Below are updates on our twenty-two current high-conviction long and short ideas. We have removed Kohl's (KSS), MGM Resorts (MGM) & Sysco (SYY) from the short side and added Insperity (NSP) to the 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.
SFM
Click here to read our analyst's original report for Sprouts Farmers Market
Fresh produce demand grew 10% YOY in the week ended August 9, accelerating 1% from the previous week as seen in the following chart. Fresh vegetables demand decelerated 1% to 13% in the week ended August 9. Fresh vegetables indicate cooking at home, which remains elevated.
Fresh produce is a key traffic driver for Sprouts Farmers Market (SFM). The company guided July SSS expectations to be up 9% YOY. Even though unemployed recipients of the additional $600/week in federal support are now eligible for food stamp benefits, food purchases have decelerated with the expiration of the extra benefits. Home meal consumption continues to be elevated and trends continue to be supportive of sales trends above consensus expectations in Q3.
CHWY
Click here to read our analyst's original report for Chewy
One of the reasons we like Chewy (CHWY) better than other names in retail is the resiliency of the pet category in tough economic times (which is what we think we have right now). As the chart or BEA data shows below Pet an Related Product PCE slowed but remained positive in the last 3 recessions.
With recent trends in pet ownership showing acceleration and spending per pet growing, we think the category is likely to continue growing in this tough consumer environment. That alongside continued shift to online for all consumer spending will help propel CHWY revenue at high growth rates.
NOMD
Click here to read our analyst's original report for Nomad Foods.
According to Kantar, UK grocery sales grew 14.4% in the 12 weeks ended August 9. Grocery sales in the latest four weeks grew at the slowest rate since February, but remain elevated. August's update was slightly less than the July's update of 14.6% growth over the previous 12 weeks.
Despite the slight deceleration, online sales growth continued to be robust at 13.5% of all grocery sales. Shopping trips took a dip in the week following a face-covering rule in England and Scotland. UK shoppers were making 14 shopping trips each month per household, fewer than July but more than April or May.
Traffic may continue to slow with a new government plan aiming to encourage citizens to eat out in August. The UK government's "Eat out to help out" initiative led to 10.5M meals in the first week.
The initiative refunds restaurant goers a 50% discount up to £10 per person for meals consumed at participating restaurants on Monday through Wednesdays in August. The UK is Nomad Food's (NOMD) largest country by sales, representing 31% of overall sales. Nomad’s modified Dutch tender offer for $500M of its own shares continues until September 9.
ZM
We can theoretically argue peak as much as we want but as long as ZM is making higher highs in billings we aren't there. We were hoping to hear more about the success of Zoom (ZM) phone but it seems at this point the company is just trying to manage the demand in core meetings before dedicating resources or attention to what comes next. Stellar results and momentum + ongoing increases in pace of billings + heavy conservatism in guidance + a future product with revenue potential as great as the first = buy.
ZM remains a Hedgeye Technology Best Idea Long.
NLS
Nautilus (NLS) stock was dragged down some this week around insider selling. It’s hard to blame insiders for selling some shares when a stock is up over 10x in less than 6 months and hitting highest level in about 2 years.
We still think 2H expectations are too low given elevated demand in the fitness space, moreso in 4Q than 3Q on current estimates. NLS should probably trade at 1x EV/sales at least, when its revenue and profits are growing like this, potentially much higher. But that multiple today is 0.8x. So we still see upside in both numbers and valuation from here.
ONEM
After the earnings call last week, One Medical (ONEM) experienced a large initial bounce followed by a stalling out period since. We believe this may be the result of the rest of the market waiting for a positive catalyst indicating validity to the impressive numbers the company posted on August 12. The “wait-and-see nature” of these holders may center around the prominent view during the height of the pandemic that ONEM was bought by those who missed out on TDOC, another Hedgeye Health Care long since October 2019. Supported by the app download data, provider tracker, and our conversations with experts in the field, we maintain a more bullish view.
Long before COVID became a regular talking point, One Medical had already attracted patients with their seamless integration of telemedicine and efficient in-person scheduling for primary care. Given that telemedicine is most likely to remain at a high level for this type of low acuity visit, ONEM should continue to grow its member base, corroborated by management’s addition of two new target markets on the most recent earnings call. We remain Long ONEM in the Hedgeye Health Care Position Monitor.
DLTR
Next Thursday the 27th, Dollar Tree (DLTR) prints 2Q EPS on the last big retail earnings day of the summer. We’re looking for $0.92 in EPS, which is in line with consensus. Coming out of 1Q we were about a nickel ahead of consensus, but the Street’s numbers have come up slightly. We’re looking for a reacceleration in comp sales at the core Dollar Tree concept (which now accounts for about 80% of combined EBIT) to +4%, from -0.9% in 1Q – which got dinged because it basically lost the Easter holiday given the then-sudden outbreak of Covid, which took aggregate EPS growth to -7%. We’re looking for an acceleration in earnings growth to 22% this quarter, with a bias to the upside.
Remember that coming out of 1Q the company saw a reacceleration in comps, and we think that – like WalMart – the impact of stimulus will push sales higher on the margin. The flip side is that WMT beat the quarter and the stock did not care. In fact we pulled it off our Best Idea, where it sat as a long, due to rising cost pressures during a time of mean-reversion in comps post-stimulus.
But WMT lacks the massive lever that exists at DLTR, which is breaking the buck in the core Dollar Tree concept, something we think the new CEO will pull sooner than later. Our math suggests that there is over $3.00 in EPS to be unlocked over a TAIL duration by breaking the buck, which is the most powerful tool imaginable in a Quad 3 stagflationary environment.
ZEN
COVID hurt Zendesk's (ZEN) 2Q. No surprise. The linearity of the quarter produced monthly results which showed extreme weakness at the start (via churn and contraction) and strength towards the exit. Management did not want to embrace better recent activities as they guided Q3 and preferred to marinate in the predictability of volatility.
Better customer count is a bright spot especially considering the company called out “significantly elevated” contraction and churn but still put up +10% y/y total customer growth (+2% q/q) and +5% y/y DBNER customer growth (+1% q/q), same as Q1.
FVAC
While investors are generally frustrated by the current equity market, we have to play the FOMO, retail-oriented, lax oversight, easy money fueled game in front of us. Fortress Value (FVAC) bridges that divide, by being both sensational – rare earths are inputs for electric cars, wind turbines, advanced sensors, robotics, and most everything else sci-fi – while also meeting reasonable investment process criteria. A few FVAC bullets:
- profitable ‘specialty chemical’ producer that is expected to serve very rapid demand growth
- facing only one mediocre ex-China competitor
- run by management of unusually high quality for sector
- backed by western government national defense interests
- trading at a discount to replacement cost, when above interests need domestic supply
NET
Cloudfare (NET) re-accelerated in our data and that translated to a re-accelerated 2Q with 3Q guidance. The next signal will be about 4Q-1Q21 which we will keep doing with our HT3 to make sure we capture but there is no change to our thoughts that NET is in a winning position with a winning business model.
NSP
Hedgeye CEO Keith McCullough is adding Insperity (NSP) to the long side of Investing Ideas. Below is a brief note.
You've had 2 days to buy things on sale. It sure beats chasing charts prior to selloffs!
After a great quarter for a Pandemic Long, Insperity (NSP) has corrected towards the low-end of its Risk Range.
Here's a summary excerpt from Industrials analyst Jay Van Sciver on a name he's had our Institutional Research clients in after going from Bear (last year) to Bull this year:
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"NSP is a ‘pandemic winner’ like FCN, TNET, FDX, and UPS, with NSP benefitting from lower workers comp and healthcare claims. PEO profit is a sliver of two much larger income statement items, with comparatively small moves driving large changes in net. With the top line holding up, costs are declining and margins expand." |
MAR & HLT
Click here to read our analyst's original report for Marriott.
Domestic hotel construction, which is a major component of the hotel C-Corp business model, has been in a state of slowdown even prior to Covid. With an awful industry backdrop and tougher lending standards, we believe the downturn in both the pipeline and new construction starts/spending will accelerate, thus further hurting Marriott (MAR) and Hilton (HLT).
The large C-Corps will push the conversion lever but it’s not as big as it was in the last downturn. Overall, a 2-3yr net unit growth slow down (similar to prior cycles) will be unavoidable in our view. As of today, we do not see this risk well reflected in estimates nor valuations.
DFS
Management is trying to focus investor attention on the company's performance during the last downturn, the magnitude and speed of fiscal stimulus, the success of loan forbearance programs, while hinting at the temporary nature of the overarching employment shock and seemingly expecting to see the delinquencies / charge-off curve pushed out further by another round of stimulus.
Adding to this, Discover (DFS) 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.
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 (SYF) is on the front lines of this COVID-19 downturn and we continue to keep it on as a Best Idea Short.
GOLF
Click here to read our retail analyst's original report.
Some recent negative developments on Acushnet Holdings (GOLF), the stock touched the post earnings lows this week and that comes about a week after one of the company Presidents logged a sizable open market stock sale. As we look at online resources it appears interest in golf and golf balls has fallen in the last couple weeks.
Perhaps this is a sign that golfers are seeing the season starting to come to a close. Also major golf tournaments are returning to TV, the PGA Championship was played, the Playoffs are underway, so it’s a time when big fans of the sport might enjoy allocating time to watching it as much or more than getting out and playing the game. Days are getting noticeably shorter, so that constrains absolute growth in rounds for the remainder of the year as well.
We continue to think that sales and earnings expectations and the implied multiple for GOLF are too high for what we think the actual earnings will be a very tough economic environment.
AXP
With net interest income accounting for only 22% of total revenue, American Express (AXP), unlike its consumer lending peers, faces the dual impact of massively depressed payments volume and ballooning credit risk. Whereas companies like SYF, COF, and DFS saw earnings eroded primarily as a result heightened provisioning, American Express, even after adjusting for its reserve build, is currently running at ~$0.91 of quarterly earnings power, down from $2.07 of quarterly earnings power in 2Q19 - a greater than 50% decrease in core earnings power.
Delving into the details, billed business growth fell -33% y/y in the second quarter, hitting a low of ~40% y/y in April and rebounding to -25% y/y in June.
ZI
Near term data looks ok with website visitation up 5.5% q/q in 2Q, hiring improving in July, and mainly an easy setup for 3Q Billing-per-Customer as 3Q19 average was ~$24k vs ZoomInfo's (ZI) normalized average of ~$30k. However, we also showed data from a developer who reached out to us having single handedly built a competitor to ZI of his own in the last few months with over 100m contacts (ZI = 120m) and cell phone numbers across executives and mid-level management teams which reminded us that whatever barriers may once have existed in this territory are no longer there.
Remain Short.
LYV
Estimates need to come way down for Q3/Q4/Q1 of next year. It will be interested to see how the stock reacts to the negative revisions. In May, they thought they would be back to concerts at scale by Q1 (consensus was at +10% YoY going into this). The risk of course is that it gets pushed back again and Live Nation’s (LYV) loses out on another big summer season.
“The company's operational cash burn rate estimate is $125 million per month and estimated gross burn rate is $185 million per month, both on average for the second quarter through the end of the year.”
While they have enough liquidity to keep the lights on… the problem is that this business didn’t produce much free cash flow in peak times and therefore deleveraging once we do recover will take time. Either way, it is bad for LYV’s equity value.
SHAK
Between 4Q17, 4Q18, 2Q19 and 3Q19, SHAK opened 26, 34, 40 and 44 units, respectively. All those quarters represented peaks in new unit development at the time. The accelerated pace of development caused massive declines in store productivity.
Management’s push for new unit development in high rent, but now low traffic locations will haunt the P&L for an extended period of time. There is no recovering from mistakes like this for Shake Shack (SHAK) and new unit development will have to come down significantly from the current pace. The company’s historical premium valuation depended upon its high rate of store growth.
SMAR
We see risks to the Smartsheet (SMAR) adoption curve, with seat growth already well below revenue/billings growth, enterprise adoption well along the way, 15 years into the journey with under 1MM paid seats and decelerating versus messaging of a TAM infinitely larger which together points to a much smaller landing spot for SMAR.
We see peers outgrowing SMAR adoption rates, large competitors refreshing their tools, tens of millions of potential users who have trialed Smartsheet and passed, tens of millions of users sitting in the free tiers of competitors, and we continue to see SMAR taking price on their free base of users.
EDU
Similar to New Oriental (EDU), TAL Education Group (TAL) turned more prudent regarding its marketing expenses this past Q but G&A cost growth accelerated as TAL paid more money to staff.
Compared with EDU, TAL has a significant advantage in terms of enrollment and revenue growth and is more focused on the online side and investing more dollars in online technology and tutors. Because of this, TAL is scooping up market share at a faster pace than EDU.
We remain short on EDU.
