Below are updates on our twenty-three current high-conviction long and short ideas. We have added SunOpta (STKL) 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
For the week ended August 26, fresh produce demand increased 11.5%, accelerating from 9.5% in the prior week. Fresh produce demand increased 14% YOY, as seen in the following chart. Fresh produce demand is a key category to assess consumption trends vs. sales trends as the category is not stockpiled and indicates home meal preparation.
Produce consumption trends have been relatively steady and elevated. Fresh fruit sales growth improved by 3.1% from the prior week and narrowed the gap to fresh vegetables to 3.6% percentage points, the smallest gap since the pandemic began.
Fruit tends to be a basket builder rather than a traffic driver. Produce is a key traffic driver and point of differentiation for Sprouts Farmers Market (SFM).
CHWY
Click here to read our analyst's original report for Chewy
Looking at recent trends from similarweb, we’ve see strength in Chewy’s (CHWY) online platform visitation in recent weeks, which is testing the March/April highs we saw when Covid first broke out. Bullish near term datapoint there. On those trends the stock got an old wall upgrade this week taking the stock to new highs at week’s end.
NOMD
Click here to read our analyst's original report for Nomad Foods.
For the week ended August 15, total CPG index levels in the U.K. grew 5% compared to the prior year, as seen in the following chart. Edible categories increased 10%, outpacing non-edibles at +7%. The frozen category increased 25%, accelerating for the third consecutive week.
Frozen food even outperformed alcoholic beverages, the strongest category during the pandemic, which was up 21%. The U.K. is Nomad Foods' (NOMD) largest market at 31% of sales. The frozen category has generally outperformed other grocery categories in Western European countries. Still, the magnitude has been less than in the U.S. This is due to a lower share of food away from home consumption pre-pandemic in Western Europe.
Nomad Foods previously said sales in July grew double digits, similar to June. Management's guidance is for organic sales growth of HSD% for the year and MSD% for Q3. July is the smallest month of Q3 for the company, and management expects retail sell-through of frozen food to decelerate in Q3, but trends have remained steady in August. Shipments are still trying to return inventory levels at retail to normal levels because it was unable to meet demand in Q2.
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
A good week for Nautilus (NLS) after some volatility around insider sales and Trump pumping the vaccine the prior week. The company launched a new bike this week, the Bowflex VeloCore.
It’s a bike with a screen, that leans to ‘simulate’ riding and leaning in turns, though that leaning feature doesn’t make sense vs physics unless you are actually in motion.
It’s kind of a silly gimmick, but it will probably sell since demand is high for all home fitness and manufacturers have struggled to meet that demand. Dick’s Sports commented this week about the strength of the category again, as did Best Buy.
We think the elevated demand lasts at least into mid-winter, and that NLS will continue to see sales upside and great profit flow through as the demand comes at low incremental cost.
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.
What many are not considering is that the flu vaccine is likely to be in high demand this winter as many will want to avoid playing “Is It COVID?” One of the headwinds $ONEM faced during the pandemic was the lost revenue of substituting a telemedicine visit for in person care, a lot of which is vaccinations.
This flu season, we expect a higher number of patients will be scheduling in-person appointments to get their flu vaccine, and perhaps, if we are all very fortunate, a COVID-19 vaccine as well. We remain Long ONEM in the Hedgeye Health Care Position Monitor.
DLTR
Dollar Tree (DLTR) reported 2Q results this week. The DLTR quarter was solid, 20% EPS beat, 45% EPS growth. The stock showed some weakness likely around the slowing in Family Dollar comps into 3Q, though this should be expected from everything we heard in lower end retail for 2Q and August with lower governmental benefits.
Wages also pressured EBIT margins some. But the call on the stock from here is still very much around the breaking of the buck. Commentary this Q was positive on the dollar plus test, after being left out of the story last Q.
New CEO Michael Witynski said “Now regarding Dollar Tree Plus! Our focus on selling great value merchandise at price points of $5 and below, we are continuing to analyze, learn and make adjustments to the program. Earlier this year, we transitioned from the initial consumable-dominated assortment to more of a wild-type discretionary products that Dollar Tree is known for. We recently added bins to our larger test stores to promote some hot, one-time item sales. Sales of these discretionary products remained strong with good sell-through as customers are responding favorably. We are excited about the many new, multi-price discretionary products that we already have on the store shelves for this fall selling season. We remain encouraged about the potential for Dollar Tree Plus!”
We are recently seeing products with more compelling value in the tests in stores. But for some products, buys will need larger order volumes to extract worthwhile value, yet the test is still small in terms of the total store footprint, so it needs to be expanded to further enhance the product offering and to actually see an impact on the P&L.
We think we should hear something to that effect by early 2021, and should start to see some P&L benefit by 2H2021, with still larger rollouts and larger assortment levels meaning further comp upside in future years. With various cost pressures in the model and further expected inflation, we think there is no better time to be pulling the multi-price point lever.
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.
Concerns focused on substitution of other materials – a real risk but one we see as low in the near-term. New materials would require a long development cycle to be placed into service – permanent magnet electric motors are the substitute. Materials scientists have already looked for decades, and alternatives would likely include rare earths because of their f-orbital configuration.
Concerns about competitive entry seem misplaced, in part because Mountain Pass is a well characterized deposit with tolerable byproducts and also because of the decade or so it would take to launch a new integrated production facility. More importantly, it is already largely built with a capital cost to market size ratio that would dissuade most evenhanded analyses. We think FVAC is worth a look.
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
Insperity (NSP) is a ‘pandemic winner’ with it benefiting 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.
NSP reported a quarter that was hard to model because of anchoring bias; it was the sort of discontinuity vs. the environment that can be a challenge. That break in the relationship to prior results or the employment environment – which was never all that important anyway - was evident in the report.
STKL
Hedgeye CEO Keith McCullough is adding SunOpta (STKL) to the long side of Investing Ideas. Below is a brief note.
My Independent Research (read: non-banking and non-unreformed-brokering) teammates and I continue to scour the Full Cycle Investing landscape for ways to be long of Commodity Inflation.
This SunOpta (STKL) idea by Consumables analyst Howard Penney is a lot more than just that - it's got ingredients!
Here's a brief summary paragraph from Penney on the name in a prior Institutional Research note:
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We added SunOpta (STKL) to the Best Idea List as a LONG bias. SunOpta, Inc. engages in the sourcing, processing, and packaging of organic and non-genetically modified food and beverage products. It operates through the following segments: Global Ingredients, Plant-Based Foods and Beverages, and Fruit-Based Foods and Beverages. |
MAR & HLT
Click here to read our analyst's original report for Marriott.
Non-accelerating RevPAR growth evident in the STR weekly data was a bit of a surprise. We don’t want to overly focus on one week of data, so let’s look ahead shall we? Based on our most recent forward looking room rate survey, the trend looks worse through the end of September. In fact, following the Labor Day week, our survey suggests that growth could actually decelerate.
Our survey tracks only the full service hotels in the top 25 markets so there could be demand in other areas that offset the headline figure in our data, but either way, the directionality of the survey is not positive. Note, we’re solely focused on the directionality of the below chart and less so on the absolute levels. After seeing our data for the coming 4-5 weeks, we have far less confidence that the hotel cycle is on solid footing
We remain negative in the long term for Marriott (MAR) and Hilton (HLT).
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's (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
Regarding asset quality, Synchrony (SYF) increased its allowance for credit losses by +139 bps to 12.52% of period-end loan receivables, matching the reserve ratio of JPMorgan on its own card book. While the street took comfort in the company's provision expense, -13% below expectations, we see things differently.
With a card book of significantly lower quality than that of JPMorgan, our view is that Synchrony remains behind the curve in terms of its provisioning and we expect further catch-ups in future quarters. Synchrony is on the front lines of this COVID-19 downturn.
GOLF
Click here to read our retail analyst's original report.
US rounds of golf were reported for July this week. For the month rounds were up 19.7%, taking the YTD into positive territory at +3%. This is a moderately better than we would have expected after June came in below what we would have thought given industry commentary. It’s backward looking, and basically built into the commentary on July sales from Acushnet Holdings (GOLF) back on the 2Q print but trends in play have been strong, getting some investors excited about the golf equipment industry.
Increased play doesn’t have to mean higher spending on equipment, so the key questions are does the elevated play seen in recent months mean any ability to reverse the secular decline trend in US golf participation?, and how much if any will it benefit annualized equipment/ball sales? It’s too soon to tell if there is any change in long term participation, we haven’t seen any quantifiable evidence to support that.
As for spending we still think this is a category that has big relationship with macro economic factors, so as unemployment data remains at some of the worst levels ever seen and consumer sentiment falls to new lows, we think it’s unlikely we’ll see new peak sustained rates of spending that GOLF’s stock price seems to imply.
AXP
With both its credit and charge card portfolios, the American Express (AXP) saw delinquencies and charge-offs rise y/y, although management noted that this increase did not yet reflect incremental stress as not enough time has passed for the impacts of the current environment to flow through traditional credit performance measures. This is in stunning contrast to peers SYF, COF, and DFS, which all benefited from the upending of normal credit cycle dynamics by the size and speed of government and lender support programs.
Nonetheless, management tried to focus investor attention on the fact that the company's delinquency dollars were down y/y, and that the increases in DQ and NCO rates were largely attributable to an unfavorable denominator effect from significantly lower loan and receivable balances.
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
Live Nation’s (LYV) has been swept up in the cyclical rally on optimism over vaccine development. LYV daily price correlation to cruise and theater stocks has been 0.98 in the last rolling 30-day period. Meanwhile, consensus 2021 and 2022 EBITDA estimates have declined by ~20% and ~5%, respectively in the last 60-days. This negative estimate revision trend is consistent with our short thesis.
With the stock near $60, LYV is trading at 17.5x 2022 EBITDA, which compares to 2019 peak of 19.0x. We continue to see downside risk to estimates and believe fair value is close to $30/share.
While 2021 and 2022 estiamtes have come down, sell side has increased their 2023 EBITDA estimates by 10%. We find the margin assumption embedded in the estimate unreasonable, and that street is simply pushing out year estimates to justify their bullish biases.
SHAK
The NYC Hospitality Alliance said an industry survey found that 83% of dining establishments could not pay their full rent last month. Mayor Bill de Blasio said he has "no plan" for the return of indoor dining in NYC.
Nearly 10,000 restaurants of the 25,000 operating in NYC have set up outdoor seating. About 1,300 have closed permanently since the pandemic began. The rest are either closed or doing delivery, catering, or something else.
The restaurant industry employs more than 300,000 in NYC, and 160,000 remain unemployed according to federal employment data. More would probably be closed if not for a local emergency law shield restaurant owners from personal liability for commercial leases allowing many restaurants not to pay their full rent.
During the week of Aug. 14, New York City restaurants had 23% of last year's covers (headcount of customers), according to Resy, the reservation app used by many outdoor dining restaurants. The week prior covers were at 18% from the previous year, and in mid-July, it was 10%. This is particularly negative for Shake Shack (SHAK) that has the highest percentage of restaurants and sales in New York City of public companies.
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
The feverish summer marketing campaign is over, and the focus turns to converting the millions of entry level/free students into regular priced Fall courses as students formally go back to school on Sept 1, 2020. As summer courses wrap up, it's a mixed picture for Fall 2020 online course pricing, according to our database. In addition, online education platforms are in the middle of a two-month rectification process for minors, which includes cleaning up any harmful material from live broadcasts and short videos.
While these may be near-term positive developments for New Oriental (EDU), we remain cautious given online education peers taking market share as well as overseas uncertainty.
