Below are updates on our ten current high-conviction long and short ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
AMN
Click here to read our analyst's original report.
As the economy grapples with COVID-19, the storm path for Hospitals will cut through job losses, declines in the insured medical consumer population, bad debt increases, and a deterioration in the mix of private pay. While "social distancing" may include avoiding visiting physician offices and hospitals, the young and healthy and least at risk of a severe COVID-19 infection are working from home, concerned about losing their job, and more likely to pull forward medical consumption than before.
Our forecast tools will allow us to track the impact of COVID-19 at both the macro and company level. The shutting in of demand will be apparent across a number of series we track.The AMN Healthcare (AMN) Trackers will update as the underlying independent variables update throughout the months to come, in addition to other time series that will indicate current levels of demand.
MAR
Click here to read our analyst's original report.
As a follow up to the RevPAR drawdown topic we put together yesterday, we had fielded a few requests about how the hotel stocks fared during the last few downturns and how fast they began to bottom and front run a recovery. We provide the details below. Note, this cycle will be different, especially given the drastic and swift nature of the current sell off, and the fact that RevPAR growth had already been in a 0-1% growth range. With the hotel stocks down anywhere from 40-60%, we’re getting closer to the drawdown range that we've seen in prior cycles. That said, with little data to go by so far, it’s hard to predict how bad the RevPAR declines could actually wind up getting. We’re staying cautious on the hotels for now.
- ’90-’91 Recession – Took RevPAR growth about ~8 months to bottom, and the stocks (HST as proxy) bottomed about ~4 months ahead of that RevPAR growth bottom forming
- 9/11 - 2001 Recession – Took RevPAR growth about ~6 months to bottom, and the stocks (Marriott MAR as a proxy) ended up bottoming at the same time. Stocks then MAR faded in 2002 when the recovery proved to be anemic. MAR then bottomed a 2 months before RevPAR re-bottomed.
- 2008 - 2009 Recession – Took RevPAR growth about ~15 months to bottom, and the stocks (MAR as a proxy) ended up bottoming ~3.5 months ahead of that RevPAR growth bottom forming.
CMI
Click here to read our analyst's original report.
It is hard to get good work completed with so much market noise; some ideas play out while we are working on them. Volatility takes a toll. As this virus got started, and even now, many investors argue about whether the coronavirus is *actually* so dangerous or worthy of containment costs.
The presidential address and the extreme measures taken to contain the virus confirm that society will treat COVID-19 as radioactive. Period – at least for now. The data we have suggest it is a very serious contagion; bulls rely on an unquantified number of undiagnosed to lower the mortality to more flu like levels. If true, the unseen isn’t what will justify containment policies. To follow the data on mortality, one would look at deaths/resolved cases [deaths/(recovered + deaths)]. With only ~67,000 recovered and ~4,400 deaths, it isn’t reasonable to expect public health officials to let it go. As testing ramps in the US, case counts are likely to continue to rise exponentially. The uncertainty created by not testing may be worse. The impact on everything may be somewhat prolonged – at least until some viable treatment becomes widely available.
When is that? Remdesivir trial results should be available in late April. If it works, markets might start to factor in a resolution, although it would take a while for any drug production and distribution to scale up. If it doesn’t work or the virus mutates, or the safety profile doesn’t work etc.? For the moment, we’ll hope science produces results.
As we enter pre-announcement season ahead of an ugly 2Q20 demand environment, we reiterate that second order effects of the coronavirus and economic deceleration extend to cycle specific industries like education and transportation, leaving previous ‘safe spaces’ potentially toxic.
We reiterate our short call on Cummins (CMI).
MDLA
Medallia’s (MDLA) data shows no recent noticeable customer adoption signals in the key medium to large size company categories. But we are tracking the ongoing MDLA M&A, now at ~$110MM cash outlay LTM resulting in $15MM+ acquired subscription revenue.
CEO suggests that Coronavirus won’t affect the implementation or sales process of the Medallia product because most of it can be done remotely
His suggestion runs counter to our research and field notes indicating that the core Medallia product is high-touch and deeply integrated with back-end systems. If correct, perhaps the CEO’s comment shows MDLA’s shift to selling lower value, un-integrated products to smaller companies, as well as M&A based revenue which does not require core Medallia integration expertise
Also, MDLA revenue skews heavily to USA (76% of revenue in NA and increasing) which suggests that MDLA has not yet seen the negative impacts of Corona in its results
We stay firm with our short thesis.
SQ
We continue to discount 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.
ATUS
Click here to read our analyst's original report.
For Altice (ATUS), we expect Pay-TV declines to accelerate through the 1H20 and also weigh on broadband subs. With 60-65% of the Optimum footprint bundled with video/broadband/phone, a cord-cutting decision increases the probability of an outright customer loss. The risk is higher in markets where they compete with Verizon (VZ), who recently began offering Fios internet and video unbundled w/no contracts.
The most recent data updates (as of 2/7) suggest the problems at ATUS have not gotten better. The number of complaints filed with the Better Business Bureau (BBB) ticked up slightly in December 2019, which runs counter to management's "back to normal" commentary. In fact, the number of BBB complaints and negative reviews remains elevated so far in 2020. Meanwhile, the number of reported outages/service problems at Suddenlink and Optimum continues to increase in size and frequency. Finally, the NPS for "employee compensation" and "views of senior management" continue to remain depressed and well below peers.
DFS
Discover Financial (DFS) total revenue of $2.94 billion grew +5% y/y, missing street expectations by -33 bps. The top-line miss was driven by a -82 bp disappointment in net interest income, which totaled $2.42B for the quarter and registered +5% higher y/y, attributable to +6% loan growth offset by NIM compression. Non-interest revenues of $520 were up +3% y/y and beat estimates by +1.5%; however, with net discount revenues essentially flat y/y due to higher rewards costs, the increase and beat were fueled by a +14% increase in loan fee income, reflecting increased late fees driven by greater incidence and pricing adjustments.
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.
SYF
While contract extensions with major store parents are in place, we draw on the experienced insights of the Hedgeye Retail Team to cast serious shadow on the outlook for some of Synchrony Financial's (SYF) major brick and mortar partners like JCPenney and GAP; A reminder of late-cycle realities: elevated loan loss rates, increased defaults, higher credit costs, slower loan growth, and highly sensitized investor sentiment to the consumer finance space amid deteriorating economic conditions.
SYF has high sell side ratings combined with low levels of short interest which historically have translated to underperformance according to our proprietary scoring system. With the Hedgeye Macro Team firmly positioned in Quad 4, we highlight SYF's abysmal record under an economic regime characterized by decelerating growth and inflation.
We stay firm with our short thesis.
PYPL
- Total payment volume growth decelerated -500 bps and -309 bps to +22% and +21.85% on a current and constant currency basis, respectively
- PayPal (PYPL) Management attributes the slowdown in TPV growth to lapping of 2018 acquisitions of iZettle and Hyperwallet, as well as the phasing out of eBay marketplace volume; however, on the former, it is simply time to pay the piper as TPV growth returns to the decelerating trend prior to disruption from the aforementioned acquisitions, whereas on the latter, management seemed to lean much more heavily on the eBay crutch than it had in prior quarters
BABA
We had already seen some kinks in Alibaba's (BABA) seemingly impenetrable armor before COVID-19 but the virus greatly amplified the risks ahead for BABA. Sellside is complacent, and consensus calls for a V-shaped recovery in China beginning in March/April. We believe the recovery process will take longer. Even if the virus is contained and demand & supply conditions are normalized, Alibaba will face more difficulties than its peers.
We have finalized our February proprietary GMV data for the Taobao and Tmall platforms. We disclosed preliminary figures in our BABA Short presentation and the results look ugly. We believe the Street is underestimating the damage caused by COVID-19 for BABA. In addition, we argue the March/April 'recovery' is far from a V-shaped one and demand will normalize to a lower growth level for BABA.
