Below are updates on our twenty-three current high-conviction long and short ideas. We have removed McDonald's (MCD) from the short side of Investing Ideas this week. We have also added Constellation Brands (STZ) to the long side and Shake Shake (SHAK) to the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
SFM
The gap between price and volume growth for groceries remained 4% for the second week in a row in the latest week, according to IRI. The gap was the widest it has been since the pandemic began, as seen in the following chart. Both vegetables and fruit drove the gap at 6.1% for vegetables and fruit at 1.7%. Faster growth in dollars over volume indicate better pricing trends for the grocers. The trend is a tailwind for Sprouts Farmers Market (SFM) that has a more extensive produce department than conventional grocers.
CHWY
Click here to read our analyst's original report for Chewy
Tractor supply reported earnings this week. During the conference call management noted high pet adoption rates and commentary around the elevated demand in pet spend remains bullish for the category.
The company stated, “a lot of efforts are going in place, whether it be on our pet supplies resets and continue to make sure that we have the product there as we're seeing these record adoption rates. The pet supplies business just showed incredible strength in the quarter. And we're continuing to see that strength.”
We think this is bullish for continued strength in near term trends for Chewy (CHWY) as the category is growing strong while accelerating the shift to online.
NOMD
Click here to read our analyst's original report for Nomad Foods.
U.K. grocery sales grew 16.9% for the past 12 weeks ended July 12. Over the most recent four-week period, grocery sales increased by 14.6%, decelerating from 18.9% in the previous four-week period. Traffic was still 15% lower during the past four weeks, while the average basket was 35% higher. Off-premise alcohol sales were up 41% in the more recent month despite restaurants and pubs re-opening.
According to Nielsen, online grocery now accounts for 14% of spend in the U.K. Grocery inflation for the most recent month was 4.0% compared to 3.6% for the 12 weeks. The U.K. is Nomad Foods' (NOMD) largest market at 31% of sales.
ZM
Before COVID, Zoom (ZM) averaged $180 of RPO Billings per transaction and $140 of Billings per Transaction. After the impact of COVID on the business ZM averaged $93 of RPO Billings and $76 of Billings per Transaction. Net, our work leads us to see that Billings and RPO Billings may ~2x from F1Q21 to F2Q21.
ZM remains a Hedgeye Technology Best Idea Long.
NLS
In our latest consumer surveys we have seen a resurgence in concern over the virus. We think there is a good chance this continues into the fall, and as weather gets colder and we approach holiday selling season, we suspect that home fitness equipment will be one of the main big ticket items on the shopping lists of middle America.
That means sales outperformance with street expectations up at up 5% YY for 4Q. Google interest on NLS’s key brands remains elevated, so the demand does not appear to have reverted back to pre covid levels, so as long as Nautilus (NLS) can get the product through the supply chain, we expect sales and earnings beats for the foreseeable future.
ONEM
On our 3Q20 Themes Call this past Monday, we updated our trackers and app download data which continue to support the long thesis. One Medical (ONEM) has been a quintessential part of its users’ wellness concerns and the distribution of correct and timely information throughout the COVID-19 pandemic.
The company’s telehealth platform and efficient appointment scheduling system will remain an attractive option to potential patients who are seeking a mix of telehealth and in-person primary care alternatives.
We expect ONEM will have a good 2Q20 print driven by higher activation rates and claims per member. Based on One Medical’s success, we anticipate other platforms with similar business models such as soon to IPO, Oak Street Health, will come into the space. We remain Long ONEM in the Hedgeye Health Care Position Monitor.
DLTR
Changing of the guard at Dollar Tree (DLTR), with CEO Gary Philbin retiring after becoming CEO in 2017 (he joined DLTR in 2001). Only 60 years old…still youngish to retire. Michael Witynski has been promoted to the CEO slot. He joined the Tree in 2010 as SVP stores and was promoted in ’17 as President and COO of Dollar Tree stores. Most recently he worked as enterprise president (i.e. the cross brand head).
The biggest question for me is how politically invested he is in breaking the buck at Dollar Tree – that’s the call here. It is the single greatest strategic move for outsized value creation amongst the major retailers, and he oversaw the test in his former role.
Overall we think the change is likely to be a positive catalyst both for the breaking of the buck and the organization as a whole. Also this week we saw some sales updates from DLTR competitors that were positive suggesting the industry is still seeing elevated demand/sales trends.
STZ
Hedgeye CEO Keith McCullough added Constellation Brands (STZ) to the long side of Investing Ideas this week. Below is a brief note.
Pretty slow volume day with the VIX < 26 and VXN < 33 is bullish for Tech Beta, until it isn't (Tech is a long in #Quad3).
In the meantime, we keep getting names that we like at the low-end of their respective Risk Ranges for whatever reason doesn't really matter to me!
On buying Constellation Brands (STZ) on sale -2% today, here's a summary excerpt from Consumables Team (Penney and Biolsi) on why we still like the name, fundamentally, here:
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"The combination of current depletion trends continuing to be healthy and affirmation of Mexican production resuming in June was well received by investors. The upside to margins was a positive surprise, but the marketing spend for beer was just delayed to when the investment is better spent. We continue to see Constellation Brands outperforming from here as shipments resume and the many concerns that were an overhang on the stock a couple of months ago continuing to recede." |
MAR & HLT
Click here to read our analyst's original report for Marriott.
Again hitting on a major theme of ours – business travel. Updated survey results per MMGY’s monthly “Travel Intentions Pulse Survey” (TIPS) suggests that intent for travel among business travelers is back to its lows last seen in May. There’s still an elevated level of interest in leisure travel among US citizens that had been active travelers prior to the Covid-19 outbreak, but the “net” intent did slow a little there, too.
We have been active in recent weeks about this discussion of business vs leisure travel, and particularly examining the potentially structural changes in store for corporate transient demand – these survey results via MMGY continue to be more proof of what we have been seeing and hearing elsewhere.
We remain very skeptical of the corporate travel demand recovery, and the best way to express this continues to be via core C-Corp short Marriott (MAR) as well as Hilton (HLT).
ATUS
Click here to read our analyst's original report.
Altice (ATUS) completed its small acquisition of Service Electric Cable T.V. of New Jersey earlier this week for $150M. The acquisition is expected to contribute between $45 - $50M in revenue a year, and was originally announced in February 2020. ATUS is scheduled to report earnings on 7/30 and we expect them to update their guidance for the most recent deal. We will be updating our service trackers for Altice next week and will have more detail to share in next week’s update. However, we would remind investors that Q2 was the most difficult revenue and EBITDA comparison for ATUS prior to COVID.
DFS
Discover's (DFS) card portfolio, despite record low household leverage amid a historically favorable labor environment, had already been deteriorating going into the COVID-19 cliff.
As we have highlighted in our past work, we observed this downward credit trend to be a result of greater late-cycle subprime exposure brought on by adverse selection and masked by an inflationary FICO score phenomenon, starkly contrasting the company's behavior in the last downturn when it was shedding risk steadily in the years leading up to the crisis.
SYF
We continue to hold the view that private label card operators are in a curious position relative to their general purpose counterparts due to the risk-sharing and economics-splitting nature of these relationships.
On the one hand, these arrangements serve to insulate the issuer, but on the other hand, this risk-sharing may catalyze a liquidity event on the part of certain retail partners. This past quarter, retailer share arrangements decreased -$86 million, or -10%, to $773 million, reflecting the initial impact of COVID-19 on program performance.
Accordingly, with both private label and considerable subprime consumer credit exposure, Synchrony Financial (SYF) is on the front lines of this COVID-19 downturn and we continue to keep it on as a Best Idea Short.
SYY
In Yelp’s Economic Average report this week it said 60% of the 26,160 temporarily closed restaurants on the site as of July are now permanently shut. Temporary closures are dropping and permanent shutdowns are increasing.
Yelp’s previous report in April found that more than 175,000 total businesses were closed in some capacity. Just under 25% of those closed businesses have reopened three months later. Yelp noted a 23% increase in permanent restaurant closures from only a month ago.
Bars and clubs are closing at higher rates, 44% in July. Cities with large tourism businesses like Honolulu, San Francisco, and Las Vegas were seeing the highest rate of closures. Independent restaurants are still struggling. This is not good news for Sysco (SYY) whose most profitable customers are independent restaurants.
GOLF
Click here to read our retail analyst's original report.
Temporary Coverage Restriction Notice – Acushnet Company (GOLF)
From time to time, during the ordinary course of conducting our investing research, circumstances or events outside our control can cause us to temporarily restrict or halt our research coverage of a specific security. It’s inconvenient for Hedgeye analysts and our subscribers.
But we believe it is the appropriate and ethical way to conduct business.
Please be advised that Coverage of Acushnet Company (Ticker: GOLF) has been temporary halted at this time. We hope to resume coverage soon. Unfortunately, we cannot comment further and are unaware of exactly when we will be able to resume coverage.
BYD
There has been a lot of talk about pent up demand as the regional casino markets reopened in May and June. Indeed, as part of their disclosure as they closed their merger, CZR and ERI both disclosed some pretty impressive numbers – top line and EBITDA – from recently opened properties.
Our findings are mixed. Roughly half of the states that allowed their casinos to reopen experienced some sort of pent up demand while the others saw demand decline. Moreover, the evidence suggests the pent up demand was short lived – month 2 (June) fared much worse for all the casinos that opened in May. Our conclusion is that pent up demand will not be much of a topic going forward as casinos face recurring obstacles such as capacity restrictions, high unemployment, and an aged customer base that may be uncomfortable in crowds.
We continue with a negative thesis on Boyd Gaming (BYD).
AXP
Given its exposure to T&E spending due to the travel-heavy appeal of its card products, we think the American Express (AXP) top-line will likely be impaired long-beyond a basic resumption of activity, as evidenced by the very slow recovery in T&E billings.
Marred by a deteriorating merchant value proposition and staring down the double barrel of depressed payments volume and rising credit risk, we continue to see asymmetric downside in the shares of American Express and are thus continue the short.
IFF
International Flavors & Fragrances (IFF) may look defensive, but it isn’t. We continue to expect shares of IFF to be disproportionately impacted by the current pandemic and expect greater that 40% relative downside.
Incremental data and field work have increased our confidence in the bear thesis. We have assumed that investors would see the N&B deal as a bit desperate - faddish assets pursued to paper over the troubled Frutarom deal. IFF may look defensive, but it isn’t. Mature, ‘seasoned’ business lines have trended flat to down, while poor capital allocation aimed at offsetting core trends have likely destroyed billions in shareholder value
ZI
Some of the other negatives we have to know include the non-software roots of ZoomInfo (ZI). The “research” team at DiscoverOrg was not building software. They were cold-calling companies pretending to have a research project and taking notes on the org chart, key titles + responsibilities, and contact information.
On the + side, ~40% of the business comes from US software companies - i.e. the traditional early adopters of the best tools and tech - contrary to companies throwing around "digital transformation" to create fomo induced buying from old + losing market players.
The net is we believe the company has tail risks on the business model, that its current growth rate incorporates a re-pricing period that is not reflective of adoption demand, that S-1 data points themselves point to a period of steep churn in 2019, and other elements wherein we remain convicted on our ZI Short.
Remain Short.
LYV
In 2019, approximately 220 million fee-bearing tickets were sold on the Ticketmaster platform representing a gross-transaction-value (GTV) of $20.7 billion across music, sporting, and live theatre events. We believe the supply and demand for events will be slow to recover in 2021.
In the case of sports, for example, many leagues have planned their return but on a condition of no fans in the seats. We believe consensus estimates reflect inorganic growth that is unlikely to materialize given balance sheet restrictions that limit LYV's ability to do deals. Live Nation (LYV) has also been active in rolling up the fragmented promoter industry, with a 38% share of gross ticket sales in 2019 among the top 100 promoters worldwide.
DIS
Disney (DIS) reopened Disney World in Florida in the last week with limited capacity. However, with the number of COVID cases accelerating in Florida, we question how long it may be until another shutdown. We would note that just as U.S. theme parks were reopened this week, Hong Kong Disneyland closed again on 7/13 after a spike in COVID cases.
We continue see risk/reward skewed to the downside as parks continue to operate at limited capacity and theatrical releases remain on pause. Meanwhile, production delays due to COVID are delaying the highly anticipated August release of ‘Falcon & the Winter Solider’ on Disney+.
KSS
An interesting story coming out of Ridgefield CT for Kohl's (KSS). Ridgefield’s large Kohl’s store will be giving some space back to the its landlord for other use. The Kohls will be going from 102k sqft to 75-78k sqft. What will fill the space? A Homegoods!
We have to think this came about with recent rent negotiations with landlords. The landlord asked for some space back as part of the deal for rent reductions/concessions, but we imagine KSS didn’t give up the space knowing a home competitor would be taking it.
It’s also giving up the space between itself and neighbor traffic driver Stop and Shop. So Kohl’s has to hope a lot of shoppers want to buy food and apparel, home and apparel, or food, home and apparel in a given trip, but not just food and home. Otherwise it will be losing traffic to the Homegoods.
KSS has operated for years with a long duration, aggressive lease strategy on oversized stores. That means as KSS is now pressured it will be hard to negotiate lease conditions that will make KSS better off in terms of costs and competitive position.
SHAK
Hedgeye CEO Keith McCullough added Shake Shack (SHAK) to the short side of Investing Ideas this week. Below is a brief note.
Looking to re-short a great short that's up this morning on no volume? Enter Howard Penney's Shake Shack (SHAK) short idea.
Here's what Consumer Staples analyst Howard Penney wrote about the SHAK (a lot higher) in FEB:
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Takeaway: SHAK is on the Hedgeye Best Idea list a SHORT To be LONG SHAK today means you like aggressive unit growth. If you are short SHAK, you are short because of the aggressive unit growth and appreciate the complexity that comes with this strategy. In the end, complexity is the silent killer of growth, and those issues are apparent at SHAK. Outside of aggressive unit growth, there are zero reasons to be LONG SHAK. SHAK is aggressively (poorly) run, low margin, low return, high multiple company. |
