Below are updates on our twenty one current high-conviction long and short ideas. We have added Constellation Brands (STZ), Expedia Group (EXPE), & Michaels (MIK) to the long side of Investing Ideas this week. We have removed Discover (DFS) & Live Nation (LYV) 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
Last week the August census retail sales were reported and included non-store retail growing 22.4% YY. That was a slight slowdown from July, though against a slightly tougher comparison.
To put the numbers in perspective though, even as we have seen stores throughout the country re-opening, non-store retail (ecommerce) has maintained growth rates above 20% and running about 2x the growth of pre-covid. Removing the enhanced government benefits in August had little impact as well.
Chewy (CHWY) is an ecommerce leader in the pet category that will gain significant share within the consumer wallet as both pet spending and online spending grow. The street is expecting CHWY’s revenue to slow 3000bps over the next 4 quarters. We think the shift to ecommerce is far from over, and that the nature of increased customer adoption in driving future spending within the CHWY model means such a big slowdown is unlikely. As CHWY growth continues to beat expectations we think you have further upside in the stock.
NOMD
Click here to read our analyst's original report for Nomad Foods.
For the week ended September 19, the UK's total CPG index remained flat to the prior week at +7%. The frozen category saw an acceleration from +12% to +16% in the most recent week. The frozen category was tied with beverage alcohol for the strongest department in the grocery stores. The frozen category was driven by ice cream, desserts, and frozen fish (+21%).
Nomad Foods (NOMD) is a market leader in frozen fish. Produce sales in September are up 6% after three weeks of being up 1-2% during the famous "Eat out to help out" program. The UK is Nomad Food's largest country by sales, representing 31% of overall sales.
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.
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
There was some misinformation in the home fitness space this week. Echelon announced a new low priced bike in collaboration with Amazon. Unfortunately, the only collaboration from Amazon appears to be that they are selling the bike on the site like any other product. This is a very odd announcement by Echelon to potentially upset its retail channel by being too aggressive with the description of a partnership with Amazon.
Amazon has reportedly stopped selling the bike on its site until Echelon corrects its marketing and product description. The launch of such a bike is maybe a small negative for Nautilus (NLS) in terms of share in that it’s a new competitor for its low priced bikes, but now we’ll have to see if the product even gets a chance to sell this year given the reaction from AMZN.
The launch however also signals Echelon’s expectation of continued home fitness demand at all price points, and remember that the NLS fitness product portfolio extends well beyond low price point bikes. So overall any negative sentiment towards NLS around this announcement is probably misguided.
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
Increasing US tensions with China, flows into ESG funds, growth in alternative transport powertrains, lower carbon energy investment, combine with macro forces like accelerating inflation should drive investor interest in Fortress Value (FVAC). Rarely does a single equity check so many ‘thematic’ boxes, particularly when many of those categories are seeing rich equity market valuations.
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
According to Bloomberg Oatly is seeking an IPO next year. Starbucks added Oatly products to its menu in China earlier this year. Oatly also secured a European green deal this year. Oatly has done a commendable job in growing the awareness of the oat milk category. There are a number of alternative plant based milks including the newer flaxseed, cashew, and hemp milks.
It takes a combination of marketing, taste, nutritional advantages, price, and distribution to win in the category. It is in the latter that SunOpta (STKL) is positioned to boost oat milk with the current capacity expansion it is undertaking. Grocers are more likely to expand the shelf space for oat milk with its own private label offerings. Offering private label options for the grocers is an opportunity SunOpta can pursue when it has additional capacity.
IIPR
Innovative Industrial Properties (IIPR) is uniquely positioned to benefit from the growth in legal cannabis. Despite the pandemic, cannabis has continued to grow at a high rate in 2020 as seen in the following chart.
With several states poised to legalize cannabis during the November election future growth also looks promising. Since cannabis is still listed as a Schedule 1 controlled substance by the federal government the industry has limited access to capital.
By providing capital through sales leasebacks IIPR enjoys very attractive rent yields. IIPR is the only publicly traded REIT focused on the growing cannabis sector.
LVS
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.
The border is now open, IVS is back (at least somewhat), and the government is providing visitation incentives. Golden Week should catalyze all the Macau stocks, but consensus is that the higher end segments – premium mass and VIP – will outperform over the near term and we don’t disagree.
However, that seems to be priced into the stocks but what may not be factored in is the likelihood of a major share shift to the property formerly known as Sands Cotai Central (SCC) and also Four Seasons. The Londoner will be a major draw, in our opinion, with an already great room product that will be enhanced by 370 high end suites and now a viable theme. Four Seasons will also attract even more premium visitors with its own brand new 290 huge suites.
Could LVS lose a little share over the very near term? Certainly, but loss share will quickly prove fleeting and by year end, Las Vegas Sands (LVS) should generate growth well above market, and provide an outsized investor return over the next 12-18 months.
STZ
Hedgeye CEO Keith McCullough added Constellation Brands (STZ) to the long side of Investing Ideas this week. Below is a brief note.
At VIX 30 or higher, levered long TQQQ & JETS bulls who bought what was not a dip #drink...
Long Constellation Brands (STZ) is a good way to be long of alcohol consumption #accelerating. The rising probability of #Quad4 in Q4 is definitely going to drive some perma Old Wall bulls to the bottle.
Remember, from a risk management perspective, you get to buy your fav longs when SPY is probing the low-end of its @Hedgeye Risk Range (like it is right now).
EXPE
Hedgeye CEO Keith McCullough added Expedia Group (EXPE) to the long side of Investing Ideas this week. Below is a brief note.
Here's a good example of an explicit OODA (observe, orient, decide, act) loop within my risk mgt #process:
A) I saw a breakout in #NazVol developing ... so
B) I waited for that signal to tone down before buying a name with Tech beta like EXPE
It wasn't waiting because Todd Jordan told me wait (it was on my BUY list because he gave me the idea!). I was waiting because my macro market signals said I could get a better price.
Here's a good intro excerpt from Gaming, Lodging and Leisure (GLL) analyst Todd Jordan on the name and Alternative Accommodation via Expedia's (EXPE) Vrbo, which is on fire:
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A new sequel to Bill And Ted’s Excellent Adventure is hitting the big screen and Sean and I are excited. The first one was, well, excellent. While the sequel to OTA’s hotel business is not exactly new, we’re not sure the outlook has ever been this promising for Alternative Accommodation (AA). The adventures available through AA are more varied than straight hotels and seem to fit better in the Covid world. As we’ll discuss in this note, most datapoints are not only positive from a relative perspective (vs hotels, brands, business travel, etc.), but even on a YoY basis, despite comping against pre-Covid numbers. |
MIK
Hedgeye CEO Keith McCullough added Michaels (MIK) to the long side of Investing Ideas this week. Below is a brief note.
Yesterday I figured whoever was Levered Long TQQQ and forced to puke at the intraday lows was going to hit the bottle, hard (STZ)...
Now, I'm thinking some arts & crafts (MIK) for those who just want to chill because they had a risk management process…
What happens if VIX drops back below 26? High Short Interest stocks with #accelerating fundamentals (MIK) are going to get squeezed again.
Here's a good summary excerpt from Retail analyst Brian McGough on the name (new idea):
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Michaels (MIK): Adding to Long Bias list after a solid 2Q. I was surprised by the 15% sell off in Michaels on the print. The company put up a quarter that was much better than decent, and well ahead of consensus on almost every metric. Comps came in at 12% -- which is huge for a company like MIK -- vs the Street’s expectation for a 6% decline. Gross margin and SG&A each beat by about 400bps, with total EBIT margins coming in at 9.2% vs the Street at 1.5% (and last year at 7.3%). Inventory is in great shape – down 19% -- almost too lean. But I’ll take that any day. Liquidity is at $1.3bn, $100mm better than pre-pandemic. E-comm growth in the quarter was up 350%, which is one of the biggest e-comm gains we’ve seen from any retailer reporting 2Q earnings. |
MAR
Click here to read our analyst's original report for Marriott.
US hotels posted another soft week and for the first time in over a few months, RevPAR growth actually decelerated in back to back weeks, which may surprise some since the industry is digging out of all time lows.
In fairness, RevPAR growth was somewhat negatively impacted by the shift in Rosh Hashanah this year vs last year, but even on non-shift days, RevPAR was still bad.
We think the industry has entered a phase where RevPAR and travel data will reflect its normal seasonal tendencies, but in the year of 2020 with very little corporate or group travel, such seasonal tendencies will negatively impact growth. But to be clear, the seasonality really impacted and artificially boosted RevPAR in the summer months whereas no the leisure/business mix is more normal. With RevPAR trending around -50%, that’s not a good sign.
Marriott (MAR) remains on top of our short list.
GOLF
Click here to read our retail analyst's original report.
The NGF announced August rounds played up 20.6%. That brings YTD to +6%. With the season winding down, the year should finish up at least high single digits, the best growth in rounds in decades. The buzz around rounds trends in real time in June, July, and August is what drove GOLF to its mid-summer highs. The question now of course is what will it mean for golf spending.
There is little reported data so far to suggest a material ramp in new participation, rather our surveys this summer implied higher volumes out of regular players. That could mean some elevated ball sales, but doesn’t mean much for higher equipment, clothing/footwear, and gear sales. We still think the macro environment over the next twelve months will be more important for golf industry sales than rounds played, and next year rounds will have very difficult comparisons outside of March and April.
The market clearly expects upside on NTM numbers with the stock still trading at 26x EPS even after a pullback of about 17% from the highs. When it becomes evident that ‘21/’22 earnings won’t snap back beyond the 2019 highs we think that multiple is at risk.
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.
SMAR
Smartsheet (SMAR) 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 (Medallia 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
Business likely hasn’t picked up at Ralph Lauren (RL), leading the company to join the likes of Kohl’s and Macy’s in announcing a 15% headcount cut. RL employed roughly 25,000 people at the end of its last FY (March), suggesting about 3,750 jobs will be lost. This is not a total surprise, as the company noted on its Aug 4th conf call that a strategic review was underway to create a sustainable cost structure.
In addition, we’ve seen other brands like Nike and UnderArmour come out and reorganize their respective org structures to facilitate more consumer-direct/online selling as opposed to a wholesale/store-based model to match consumer shopping preferences in a post-covid world. All in RL expects to incur estimated pre-tax charges of $120mm to $160mm by the end of the Mar21 fiscal year.
It expects pre-tax savings of $180mm-$200mm starting the following year. While the reorganization around going consumer-direct makes sense, the last thing Ralph needs is to be pitched as a cost-cutting story. This is a tired brand that needs to invest savings back into the model to deepen the consumer connection, gain relevance to a younger generation, and stimulate long-term top line growth.
That doesn’t appear to be the case here. Until we see that level of elevated investment and consumer connectivity, we remain short RL.
