continues to be an excellent long position for the Hedgeye Health Care team as we move from 2019 into 2020. For this top 3 position in our Healthcare team's position monitor, we draw our edge from the extensive health care labor demand data we routinely track, analyze, and release to clients. Through this math- driven approach, we are able to gain key insights on the current state of the U.S. Medical Economy and the particular themes pertaining to health care staffing companies.

Going into February, we have minded the same process, updating our AMN Tracker and Labor Demand Chartbook with every new release. We remain long the favorable trends which have driven AMN to this point.


Click here to read the our analyst's original report

Disney (DIS) continues to scale Disney+ 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.


Guardant Health (GH) remains a key favorite of our Healthcare team's since beginning our deep dive into the world of genetic testing labs. Finally, we are seeing the adoption rates and interest in genetic testing that many in the health care industry have expected for years. For this reason, our team continues to utilize our proprietary data sources to maintain a wealth of claims information for the struggle of power between market share leaders and new entrants looking to challenge them.


BKNG is not fully immune from any Coronavirus fall out.  We estimate that their direct exposure to China and the broader outbound consumer is in the range of 6-8% of their total business, and investors should recall that much of the China outbound business has actually been somewhat of a headwind over the last 18 months (China Trade War, travelers trading down to lower ADR markets, etc), so the incremental impact may not be as bad as feared.  Additionally, BKNG could benefit from from a rebounding EU economy (vast majority of their business), potential share gains in the US, and then also the robust growth out of the alternative accommodation space.

For context, the Ebola virus drawdown in 2014 showed the OTA stocks fall -13%, which compares to the current drawdown of -6%.


Given the CV of the CEO, and the capital the company is attracting, there will be no stopping Luckin (LK) any time soon.  As Starbucks will tell you, the potential for the coffee market in China is tremendous and they are creating a path for new competition in the market.  The “year-old” company recently raised $150 million in fresh funding, upping its valuation to over $2.9 billion.  It appears that Luckin did not happen by accident, and now celebrity CEO Qian Zhiya (Jenny) has been able to attract a tremendous amount of venture capital to support the company’s growth.

In summary, higher-end stores with expensive decor and hand-crafted beverages/bakery and fat margins, will likely suffer with the data centric competitor trying to reverse engineer the coffee experience.


Click here to read our analyst's original report.

Marriott's (MAR) 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.   


Click here to read our analyst's original report.

More bad news out of Asia this week for Canada Goose (GOOS). Hong Kong will reduce cross border traffic with the rest of China as it adopts tougher measures to contain the spread of the Wuhan coronavirus. Two railways will be shut down and new visas will be suspended for mainland tourists. Flights will be cut by half and cross-border bus services will also be reduced. Hong Kong currently has eight known cases of the virus, but the actions will have a significant impact on tourist spending in the City which has already been slashed due to the ongoing protests.

Canada Goose has two stores in Hong Kong and three on the mainland. Combined China represents nearly a quarter of the company’s store base. E-commerce should benefit as less people visit stores in China, but consumers may be less interested in an outerwear “investment” if they are limiting their trips outside to necessities. 

This is a problem given the company’s guidance indicated very strong DTC sales within the plan and inventories to support it.  We think we’ll see revenue and/or margin issues in the next couple quarters because of the mismatch between inventories and end demand.


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 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. 


Medallia (MDLA) reported that the largest retailer in the world with 1.5MM employees took the employee experience module and has grown their account with MDLA by 400% in the last year as they start to migrate to bigger modules. A few problems with this example. If the dollars are material, and we can all make our estimates, then if you back out the 400% growth from one customer it implies all other customers would have had an NRR somewhere lower than the reported 118%.

For example, if the retailer (clearly Walmart?) expanded from $1MM to $4MM ARR then the overall NRR x-this one deal was ~125bps lower than what was reported. If the dollars were immaterial, there are two problems. First, CEO shouldn’t be hyping up 400% increases if they are immaterial. Second, if the dollars are immaterial, it shows you customers don’t really value the employee experience module very highly, as a 1.5MM unit account – likely to be their largest ever in this zone – generates immaterial revenue.


Regarding the Cash App, total revenues hit $159M in 3Q19, up +115% Y/Y - growth that continues to be largely inspired by the launch of the company's zero cost rewards program in May of last year. While this program no doubt proved popular among the company's under-banked and young user base, we do not see the same momentum extending into older and more adequately banked segments of the population, especially given the increasing level of competition on rewards among the major card issuing players. Hence, the Cash App, now ~28% of adjusted revenues and ~50% of subscription-based revenues, will continue to struggle from a very difficult comp setup.

In response, Square (SQ) unveiled the addition of a fractional investing feature to the Cash App, enabling users to buy and sell divisible shares of domestic equities for as little as $1, all without charging a commission. Of course, the firm expects to lose money on this initiative with the ultimate goal of driving greater app engagement and usage, similar to the function of its existing Bitcoin offering. While it is no doubt a novel idea, we view the prospects for increased app engagement as highly limited for a number of reasons, including a limited target market, an offering that runs against conventional investing wisdom, and the existing plethora of low-to-no cost wealth management products available to individuals with investment goals. 


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.  

with a further outlook into 2020, 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.


Click here to read our analyst's original report. 

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.

In addition to missing their Q3 numbers, guidance a “churn problem,” 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.


Hedgeye CEO Keith McCullough added Fastenal (FAST) to the short side of Investing Ideas this week. Below is a brief note.

Looking to tighten up your net exposure to the US Equity market? You obviously do that by adding shorts. We have plenty of shorts. I was just waiting for a 2-day bounce to lower-highs.

One of Jay Van Sciver's fav cyclical shorts remains Fastenal (FAST). The stock obviously didn't enjoy the most recent earnings report. Nothing fundamentally has improved since.


Hedgeye CEO Keith McCullough added Discover (DFS) to the short side of Investing Ideas this week. Below is a brief note.

Discover (DFS) had a terrible quarter (probably because, unlike some of their peers, they told the truth about the US consumer slowing)...

Here's an important excerpt from Financials analyst Josh Steiner's take on the DFS bad debt cycle:

On the earnings call, while addressing the subject of credit, CFO John Green previewed the company's forthcoming 10-K disclosure on troubled debt restructurings, with credit card TDRs up +$1.1B or +48% y/y to $3.4B as of December 31, 2019. Combining the 2019 and 2018 ending balances, average TDRs for the year were $2.85B - a near tripling of the $1.0B figure in 2016.