Below are updates on our twenty current high-conviction long and short ideas. We have added Ralph Lauren (RL) to the the short side and Las Vegas Sands (LVS) to the long side of Investing Ideas this week. We have removed Cloudflare (NET) from the long side and Shake Shack (SHAK) 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
Chewy (CHWY) announced a $275M offering of Class A common stock through Morgan Stanley this week. The announcement came as a big surprise to us. Internal cash generation is ahead of plan, and the company is going to close out this year with a far higher EBITDA hurdle than it’s currently promising the Street.
Aside from wanting a cash buffer on top of a stock price that is up 94% year-to-date, my only real speculation here is that it is thinking ahead to international expansion, which will be costly – albeit with huge payoff.
I think that comes next year with expansion into Canada, and then a year later into Western Europe, which will be the big next level growth driver for the story. We still think CHWY is an $80-$90 stock over a TAIL duration. The deal is reportedly being priced at $55-$56. The stock didn’t like it trading off some this week, though there is also the fact that tech volatility has been spiking.
NOMD
Click here to read our analyst's original report for Nomad Foods.
For the week ended September 5, total CPG demand remained at +6% for the second consecutive week, as seen in the following chart. Frozen food improved to +9% due to strength in ice cream from +4% the previous week. Sales of frozen pizza and frozen fish fell. Schools across the UK have fully re-opened, which will alter lunch meal consumption. The UK is Nomad Foods (NOMD) largest country by sales, representing 31% of overall sales. Food away from home pre-pandemic was a lower percentage of consumer spending in Europe than in the US, so the shift to food at home has not been as dramatic in Europe.
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 CELEBRATION POINTS:
- RPO Billings >$1B
- Revenue for 2Q was 7% above our high end of revenue and 33% above consensus
- Revenue guidance for Q3 higher than Q2 and implied Q4 higher than Q3…all positive and show that bears can't point to a circumscribed opportunity (yet)
- ~70% incremental OCF margin to billings after ~50% last Q shows strength of model and cash flow generation
- Highly efficient cost structure with 42% NG OPM puts Zoom in a class of its own which is real margin rather than PE-rollup add-back margin (ahem, ZoomInfo)
- Diluted shares didn’t spike despite some buyside expectations
- Strong incremental customer capture (second highest quarter ever) and highest ever for the >$100K TTM revenue customer cohort
ZM remains a Hedgeye Technology Best Idea Long.
NLS
This week Apple announced a new app called ‘Fitness +’ along with several new devices, which made the twittersphere light up with banter that AAPL is making a run at PTON’s jugular. We’re not sure how negative it is for PTON, but it’s definitely a positive for Nautilus (NLS).
NLS has been leveraging the content platforms for other players with streaming class offerings to sell its products to provide equipment for the classes. Apple classes so far don’t use large equipment, but do use some smaller items that NLS has under its product portfolio, and we suspect the continued growth of home fitness content will also continue to drive demand for home fitness equipment solutions.
Lastly, we don’t think it’s probable, but there is a chance AAPL wants to get in the equipment business via acquisition or partnership, where NLS could be a potential beneficiary.
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. Our thinking is that rising COVID concerns could lead to overwhelming flu vaccine demand (and possibly scarcity). Our recent survey work, which is not yet complete, suggests that 55% of Gen Z consumers want to get the flu shot this season.
If we are correct, incremental vaccine demand will act as a strong tailwind for in-person volume and support the recovery in patient service revenue. And if we are all very fortunate, a COVID-19 vaccine may be available through these visits 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.
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. Molycorp was ‘early’ to market, leaving an extremely valuable processing asset base and unfocused operationally, which we expect Mountain Pass to optimize (finally). As highlighted in our prior work, EV/Motors, Electronics, and Sensor market growth are very real for rare earths.
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
We held a call with a buyer from a 250 store grocery chain this week to dig into the fundamentals of plant-based food. Our three main takeaways were the following:
1. Price sensitivity of the plant-based category. Plant-based products are priced at a significant premium to regular milk or meat, so I thought there would be less price sensitivity. I was surprised by the number of examples our speaker gave of the price sensitivity in many plant-based products. As the number of competitors and products entering the plant-based categories continues to grow, it will only become more promotional as the new entrants are looking to gain share in the growing category, with the price being a significant sales driver. SunOpta is the low price producer in many of the categories it competes in.
2. Private label opportunity in oat milk. Our speaker said oat milk was third in plant-based milk at her company behind almond and cashew due to the higher price of oat milk. Her chain did not carry a private label oat milk, but believes it would sell well. Private label represents a massive opportunity for SunOpta (STKL) when it completes its manufacturing expansion.
3. Plant-based foods are a higher margin for the grocer. Plant-based products generally have higher prices and margins than the regular products they are replacing. The buyers also have higher incomes and spend more at grocery stores, so they are attracting customers to retain for the grocer. We expect the grocery stores to continue to expand the shelf space for the category in the future.
IIPR
Innovative Industrial Properties (IIPR) targets medical use cannabis facilities for sale-leasebacks. The company’s lease contracts have terms between 10 to 20 years. The rent yield is typically between 11 to 15%. That is an attractive spread over its borrowing costs of 3-4%, but the company has little debt currently.
The company is enjoying these outsized returns, because it is the only publicly listed REIT focused on the cannabis industry. Most banks and lenders do not lend to the industry and access to the capital markets is challenged despite the attractive growth prospects. If legalization were to occur in the future, IIP would then borrow to enhance returns which would offset the expected compression on rents.
LVS
Hedgeye CEO Keith McCullough added Las Vegas Sands (LVS) to the long side of Investing Ideas this week. Below is a brief note.
Top down, Chinese Equity Volatility looks nothing like #NazVol in the QQQ...
Bottom up, Gaming, Lodging and Leisure (GLL) analyst Todd Jordan is making a big pivot call on Macau and Las Vegas Sands (LVS) this morning. He walked through the idea for subscribers on The Call @Hedgeye and here's an excerpt from his Institutional Research note from this morning as well:
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Takeaway: A less traveled way to play the Macau recovery w/Singapore next on the list. LT, LVS may be the best positioned casino company in the world HEDGEYE EDGE We’re adding LVS to the Hedgeye Best Idea list on the long side and encourage investors to take the road less traveled not only for the recovery trade but also to buy into possibly the best long term story in gaming. There is little doubt that Macau is finally in recovery mode. While down a ton from last September, this month should show some sequential progress and we’re expecting an even bigger jump in October. |
MAR
Click here to read our analyst's original report for Marriott.
Up until Wednesday’s bad datapoint, the weekly RevPAR data had showed consistent improvement but the monthly data is more comprehensive. August data was just released and it suggests that the incremental gains for the industry have been in a state of slowing, really since June. In the below analysis, we’re measuring sequential RevPAR growth (MoM) but removing the seasonality to gauge true industry improvement.
Given how deep the RevPAR hole is, we expected these “true” sequential growth rates to remain positive, but the more they slow each month, the more likely it is to see slowing growth in the headline YoY metrics as well. Final August data suggested there was another step down in sequential momentum, and MTD data for September (despite having the big LDW) shows a similar, slowing trend.
Looking to the rest of September and October, as the industry compares against a bigger base of business and group travel, we see risks rising for the RevPAR recovery, and charts like the below are foreshadowing, alongside other metrics we follow internally and also the slow down in TSA data so far this week. Maintain our bearish bias towards much of the hotel space –including Marriott (MAR) on top of our short list.
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.
Discover is no longer offering enrollments in the Skip-a-Pay (payment deferral) program for cardmembers impacted by COVID-19 as of August 31, 2020. Since program inception, $3.5 billion of credit card receivables have enrolled in the payment deferral program. As of August 31, 2020, $197 million of credit card receivables were actively enrolled in the payment deferral program.
We continue to remain short.
GOLF
Click here to read our retail analyst's original report.
US Retail sales for August were reported this week and Sporting Goods Stores saw the biggest sequential slowdown in YY growth and biggest month over month contraction. It had been an outperforming category early in the summer, and it’s still up YY, but the slowdown is likely to continue into the fall.
Golf and other sports saw good demand in the summer with consumer looking to get outside. Though golf lost a lot of sales in spring, and we don’t think the recent strength will make up for what was lost. With street expectations for revenue growth and acceleration in 4Q, the rate of change in sporting goods retail sales and golf product interest online are signaling we are likely past peak.
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.
During the first quarter 2020, the Company created a Customer Pandemic Relief Program for customers impacted by COVID-19. Delinquency status is generally frozen at enrollment, and loans that are current at enrollment do not age, regardless of whether payment is made. Upon exiting the program, delinquency aging resumes where it had left off at enrollment. The Company closed the Customer Pandemic Relief Program for new enrollees in the United States as of June 2020.
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.
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.
Here are some user count headscratchers: CEO said “We added 500,000 new users in Q2, the largest sequential increase we've seen in the last 8 quarters. That brings our total number of both paid users and collaborators to over 7 million. This reflects the fact that our value proposition is resonating with customers.” But sequentially, SMAR also added 500K in Q4 F20. And prior to that Q the company had never added >500K (and only 400K once) so why the reference of the “last 8 quarters” as opposed to the longer period of time. Additionally, the CEO said SMAR finished with over 7MM total users but in the past he has always provided 1-2 decimals. If the company added 500K net new users the implied quarter-ending number was 7.25MM.
MDLA
Leslie Short (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:
- Reported Billings grew 21% Y/Y. But not if you strip out the M&A impact. Then it’s 11% Y/Y.
- Subscription Revenue grew 25% Y/Y. But not if you strip out M&A impact. Then it’s 14% Y/Y.
- SaaS Billings grew 25% Y/Y. But not if you strip out M&A impact. Then it’s 13% Y/Y.
- & Using calculated Deferred Revenue, rather than reported, plus stripping out M&A impact to revenue in the Q, gets 9% Y/Y Total Billings Growth.
RL
Hedgeye CEO Keith McCullough added Ralph Lauren (RL) to the short side of Investing Ideas this week. Below is a brief note.
Looks like some of the bears overstayed their welcome last week, pressing shorts right when they should have covered... It happens. Not many in this game are known to be good at the short side, across cycles...
What I like to do is wait on it... yep, wait for Bearish @Hedgeye TRENDs to get squeezed towards the top-end of my @Hedgeye Risk Ranges, especially into a market close...
That’s happening with Ralph (RL) today. Here's part of Retail analyst Brian McGough's Institutional Research note on RL from this morning, addressing the High Short Interest ... but also the downside, from here:
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My only concern is that Short Interest is ~12% of the float, which is a critical level for us at Hedgeye. But ultimately, I think that the model will prove the shorts right, and then some. This stock is worth 12x recovery earnings of $5, or $60 vs the current price of $78. We wouldn’t own it until the stock price started with a $5-handle – and even then would do so nervously given the secular challenges that face the company. |
