Below are updates on our sixteen current high-conviction long and short ideas. We have removed Teladoc (TDOC) from the long side along with Alibaba (BABA), PayPal (PYPL), Smartsheet (SMAR), and Square (SQ) from the short side. We have added Grocery Outlet (GO) to the long side along with Sysco (SYY) and Acushnet Holdings (GOLF) to the short side of Investing Ideas. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
KR
C+R conducted a survey of 2,012 consumers in late March to measure how their shopping behavior and budgets have changed. 73% said they were making fewer trips to the grocery store down from an average of 2.3 visits per week to 1. Kroger (KR) recently said consumers rarely visit anymore to pick up the night’s dinner. At the same time, the average weekly grocery spends increased from $159 pre-COVID-19 to $184. 44% of the respondents said they were using more restaurant delivery, meal kits, or grocery delivery. 60% said they had anxiety or were fearful when shopping at brick & mortar grocery stores. A survey conducted by the International Food Information Council in early April found that the #1 concern from food shoppers was the health of other shoppers (42%). The majority of consumers are clearly not looking to visit grocery stores unnecessarily.
Yet CNN published an article on Sunday titled “Experts say it may be time for grocery stores to ban customers from coming inside because of COVID-19.” The experts cited turn out to be union officials, some worker experts, and some small grocery owners. I would note that it would be near impossible for grocers to pick all the items for shoppers at current staffing levels, grocery delivery is already maxed out, and many stores do not have the digital capabilities to offer curbside pickup. The grocery store has become the most essential of stores in the current COVID-19 environment. It would seem that the grocers need to do more to make their customers feel safer. Food retailers, including Kroger (KR), have cited the increased costs in the current environment to stock the shelves and keep employees and customers safe which are more difficult for the smaller grocers to keep up with.
The following chart depicts the local store closings, as reported by Womply (a CRM provider). The recent acceleration in the closing of food & beverage stores from 9% closed on April 11 to 27% on April 16 is notable. Grocers are considered essential businesses in every state. We have heard about the increasingly difficult conditions for the small and independent grocers, and it appears to be causing more of them to close. The challenges with keeping employees safe are one of the most difficult for the operators. Inventory availability, employee absenteeism, increased costs for sanitizing and cleaning, and employees contracting COVID-19 are also contributing to the decision to close the store. The larger chains have many advantages in dealing with the challenges, but they also have a unionized workforce and have been scrambling to add employees.
SFM
Our weekly survey points to a slight deceleration in the percentage of consumers who are spending significantly more on groceries from 16% five weeks ago to 12% last week. At the same time, the percentage of consumers who are spending slightly more has increased from 31% to 34%. The combination of consumers spending more remains steady and likely points to consistently higher spending on food at home after the initial stocking up a trip that preceded the stay at home orders. The shift to more food spending at home will last longer than the current estimates imply and Sprouts Farmers Market (SFM) is one of the retailers that will benefit.
GO
Hedgeye CEO Keith McCullough added Grocery Outlet (GO) to the long side of Investing Ideas this week. Below is a brief note.
Wait on it... another Consumer Staples Long Idea from the Howard Penney/Daniel Biolsi combo, Grocery Outlet (GO).
Per their Institutional Research note on the name:
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This past week a private equity firm sold 2/3 of its remaining holding in Grocery Outlet. The secondary offering was upsized from 11.5M shares to 17.25M due to strong demand. That’s a bullish sign for the demand for the shares, but it did add more pressure on Thursday. By Friday the shares were higher than the offering price of $34. The company did not issue any shares in the offering. It was the third secondary since the company went public last year. Grocery Outlet's focus on extreme value consumables is well-positioned for the recessionary consumer spending environment we will be in. The company provided a financial update in conjunction with the offering and noted Q1 comps accelerated to 17.4% from 5.1% sequentially. So far in April with the initial pantry stockpiling behind us comps settled in at a high single digit increase. "Yesterday a holder of Grocery Outlet announced a secondary offering consisting of 10M shares plus an over-allotment of 1.5M. The shares are not primary. It was the company's third secondary offering since it went public last year. Grocery Outlet's focus on extreme value consumables is well-positioned for the recessionary consumer spending environment we will be in. The company provided a financial update in conjunction with the offering. Q1 comps accelerated to 17.4% from 5.1% sequentially. I see it due to the secondary being upsized from 10M plus 1.5M over-allotment to 15M plus 2.25M. That’s a bullish sign for the demand for the shares, but clearly would put more near term pressure. Also it’s non-primary shares, clearing out 2/3 of the PE firms holdings." |
MAR
Click here to read our analyst's original report.
March 2020 total construction pipeline showed little downside movement, in fact, the construction pipeline for the broader US was actually up 5.5% YoY. But judging by the internals of the total pipeline, we’d expect that could change in the coming months.
The current construction pipeline data is currently masking what it is likely coming down the pike, as projects that are in the “final planning” and “planning” stages, are already getting deferred and there was a noticeable spike in projects getting outright abandoned. Keep in mind, this is March data so it’s somewhat lagging and not reflective of the further degradation in fundamentals and access to financing in today’s environment.
Today’s weakness in the RevPAR environment will materially impact the pipeline over the next few months, which will then stress C-Corp NUG in 2021 and 2022. For reference, Marriott (MAR) saw its development pipeline drop by 30% peak to trough over the last downturn, and the industry faced a downturn of 55-60% peak to trough.
MAR remains a Best Idea Short, and in our view, is the best way to play our negative view of both NUG and RevPAR downturns.
CMI
Click here to read our analyst's original report.
Trucking for companies like Cummins (CMI) has been comparatively resilient in the pandemic, but April diesel consumption data points to sizeable declines mid-month. While shipments to grocery stores and big box retailers were strong in March, the broader downturn is just starting to influence the aggregate.Truck orders have remained weak, while production is curtailed on supply challenges, weaker orders, and COVID-19 related shutdowns. April orders are unlikely to pick-up if tonnage is starting to soften.
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.
ATUS
Click here to read our analyst's original report.
We updated our data trackers from the Better Business Bureau, Glassdoor.com and Downdetector.com. We spoke with the BBB and they expect a delay in processing consumer complaints. Meanwhile, the Net Promoter Score (NPS) for Altice (ATUS) compensation and benefits, and view of senior management continues to trend well below peers. In terms of network stability, the number of comments on downdetector.com suggests that the Suddenlink and Optimum networks are holding up well so far since the national emergency was declared on 3/13. Meanwhile, the Net Promoter Score (NPS) for ATUS compensation and benefits, and view of senior management continues to trend well below peers.
DFS
Discover (DFS) reported 1Q20 results, posting diluted EPS of -$0.25, down -112% y/y, driven by a +123% increase in provision for credit losses tied to the reserve build for the projected impact of COVID-19 related losses and CECL adoption.
Not dissimilar from its consumer lending peers, management is trying to focus investor attention on the company's performance during the last downturn, the magnitude and speed of fiscal stimulus, the degree of loan forbearance, and the acute nature of the overarching employment shock. Adding to this, Discover's management emphasized the improved quality of its current loan book evidenced by a lower share of the FICO sub-660 loans, along with mention of its superior liquidity, capital position, and low-cost funding stack. Those who accept this narrative see a stock trading just north of 1x tangible book value - albeit 50% greater than the all-time low of 0.5x reached during the last downturn - with considerable upside.
SYF
Synchrony Financial (SYF) reported 1Q20 results, posting diluted EPS of $0.45, down -72% y/y, driven by a +95% increase in provision for credit losses tied to the reserve build for the projected impact of COVID-19 related losses and CECL adoption.
Additionally, the company announced the suspension of ts remaining authorized share repurchase capacity of $366M in response to COVID-19 - an important development in light of the fact the company has repurchased ~25% of shares outstanding over the last few years.
We stay firm with our short thesis.
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
1Q20 revenue of $269-$272M represents growth of 33-35% YoY (compared to 46% YoY in Q4) and was in-line with consensus estimates (which have come down from $280.5M since February). Global ARPU growth in Q1 grinded to halt as incremental user growth continues to come from countries where Pinterest (PINS) doesn’t monetize and due to “weakness across nearly the entire advertising market”.
While management noted “record levels of engagement” in user activity in the last two weeks of March, PINS didn’t see a noticeable positive inflection in user growth in Q1 compared to more communication driven platforms like FB/TWTR. In fact, global user growth slowed modestly in Q1 on a YoY basis, and U.S. MAUs saw the slowest QoQ increase in Q1/Q4 in 3-years… which suggests that PINS continues to struggle to appeal to the male demo and scale even in a period of quarantine.
MCD
The real pain right now for McDonald’s (MCD) is in its International Operated segment. Several markets in the segment including France, Italy, Spain and the United Kingdom have closed all of their restaurants while others have limited operations with limited hours and/or capacity. McDonald’s consensus estimates are simply too high for the recovery period as consumers will remain hesitant to eat inside dining areas for more than just three months. Consumers will also have more options other than quick service drive thrus to choose from when quarantine restrictions are eased. As a reminder a "1% change in comparable sales for either the U.S. and or the International Operated segment would change annual diluted earnings per share by about $0.06 -$0.07.
ITW
Illinois Tool Works (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. Conglomerates tend to look as though diversification reduces cyclicality, but the current COVID-19 driven downturn is likely to prove unusually challenging for the majority of ITW’s end-markets. We see 30% relative downside in shares of ITW, a name that every few years gets re-rated as a mediocre, discounted conglomerate.
We remain firm the short thesis.
HLT
Long considered bullet proof with recent valuations commensurate with that view, the hotel brand asset light models of Hilton (HLT) are being put to the ultimate test. A bullet proof vest is useless against a head shot and the COVID-19 pandemic might be that gun pointed right at the face of unit growth. Certainly, the asset light vest partially deflects the RevPAR bullet vis a vis a hotel owner, but will unit growth provide the offset to RevPAR degradation?
Occupancy rates in the US could be bottoming at current levels and this past week showed some uptick. China's occupancy rates bottomed out (~10-12%) some 9 weeks ago, so the US could be on the slow path to recovery. As Europe begins to lift its more strict nationwide lock downs, we'd expect some recovery to start taking shape, but through last week, occupancy continued to make new lows in that region.
Continue the short.
SYY
Hedgeye CEO Keith McCullough added Sysco Corp (SYY) to the short side of Investing Ideas this week. Below is a brief note.
If you want to be a profitable short seller in a bear market, next to your #process you greatest asset should be patience...
Timing matters.
My first re-entry on the short side here isn't going to be a story stock that the crowd loves to chase (career risk management trades there!). It's going to be a boring food service short: Sysco Corp (SYY) that is up over +6% today on #decelerating volume.
Here's a recent Consumer Staples analyst Howard Penney summary thought on the name:
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“The Restaurant industry is effectively closed, and the analyst community will not adjust estimates for the big industry players. When the machines get the signal that forecasts for SYY are signaling a disaster, it will be a problem for the stock." |
GOLF
Hedgeye CEO Keith McCullough added Acushnet Holdings (GOLF) to the short side of Investing Ideas this week. Below is a brief note.
So... you're saying people aren't gobbling up ProVs?
Here's a good short everyone can understand (that's also bouncing to lower-highs on low-volume today). Retail analyst Jeremy McLean is our resident golf pro and bear on the stock.
Here's an excerpt from his recent Institutional Research note on the name (GOLF):
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The current expectation for GOLF’s sales in 2020 is down 1.3%. And EPS down 12%. With the US at 51% of sales, EMEA at 13%, and Japan at 12%, those sales and earnings expectations are wildly off from what will be reality. As a reference in 2009 ELY sales were down 15%, EBIT was down 125%. |
