Below are updates on our sixteen current high-conviction long and short ideas. We have added Teladoc (TDOC) and Kroger (KR) to the long side of Investing Ideas this week and McDonald's (MCD) and Illinois Tool Works (ITW). We also have removed AMN Healthcare (AMN) from the long side of Investing Ideas this week. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
tdoc
Hedgeye CEO Keith McCullough is adding Teladoc (TDOC) to the long side of Investing Ideas. Below is a brief note.
I guess people are selling one of our favorite Healthcare names, Teladoc (TDOC), today on hopes that the virus is over? Just #wow.
Here's an excerpt from Healthcare analyst Tom Tobin's recent Institutional Research note on the name:
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FLORIDA LOCKS IT DOWN, APP DOWNLOAD UPDATE Downloads of telemedicine apps continue to increase as the COVID-19 crisis continues to expand across the United States. The use of telemedicine has also been significantly helped by and the regulations being relaxed to allow greater use. Compared to January, March daily app downloads are up 200% to 300%. Florida is the latest state to issue orders to limit movement of state residents similar to restrictions in place elsewhere. We've also seen the entire Health Care delivery system turn to caring for COVID-19 patients, shutting down elective procedures and physician offices, leaving telemedicine the only way for patients to reach a physician. Based on our analysis of per capita ambulatory visits and Teladoc's membership, we estimate that there may be as many as ~28M ambulatory visits that could convert in 2Q20 from TDOC's membership, or 100x the number of app downloads over the last 30 days. We're obviously not modeling TDOC converts all of it, of course, but we do expect the app trend has significant headroom to add another 300,000 in April. |
KR
Hedgeye CEO Keith McCullough added Kroger (KR) to the long side of Investing Ideas. Below is a brief note.
I can't remember the last time I was net LONG (more longs than shorts in RTA), but that's what the signal says I should do, so I'm rolling with it...for now.
Krogering? KR is the new long idea in a Sector Style I like here (Consumer Staples) and its on sale -3.2% here today.
Here's a summary excerpt from Consumer Staples analysts Howard Penney and Daniel Biolsi's Institutional Research notes:
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More than half of Americans’ spending on food is outside the home. In 2010 coming out of the last recession, Americans spent more on food away from home for the first time. Through the combination of COVID-19 restrictions and the likely downturn, we are in the share of spending on food at home will reverse years of share loss. The restrictions on eating at restaurants and leaving your home have encouraged more Americans to cook than Julia Child could ever dream. Perhaps the biggest concern for the grocery industry before the coronavirus was the encroachment of Amazon and food delivery. With the long delays for orders and spiraling costs, the challengers have shown themselves not to be able to handle significant share gains. We think the tide turning will extend beyond the current quarter as consensus expects. |
MAR
Click here to read our analyst's original report.
We have had some follow up on our Hotel Asset Light call yesterday and there was particular focus on our Net Unit Growth scenario analysis which took into account varying levels of pipeline degradation + a deletion / attrition factor. For the latter toggle, we estimated that deletion/attrition activity could ramp up to ~2% at the high end of our estimate range. Too conservative? We thought it was a fair starting point, but we dug a little deeper after the call to confirm our views with a little more evidence. To do this, we took a look at Marriott (MAR) on a standalone basis (pre-HOT acquisition), which is probably our cleanest proxy for the Hotel C-Corp industry, we notice the following re: historical deletion %’s:
Long run deletion/attrition % is about ~1% per year, and that figure creeps up to about 1.4% for the years in and around downturns (chart below). Historically, deletions emerge at the beginning of the downturn in RevPAR, followed by a pickup as the recovery starts back up. The latter could be a function of owners trying to hold on as long as possible, but then are unable to meet standards which forces them out of the system. Given the heavier RevPAR declines and profit squeeze this cycle vs prior cycles, there will likely be a higher deletion/attrition %, but as an offset (at least early on) the brands could look to step up and provide more relief to those franchisees that are on the bubble (also not a positive). For now, a ~2% range on deletion/attrition is a reasonable starting point. Either way, when these assumptions are factored in with slower construction activity + less conversion TAM, NUG should be undergoing heavy pressure. Until the broader consensus realizes that the probable course ahead isn’t an immediate snap back in NUG, we’ll remain negatively biased towards the Hotel Asset Light model.
CMI
Click here to read our analyst's original report.
Estimates for Cummins (CMI) have moved little since the outbreak of the novel coronavirus in the US and Europe. Freight rates for trucks are broadly the lowest since 2017… who is out ordering trucks? Significant preannouncements are likely in the next few weeks. CMI is likely to have EPS less than $10 in 2020 vs. a $12 consensus, given energy, China, and North America truck exposure. Implied volatility remains very high for airlines, even after pre-announcements. Auto and oil related names have also seen notably increased volatility expectations priced in.
Insofar as the economy is turning more averse for cyclicals – a core part of themes deck that was evident in the data prior to coronavirus – being bearish on a cyclical business that is over-earning and correcting to the downside with long-term value creation challenges seems straightforward. CMI remains a top short idea for us.
MDLA
Medallia (MDLA) was once a pioneer in the voice-of-customer software industry but MDLA’s high professional services touch, complete enterprise back-end integration, and long time to value / long sales cycle, caused the company to fall behind as the market moved to pure software approaches, easy to use, low dollar, fast time to value, with consequently wider adoption. MDLA has not lost its perch serving large F100 enterprises but those organizations are also using a multitude of other solutions, and incremental customer capture at that level is an uneven phenomenon. We see ongoing organic deceleration for MDLA on dollars and % terms, partly offset by the new CEO spending ~$110MM on M&A in the last 12 months to purchase ~$15-20MM of incremental subscription revenue with acquired solutions unintegrated and delivered from companies that have never scaled.
SQ
Square (SQ) reported 4Q19 earnings with adjusted EBITDA of $119M and adjusted EPS $0.23, beating street estimates by +2.8% and $0.02, respectively.
Credit where credit is due, the company posted a strong quarter. Adjusted for the sale of Caviar on October 31st, 2019, gross profit increased +42%Y/Y, continuing the strength of the previous quarter.
Moreover, the company's subscription business, increasingly based in revenues from the Cash App, is performing well with expanding gross margins of 82%. Note, Cash App revenues have a 77% gross margin; however, Cash App revenues feature a transaction-based component and thus the margin on subscription and service-related revenues is even higher.
Nonetheless, GPV growth sequentially decelerated by -73 bps to +24.75% Y/Y, resuming a broader trend of deceleration after having briefly stabilized last quarter. Transaction-based revenue growth of +24.61% Y/Y, however, was up +1 bp sequentially owing to the effects of the company's November pricing change.
Despite shedding the lower margin Caviar business, adjusted EBITDA margin of 19.1% decreased -271 bps on a linked-quarter basis, in accordance with the company's prior guidance to ramp its sales & marketing spend to drive increased awareness of its seller business and the Cash App.
With growth in the core managed payments business continuing to slow, SQ's future is inextricably linked to the success of the Cash App.
ATUS
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. 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.
DFS
Discover Financial (DFS) 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.
Further down the p&l, expenses came in +7% higher y/y and +2.6% ahead of consensus estimates, with information processing and professional fees combining to produce negative operating leverage and catching the street off guard. The increase in the information processing and communications was driven by investments in infrastructure and analytic capabilities, while the higher professional fees were attributable to a higher level of recoveries stemming from the greatly expanded troubled debt restructuring.
Consistent with our original short thesis, we are seeing delinquencies continuing to tick upwards despite a still remarkably favorable labor backdrop, signifying the escalating risk profile of the underlying book, namely greater late-cycle subprime exposure - a stark contrast to the last downturn when Discover was shedding risk steadily in the years leading up to the crisis.
Accordingly, Discover Financial remains a Hedgeye Financials Best Ideas Short.
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
While PayPal's (PYPL) company's total take rate increased sequentially by +4 bps to +2.49%, it remains -9 bps lower y/y. The transaction expense rate, however, increased sequentially by +1 bp to 0.96%, +0.5 bps higher y/y as well.
Net transaction expenses, transaction & loan losses, and customer support & operations expense from the gross total take rate, we see a +3 bp sequential increase to 1.12%; however, on a y/y basis, we see a -8 bp decrease and the continuation of the downward trend in adjusted total transaction margin.
BABA
March was better than the disastrous February that we reported but there are still some pockets of weakness for Alibaba (BABA).
In Hedgeye's GMV database, we collect massive data on each of the e-commerce transactions. We track sales volume, sales in RMB, store count and product count on a daily basis.
Outside of Goddess Day promotions (March 5 & 8) and the Taobao Live Shopping Festival (March 21-27), apparel sales remain materially lower YoY. We estimate combined apparel sales (women's, men's, children) for the full month of March dropped mid-to-high single digits YoY, an improvement from the mid-teens decline seen in February
Shoe sales remain weak, down double digits. Sales of business services products and luggage/handbags continued its declines in March.
We remain short on the ticker.
SMAR
The question is: how far can Smartsheet (SMAR) take upsell if the Land in unit terms is fixed? Management is savvy. They see the end of the upsell road, and will push for more M&A as well as pivot to positive FCF. SMAR will exit FY21 with positive FCF on the way to ~$150MM FCF by FY25.
And that is assuming no change in the ability to add 150k new paid seats per year and to continue to increase past $1k incremental billings/seat. But if that is the ‘no interruption’ model (not from saturation or from COVID or from cycle or from competition) and that stock price is already something we have seen if you factor slower organic growth rates and share count dilution…then what is the ‘interruption’ model?
Continue the short.
FB
We see downside to Facebook (FB) 1H20 consensus growth estimates as the spread of COVID-19 weighs on global growth and pushes the U.S. deeper into #Quad4 in Q2.
We believe investors don't fully appreciate the cyclical nature of the business, with advertising budgets often the first to get cut in periods of weak demand.We went short FB on 3/5 with the view that advertising spend would be negatively impacted by COVID-19. Three weeks later, and we can confidently say that we were not bearish enough. We see a 30% downside from here. For 2020, our base case advertising revenue growth estimates for FB is -13% YoY.
PINS
As we discussed during our presentation last week, we expected Pinterest (PINS) to hold up better than the group in Q1 because of their limited (albeit growing) international exposure ( ~13% of sales vs. TWTR ~40% / SNAP ~30% / FB ~50%) as COVID-19 impacted Asia/Europe markets earlier in Q1 than U.S. And while revenue growth was still better than we anticipated in Q1, what matters most is Q2 and the rest of the year.
Brands and agencies have been scrambling to adjust their budgets and strategy in the last two weeks, and a consistent theme from our checks is that PINS/SNAP/TWTR are going to lose share of digital advertising budgets in Q2 and remainder of 2020. We continue to expect Q2 revenue growth for PINS to be (20-40%) YoY and (15-25%) YoY for 2020, although limited travel/restaurant exposure has us thinking the low-end is more reasonable. Yes… big range, but it is what it is given the situation.
MCD
Hedgeye CEO Keith McCullough added McDonald's (MCD) to the short side of Investing Ideas this week. Below is a brief note.
Since I covered all my US Equity Shorts on red last week, now I can start a new week with a fresh slate of SELL ideas. Between here and the top-end of my SPY Risk Range, I'll have plenty of them.
Here's a summary recap from Restaurants analyst Howard Penney's recent Institutional Research presentation on McDonalds (MCD):
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For decades the investment case for MCD that it was the largest landlord in the U.S.! It leases the land, the buildings, or both on a significant markup to over 13,000 restaurants in the U.S. and a good portion of the 36,000 restaurants internationally. Today the investment case for MCD is that it's the largest landlord in the world, and nobody can pay the rent! Not to mention that 15% of the company's units are closed globally, with the rest of the system operating on limited hours |
itw
Hedgeye CEO Keith McCullough added Illinois Tool Works (ITW) to the short side of Investing Ideas this week. Below is a brief note.
New one for you here with Industrials analyst Jay Van Sciver saying short Illinois Tool Works (ITW). Crazy low short interest in this name and, remember, I want to short what consensus still owns...
Here's a summary note from Jay on the downside:
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ITW looks to be at risk of a sizeable 2020 reset on consensus estimates, with very optimistic justifications focusing on bailout (‘cash for clunkers again’) and other stimulus measures. We see 30% relative downside in shares of ITW, a name that every few years gets re-rated as a mediocre, discounted conglomerate. We estimate the 2Q20 EPS will have a fun rate of roughly half current 2020 consensus. |
