Below are updates on our twenty current high-conviction long and short ideas. We have added Medallia (MDLA) to the the short side of Investing Ideas this week and removed Dollar Tree (DLTR) & Sprouts Farmers Market (SFM) from the long side along with Synchrony (SYF), Hilton (HLT), & New Oriental (EDU) from the short side. 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
Another impressive quarter from Best Idea Long Chewy (CHWY), as the company put up another positive EBITDA quarter while the Street was modeling negative cash flow. Revenue clocked in at +47% -- spot on with a positive covid-impacted 1Q rate.
CHWY added a staggering 1.6mm active customers – again, spot-on with the 1Q rate when the covid benefit was at its peak. We were looking for 1mm net adds, which in itself is an impressive level, and CHWY smoked our forecast. For 1H net adds are 3.12mm, which is super impressive given that it added 2.9mm in all of last year. Sales per active customer were up 8.9%, which is notable given the fact that in year 1 new customers have the lowest spend, and it grows dramatically in years 2 and 3.
So there’s usually a trade-off between sales/customer and customer adds, but not so this year…and we’ll take an elevated customer count over the former any day of the week given the stickiness of the customer base once a customer is added to the mix. The gross margin pressures that CHWY had in 1Q passed, and GM came in at 25.2% vs expectations for 24.3%. Guidance was once again ‘light’, if you want to call it that, which is the only real negative. But as transparent and upstanding as this management team is, it could not really substantiate why there would be a slowdown in 2H. In fact it guided 3Q revenue to $1.70-$1.72bn which compares to a $1.64bn consensus.
That suggests a slower 4Q given that it did not meaningfully take up the year (at least not by as much as the 2Q beat and 3Q upside). Translation – it’s being conservative. We’re taking up our top-line growth forecasts given the sheer momentum in the model, and are not assuming that we see a slowdown in growth until next year – but that’s exactly when we think that spending per customer should ramp further and the International story will start to take off.
In the end, nearly everything we heard on the conference call strengthens our conviction in this call, and that in spite of the upside we’ve seen so far, there’s still upside over a TAIL duration to $90.
NOMD
Click here to read our analyst's original report for Nomad Foods.
Nomad Foods (NOMD) announced the preliminary results of its modified Dutch tender would result in the purchase of 18.9M shares at $25.50 for $483M. The repurchase represents 9.6% of the company’s outstanding shares.
We would like to see management create more value through acquisitions, but the repurchase does not signify acquisitions are off the table. Management said the M&A focus will now be targeted toward European frozen food.
As Nomad Foods has matured and invested in the frozen category, management’s confidence in the long term growth prospects and their ability to extract synergies through further consolidation has led them to maintain that sector focus in the future. Our interpretation is that it signifies that the next acquisition will not be large or transformational, but below $500M.
That is a range we prefer due to lower risk. The repurchase also highlights the cash flow the company is generating in the current environment (it has generated more FCF through half of 2020 than all of 2019). It also takes advantage of a valuation that continues to be lower than its peers, despite the consistent results. The winning growth formula for the company is LSD% organic sales growth, cost leverage, acquisitions, synergies, and financial leverage, driving EPS growth of LDD%. It is not premised upon the current HSD% organic sales growth or large acquisitions.
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.
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, the catalysts were 2-fold, one it got bullish support from another research company, two there was some excitement around the PTON earnings report. PTON guided huge sub growth numbers for the upcoming quarter and its fiscal year (which ends June 2021).
That tells us that PTON is seeing sustained demand as we approach fall and expects growth to continue into winter/spring. Peloton is obviously doing some things right for its own business, but given every fitness company and product has been seeing elevated demand since Covid hit, we think the continued performance will not be unique to PTON.
Assuming the demand element is correct, NLS still has upside to numbers and the stock. The stock has been volatile, but we’re still buyers of dips as long as it remains bullish Trend.
ONEM
One of the headwinds One Medical (ONEM) faced during the pandemic was the lost revenue of substituting a telemedicine visit for in person care, a lot of which could be 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.
Aside from the volume tailwinds brought upon by incremental vaccination demand, ONEM continues to prove that it is more than other “Doc-in-a-Box” telehealth offerings. Supported by the app download data, provider tracker, and our conversations with experts in the field, we maintain our view that membership tailwinds, including those resulting from a pull forward in demand for telehealth alternatives, will persist in 2H20 and 2021. 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.
With market drowning in SPAC oversupply, it is challenging to separate ones with exceptional assets from those with, well, low quality 'companies'. The Mountain Pass mine has the richest developed rare earth deposit in the U.S. at a time when the geopolitical value of those assets has rarely been greater.
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
Impossible Foods raised $200M in its latest funding round in August, valuing the company at $4B. This is up from the $3.6B valuation when it raised $500M in March. The company will use the funds to expand its R&D programs, accelerate manufacturing investments, grow at retail, and internationally.
The company has raised $1.5B since its founding in 2011. It’s not just start-ups investing in plant-based meat but the large food companies, including Tyson Foods, Conagra, Perdue Farms, and Kellogg as well. Ryan Riddle, the R&D specialist of vegetarian meal solutions at Nestle USA, said, “It’s one of the most important spaces that Nestle is investing heavily in. I don’t think that it’s a short-term fad that we’re trying to chase. We believe that it’s the future of food.”
Since Nestle purchased Sweet Earth in 2017, it has introduced 45 vegetarian and plant-based products. Nestle has also introduced a range of plant-based alternative beverages under the Natural Bliss and Starbucks lines. In Q2, sales of Nestle’s vegetarian and plant-based food products grew by 40%. SunOpta (STKL) has a head start in the plant-based milk category and is a leading supplier with competitive advantages of scale and manufacturing IP for most of the plant-based milk brands.
IIPR
In an industry that is challenged by access to capital Innovative Industrial Properties (IIPR) has demonstrated its access to the capital markets during the pandemic. In May, Innovative Industrial Properties (IIPR) completed a follow-on public offering of common stock, raising net proceeds of about $115 million, including the exercise in full of the underwriters' option.
In July, the company completed another follow-on public offering of common stock, raising gross proceeds of about $259 million. This brought IIPR's total capital raised to approximately $1.4 billion from the IPO follow-on common stock offerings, Series A preferred stock, exchangeable senior notes, and ATM program. As of the Q2 earnings call in early August, approximately 77% or $1.1 billion of raised capital has been committed in the aggregate under the company's leases. IIPR has no debt, other than approximately $143.7 million of unsecured debt with an interest rate of 3.75%.
MAR
Click here to read our analyst's original report for Marriott.
A major theme of ours relates to the near term issues facing business travel and the high probability that this most important segment for hotel REITs and C-Corp is permanently impaired. Updated survey results per MMGY’s monthly “Travel Intentions Pulse Survey” (TIPS) suggests that travel intent among business travelers remains well below the post-Covid highs in June, but not surprisingly has improved somewhat over the last two months.
On the leisure side, intent reached a new high in August but the “net” intent falls a little short of its peak. The outlook for leisure travel is encouraging, albeit off a low base, but seasonality will require business travel to pick up the slack in the fall. We don’t see much nearly enough from business transient nor group to offset the seasonal drop off in leisure. Thus, the positive 2nd derivative seen in US RevPAR since the April lows could go negative and really soften sentiment following a big run in hotel stocks recently.
The real beneficiary of a faster leisure recovery can more easily be expressed with the OTAs. We remain open minded, but thus far, the data has made us very skeptical regarding a near term corporate travel demand recovery, and the best way to express this continues to be our core C-Corp short Marriott (MAR).
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.
An interesting update from the NGF this week in its Covid-19 blog. With excitement around rounds played and golf participation this year and what it might mean for equipment sales, the NGF seemed to give a little warning as for people to not get their hopes up too much (and odd move for golf lobbying group).
The NGF presented participation data for recent years and stated “The ability to retain customers has been golf’s Achilles heel for some time now. In the past five years alone we’ve “welcomed” more than 12 million people to the traditional game, and yet our ‘sea level’ has risen by only 200,000, give or take. It’s almost inexplicable, and signals a serious issue with the experience and/or perceived value among new customers.” The purpose was to flag the churn risk of the game, even in times of attracting new users, like what might be happening this year.
This is one of our biggest concerns around golf. The game has faced secular issues which we think are tied to consumer perception of time and time allocation, golf affordability, and inclusiveness. Covid has perhaps temporarily change the paradigm for demand in golf, as alternatives have been removed, but we’re not sure anything has changed as it relates to long term preference for participation in golf. Here is a video from the vault that contextualizes what we think is driving the secular pressures on the golf industry CLICK HERE.
We remain short Acushnet Holdings (GOLF).
AXP
American Express (AXP) carries risk on two main fronts: transaction and credit. T&E spending makes up more of American Express’ transaction volume than any other card company, which, although recovering slowly, is still comping down 65-70% Y/Y. It’s also important to note that this is higher margin business than the non-T&E categories, making it disproportionately impactful.
On the credit front, Amex took on more subprime exposure heading into this downturn and is therefore at greater risk if the government transfer payment train slows down or comes off the tracks. Beyond this, many small businesses, including many restaurants, fund their monthly working capital on Amex business cards. The risk is that increasing numbers of small businesses are forced to close in the Fall/Winter period.
ZI
Third quarter Billings will face a much easier comp. From what we can tell, after the merger, ZoomInfo (ZI) saw considerable churn and set a low water mark for Billings and Billings per Customer in 3Q19, and the comp for 3Q20 is an easier one. Regardless, investors can now see from Billings that the primary growth fireworks for ZoomInfo was the merger of the two primary predecessor companies, rather than a sustaining high growth demand curve.
LYV
At $55 - $60/share gravity appears to be taking hold, as consensus estimates continue to come down and the multiple breaking out to a new all-time high (on 2023 numbers!). Meanwhile, concerts are slowly starting to return in Europe, which the market views as a leading indicator for the U.S. However, capacity restrictions makes these events a break-even venture at best. According to an article this week from Pollstar:
“Semmel Concerts CEO Dieter Semmelmann, and the president of Germany's promoters association BDKV, Prof. Jens Michow, demonstrated that events at severely reduced capacities won't help this industry return to normalcy.”
“The concerts were a way of reminding everyone of the importance of live culture in people's lives, however, they also demonstrated that large-scale events cannot be held in an economically viable manner, according to a statement from Semmel Concerts.”
With current valuation and estimates already reflecting an optimistic turnaround story, we continue to believe Live Nation’s (LYV) is an attractive short both in absolute and relative terms.
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.
Additionally, 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 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
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.
MDLA
Hedgeye CEO Keith McCullough is adding Medallia (MDLA) to the short side of Investing Ideas. Below is a brief note.
Looking for Tech Shorts as names like WORK are crashing within a bubble (NASDAQ) that's been popping?
How about re-shorting another name Technology analyst Ami Joseph nailed on the short side that's bouncing to lower-highs as the insiders keep selling: Medallia (MDLA)?
Here's a summary excerpt from Ami's recent Institutional Research note on the name (the CEO of this company is a real treat):
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Medallia Inc. (MDLA) is a Hedgeye Technology Best Idea Short. Leslie (MDLA CEO) is predictable. This acquisition of Stella Connect keeps 4Q above 20% revenue growth. Stella is a perfect MDLA acquisition: raised $50MM+ over 12 years, acquired for $100MM, and MDLA CFO pretends MDLA can "make Stella great again". MDLA needs one more to get them there for 1Q22. But the next one will be smaller ($10MM annual revenue; should cost $50-60MM) and Leslie will be sure to remind all of us that he only does technology tuck-ins. MOST IMPORTANT ELEMENTS FROM EPS:
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