Below are updates on our twenty-four current high-conviction long and short ideas. We have added Innovative Industrial Properties (IIPR) 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.
CHWY
Click here to read our analyst's original report for Chewy
Chewy (CHWY), was ripping this week, then gave some back with the tech selloff on Thursday/Friday. Both fundamentals and momentum factors have been driving it higher. We may be tempted to book the gain but need to stay disciplined.
We’ve learned our lesson – never close out an idea due to valuation alone. Wait for a rate of change in fundamentals, or a breakdown on the trading signal to bearish Trend. And that’s not on the immediate term horizon. That’s where our research efforts are focused, to be sure.
But I think that when CHWY starts to see a slowdown in the US business – still several quarters away – is the same time it opens its logistics infrastructure to Canada and an international story starts to emerge. Not getting greedy – just staying true to a process that works.
NOMD
Click here to read our analyst's original report for Nomad Foods.
For the week ended August 22, Consumer Packaged Goods (CPG) demand levels declined to +2% from +9% the prior week, as seen in the following chart. The sudden drop was driven by the growing popularity of the Eat Out to Help Out program. 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.
A total of 64M meals were claimed in the first three weeks. There was also a calendar shift of a bank holiday weekend. The frozen category decelerated from +25% in the prior week to +6%. All of the edible grocery categories decelerated with the most significant drops seen in the categories that were previously the strongest, alcohol beverages and frozen. The UK is Nomad Foods' (NOMD) largest country by sales, representing 31% of overall sales.
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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.
The right short case on ZM is to imagine that Google Meet and MS Teams envelop this opportunity, and that video communications solutions in the enterprise narrow from ~3 per company to 2 or below, this would squeeze the air out of Zoom’s increments of adoption. Further, if for some reason the Zoom Phone offering is weak on features and functions and will not compete well in the market with either legacy or next gen product, then it potentially neuters ZM’s already-in-progress second act.
ZM remains a Hedgeye Technology Best Idea Long.
NLS
Nautilus (NLS) made new highs this week giving some back in the late week selloff. The stock and the home fitness space got some support on ratings from the old wall. Online interest remains significantly elevated, and products still aren’t staying ‘on the shelf’ at retail.
There’s still plenty of very profitable demand to chase for NLS, and plenty of time and space or upside in the numbers and stock before this run is over.
ONEM
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.
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.
Most of the data does not look good: website visitation, hiring, app downloads, and developer activity. But our website detection tracker shows significant June-July strength in adoption (which dovetailed with our field notes presented on the deep dive) including at the mid-to-larger size customers.
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
Some fans of Oatly have started to boycott the company after hearing it had received an investment from a “Trump-supporting, anti-sustainability equity firm.” Oatly is a Swedish company that makes oat-based versions of milk, ice cream, and cream cheese. It entered the US four years ago and saw sales double to $200M last year and are currently projected to double again this year.
In July, Blackstone led the purchase of a 10% stake for $200M in Oatly. The boycotters cite Blackstone’s CEO Steven Schwarzman’s ties to President Trump. The boycotters also mention a Blackstone investment in a Brazilian company that has been accused of contributing to the deforestation of the Amazon rainforest. Oatly has responded numerous times on Twitter to people’s objections over the investment.
Oatly is vulnerable to these objections as the company has said it is on a mission to combat climate change by replacing cow’s milk. I could point out that Oatly’s lead investors include China Resources, which owns large coal resources in China among other non-environmentally friendly businesses, but cancel culture is emotionally driven. Oatly fans are likely to remain oat milk fans even if they do not purchase the company’s products. SunOpta (STKL) sees significant demand growth for its oat milk, so it is currently quadrupling capacity.
IIPR
Hedgeye CEO Keith McCullough added Innovative Industrial Properties (IIPR) to the long side of Investing Ideas this week. Below is a brief note.
Looking to get your Hoodie friends some Cannabis exposure for the long weekend? They're going to need it!
Cannabis analyst Howard Penney likes Innovative Industrial Properties (IIPR) which is on big time sale here (low-end of its Risk Range) today.
Here's his recap of the latest quarter of big time growth:
MAR
Click here to read our analyst's original report for Marriott.
Stronger macro data, marginally improving hotel RevPAR, and ferocious market momentum have driven most hotel stocks higher over the last 1-2 months. We like to aggressively challenge our existing theses anyway but with the stocks moving against us, now seems a good time to update the key forward looking drivers as laid out in our 8/19/20 and 6/22/20 hotel presentations.
Despite the stock action, the current and forward looking data actually looks worse than just a few weeks ago, thus raising our conviction level regarding a slower recovery and potentially lower hotel stock prices. We also see near term and material tail risk (NUG) for the bigger hotel brands (ex. economy scales) like Marriott (MAR) and Hilton (HLT).
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 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.
We continue to remain short.
GOLF
Click here to read our retail analyst's original report.
With the VIX heading back above 30 this week one thing to keep in mind is that market volatility and its impact on the wealth effect is not good for Acushnet Holdings (GOLF). The golf industry as a whole has big risk to discretionary income and GOLF and its brands have high exposure with avid golfers, which on average have income levels about 2x the average for US households.
That means they have investments and assets that have likely done well in the recent market moves and asset price inflation. If volatility remains high or gets worse, we think that means incremental risk to spending within the golf industry regardless of how many rounds people are playing.
You don’t need brand new clubs or brand new top end balls to go out and play the game. Historically golf spending among avid golfers trends with employment, the economy, market prices and discretionary income much closer than rounds played.
AXP
First, how long will T&E activity remain depressed and what will the shape of the recovery ultimately look like? Second, will Covid-19 result in structural changes to business travel and entertainment? Given its exposure to T&E spending due to the travel-heavy appeal of its card products, we think the company's 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 (AXP).
ZI
The next few quarters will get interesting. We predict a layup 3Q Billings but maybe some more head scratching around real cash flow and margins. We predict a tough growth setup from 4Q20 and beyond. We think ZoomInfo (ZI) will have to make a large acquisition or a group of small ones around the turn of the new year.
Will investors cut and run or will they suffer 1k paper cuts until the stock reflects a teens sustaining demand growth, mature margins likely going lower, and a management team who isn't used to the math having to add up. Our original question when we looked at ZI was “Can there be beauty in mess?” and our answer so far is: “No.”
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
Shake Shack (SHAK)
Danny Meyer, Shake Shack's (SHAK) founder and Chairman, is not selling a significant portion of his holding, but he is taking advantage of the recent run-up. The run-up is likely driven by growing talk of vaccines for COVID-19. An effective vaccine is necessary for Shake Shack’s urban customers to return to the restaurants.
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SMAR
The bull case on Smartsheet (SMAR) is that users like the tool – and it provides unique value relative to the other solutions in the market. As some have expressed: a Smartsheet is more powerful than tools from Asana, Monday, or Trello, but less powerful than Microsoft Project.
The problem is the market for paid users in this category is still small and will remain that way until some innovative new product comes along and unlocks a bigger seat TAM.
Such a product will likely use ML to read our existing workloads and autopopulate and manage intra-company project management by tiers of decision makers; it will probably also be really cheap. Smartsheet is in a niche, in our view, and the equity market had misidentified SMAR with an adoption multiple rather than an upsell multiple. Now SMAR's upsell model has hit a wall and deceleration is evident.
The company is trapped. We see COVID-recovery billings for Smartsheet hitting upper 20s % organically against low 30s % cost growth, before billings decelerate back down towards mid-teens organic growth.
