Investing Ideas Newsletter

Below are updates on our twenty current high-conviction long and short ideas. We have added Slack (WORK) to the short side of Investing Ideas this week. We have removed One Medical (ONEM) & Insperity (NSP) from the long 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

Taking a look at channel sales by category, there is one trend that is as clear as day – and that is non-store retail is simply trouncing any in-store shopping. We’re at the point where earnings are normalizing, and they matter again to where and how the stocks trade. The consensus view is that we’ll mean-revert in 2021 and that the big covid winners (like CHWY) will give back their gains of 2020.

We don’t think that’s the case across the board – and definitely not with Chewy (CHWY). We expect to see additional gains for Chewy in 2021 in US subscribers, along with higher spending per capita in its existing customer base. This is the same time CHWY should start to roll out its Int’l growth strategy (Canada, initially) which provides another leg to growth.

NOMD

Click here to read our analyst's original report for Nomad Foods. 

Sales of plant-based meat have accelerated during the pandemic. Nomad Foods has invested a lot in the launch of its plant-based meat offering under the Green Cuisine brand.

Before the pandemic the company had planned a stage rollout across much of Western Europe this year. The company initially delayed the launch during the stockpiling phase of the pandemic. With shortages of product and a heightened interest in healthier eating and plant-based meat the company went ahead with its plans to launch Green Cuisine across the continent. Nomad Foods has high expectations for Green Cuisine and has referred to it as its most important product innovation. The launch so far has exceeded plans in the countries where it has been introduced.

ZM

Zoom is the best tool in the category on key factors (adoption, ease of use, & stability) as well as single pane management for companies Zoom's (ZM) follow on product creates a compelling roadmap for customers to easily unburden themselves of older telephony systems and should have significant COVID tailwinds. Zoom is still under-penetrated at the enterprise level and the growth of clunkier peers in 2020, like Webex, grows the market and leaves a long tail of wins ahead for Zoom.

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 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. 

NLS

Nautilus (NLS) hit new highs again this week.  Home fitness momentum remains.  A couple weeks back the at home cycling competition/game app company Zwift got a large investment round led by KKR valuing it at over a billion dollars. 

It also seems likely with that deal that Zwift would look to IPO in the next couple years. Capital flows continue into home fitness and demand for home fitness remains high.  We continue to expect highly elevated demand into at least mid winter, and still futher upside to NLS sales and earnings numbers in the coming months.

ZEN

Zendesk (ZEN) is a specialist in the customer support software category. In recent years, the company’s adoption curve has materially underperformed reported revenue growth as the original go-to-market motion became saturated.

The multiple for ZEN also deflated during this time. Our recent data on field notes, customer adoption, surveys, and other points, shows a refresh in customer adoption of ZEN potentially extending what was a stuck motion to a renewed adoption motion which could reset customer growth for at least several quarters if not longer.

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. 

STKL

According to the latest data from the SPINS report, oat milk is now the #2 plant-based milk. US retail sales of plant-based milk grew 17% to $2.36B in measured channels (grocery, dollar stores and mass, but not convenience stores, Costco or Whole Foods) in the 52 week period ended September 6, 2020. Sales of almond milk grew 13.1% to $1.5B and retains the #1 share spot. Oat milk grew 304% to $214M driven by refrigerated up 351% and shelf stable up 106%.

Soy milk declined 4.5% to $202M. A decade ago soy milk had sales of $1B. Pea milk grew 12.1% while coconut milk grew 16.1%. Sales of flax, cashew and rice milk were mixed. Flax milk declined 8% in refrigerated sales while shelf-stable grew 54%. Cashew milk declined 18% in refrigerated, but grew 6% in shelf stable. Rice milk declined 8% in refrigerated, but increased 4% in shelf stable. Refrigerated milks are the much larger category at $2.1B vs. $274M for shelf stable. Refrigerated shelf space will be tighter as more products are introduced. Sales of walnut milk and pecan milk declined. SunOpta (STKL) is uniquely positioned for the continued growth in oat milk with the doubling of its manufacturing capacity and by supplying four of the top five oat milk brands.

IIPR

Innovative Industrial Properties (IIPR) announced this week that it has entered into an amendment of a lease with a subsidiary of Green Thumb Industries, making available an additional $25.0 million in funding for the construction of a cannabis cultivation facility, which is in addition to the existing medical cannabis processing facility on the property. Assuming full payment of the additional funding, IIPR’s total investment in the property will be $32.2 million.

In addition to this facility in Toledo, Ohio, IIPR owns and leases Green Thumb’s regulated cannabis cultivation and processing facilities in Oglesby, Illinois, and Danville, Pennsylvania. Assuming full reimbursement of tenant improvements under the leases, IIPR’s total investment in properties leased to Green Thumb is expected to be $121.8 million.

As of October 1 IIPR owned 63, totaling approximately 5.0 million rentable square feet (including approximately 1.9 million rentable square feet under development/redevelopment), which were 99.3% leased (based on square footage) with a weighted-average remaining lease term of approximately 16.2 years. As of October 1, 2020, IIPR had invested approximately $884.5 million in the aggregate (excluding transaction costs) and had committed an additional approximately $292.0 million to reimburse certain tenants and sellers to complete construction and tenant improvements at IIPR’s properties.

IIPR is quickly deploying its capital at attractive rates in the current environment.

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

This past week Constellation Brands (STZ)reported FQ2 EPS of $2.76 vs. consensus of $2.51; the results include $.15 of equity losses from Canopy Growth. The upside was driven by better margins, with marketing spend delayed until the 2H. Beer sales were up 1%, excluding the sale of Ballast Point with organic shipment volumes down 1%. Beer depletion (sell through) growth of 4.7% and shipments down 1.6% were in line with our expectations and at the high end of guidance. Wine & Spirits' net sales decreased 11% with shipment volumes down 19%. Excluding the divestiture, organic net sales declined 9%, with shipment volumes down 17%. Overall, wine depletion volumes decreased by 3%, with its power brands down 1%.

Gross margins were flat with favorable pricing offset by unfavorable mix and reduced throughput at the breweries. Marketing was 70bps lower with fewer events. Beer EBIT margins expanded 70bps while wine margins expanded 310bps. Management expects the impact from the West Coast fires to be $25-35M in FQ3 and $10-15M in FQ4. Management said the timing of 1-2% price increases would be more staggered in 2021, which seems appropriate given the economic environment. Management also said their goal is to be a top 3 brand in hard seltzer. Corona Hard Seltzer is currently in fourth place, but share points have grown from 4% to 6%. Bud Light Seltzer currently has a 10% share in the third spot. Overall shipments will outpace depletions in FQ3, but depletions are accelerating with better inventory availability.

Constellation Brands’ most negatively impacted quarter from the pandemic is now behind us. Going forward, we see sales growth accelerating from better in-stock levels (September depletions could be the best month of 2020), more on-premise re-openings, and more sporting events/marketing to be positive catalysts for the shares. Increasing confidence in its ability to continue to gain share despite the growth in the hard seltzer category and smaller losses in Canopy should lead to a higher multiple.

EXPE

Finding sustainable growth in hotel land is difficult, but alternative accommodation (AA) continues to display impressive growth heading into Q4 per various demand proxies and trackers.  On a 7 day moving average basis, forward bookings into the Florida AA market are tracking up 20%+ YoY, which is remarkably steady with the growth seen out of that market for the last few weeks and a significant acceleration from Q2 growth rates. 

We estimate Florida AA bookings for Q3 will be +11% YoY vs -2% YoY in Q2, which could be a solid contributing factor to EXPE’s VRBO platform.  We’ll have more to share ahead of the Q3 earnings report, but our app data tracker suggests VRBO weekly usage (WAUs) broke out to all-time highs to end Q3, while also accelerating on YoY basis vs Q2.  There might be some choppiness on the hotel side for Expedia (EXPE) (though leisure outperforming), but we continue to see AA as a big catalyst for 2H’20 and ’21, particularly as Airbnb looks to go public. 

We remain bullish on EXPE and have it featured as a Best Idea Long.

MIK

The setup for Michaels (MIK) here resembles what BBBY has seen over the last few months.  MIK is trading at a very low multiple, with very high short interest, leverage and with a catalyst of a strengthening category.  We’re not bullish on BBBY like we are for MIK, as BBBY is still losing share and we are not sure its fixable long term, but riding the wave of category acceleration BBBY got a huge revaluation when earnings were better than expected.  Like BBBY, MIK has a new management team working on turning around the business, and whether it’s execution driven, or simply from category strength, a quarter or two of solid performance for MIK will convince the market that it is significantly undervalued.  We think MIK will be around for the long term, and its business will be improving as demand for crafting and other activities grows as US households shift their entertainment from doing stuff outdoors to indoors when winter approaches.

MAR 

Click here to read our analyst's original report for Marriott. 

STR and Tourism economics released an interesting scatter chart which plots the top North American markets based on the mix of Transient business each market + their share of domestic oriented travel demand into the market.  Those with a higher share of + a higher share of domestic demand – i.e. fitting into the top right box, would theoretically be the most Covid insulated.  For the most part, we agree with the way the scatter plot addresses market by market risks; however, we do think it fails to incorporate each market’s labor force and how it’s structured. 

Specifically, we’re referring to the fact that many big REIT markets like Boston, San Francisco, Seattle, and Denver all score very high on our “work from home” index, which looks at the share of each market’s labor force that has a high probability of working from home, and thus will have a low probability of being in offices, taking in-person meetings, or accepting many out of network visitors. 

Until there’s a vaccine and confidence that the virus is contained, many of these markets will be hamstrung, and it shows in the data.  On the flip side, markets like San Diego, Nashville, Key West, Orlando, and the Phoenix area could be in better shape is they are more pure plays on domestic leisure travel.  Unfortunately, not enough REITs (really any), are perfectly immune to the risks of either heavy group travel reliance, higher international mix, or “work from home” mix.  We continue to hold a bearish stance on Marriott (MAR).

GOLF

Click here to read our retail analyst's original report.

The jobs report this week came in below expectations, with job adds about 100k behind consensus (adjusting for last months revision).  The catalyst bulls are looking at for the golf industry is the spring selling season opportunity assuming there is pent up equipment demand from what was lost this year. 

We continue to think that if the economy has not shown signs of strengthening by spring, golfers will continue to push off the big ticket expense of replacing a set of clubs.  Recent data points have been indicating a rising probability of economic weakness and a potential macro Quad4, which will bearish for golf spending and 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

An excerpt from some of our field-work on ZoomInfo (ZI):

ZI rolled out Engage, their new sales engagement tool. This is what salespeople commonly and incorrectly refer to as “auto-dialer”. This tool allows a salesperson to initiate an email or a phone call to a prospect without leaving the ZI platform. Analytical information such as salesperson productivity, success of their campaign and email open rates are then available for review by both the rep and management.

The rollout seemed to be rushed and badly thought through. I attended a webinar touting the benefits of the products for existing customers and the presenters were junior, late, and ill prepared. Now, a month or so after the rollout presentation the usual ZI advertisement for the product on users’ portals and videos or marketing pieces seem absent. According to sales management ZI hasn’t been pushing it hard a t all and few salespeople at my company know or care about it.

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

PVH – Ralph Lauren's (RL) closest publicly-traded peer -- moved a step closer to me wanting to own it by naming Stefan Larsson as CEO effective Feb 1. Larsson has been with the company since last year (after a short stint as RL CEO), and was the obvious heir-apparent to CEO Manny Chirico at the time of his hiring. Over the past decade Chirico did an admirable job in growing PVH’s two main brands – Tommy Hilfiger and Calvin Klein – especially when compared to Ralph Lauren, which was once viewed as its better-positioned peer.

The two have since switched spots, with PVH in the clear lead. That said, PVH needs to evolve again, quickly. The retail landscape and consumer shopping patterns in apparel are in a greater state of flux today than since the advent of the fast-fashion model in the early 1990s. Larsson made his mark at H&M and then at Old Navy with his strength in supply chain and speed to market – an area where PVH needs to meaningfully improve.

In looking at expectations, the company is likely to clock in at an EBIT margin this year of -3 to -4%. The consensus is looking for a sharp recovery in 2021 to about 6-7%, which sounds about right. The real question will be if Larsson can speed up the model such that faster asset turns can drive the RNOA profile meaningfully higher despite what is likely an impossible task to get to prior peak margins of 11-12%. Given the ‘brain drain’ we’ve seen in retail over the past decade where talent has retired with little capable backfill, it’s nice to see such a strong young yet proven leader take the helm at an otherwise mature company.

Ralph Lauren made a massive mistake in firing Larsson after just a year on the job as CEO. That’ll go down as one of the biggest HR blunders in recent retail history. Now Larsson will take even more share from RL as head of its top competitor.

WORK

Hedgeye CEO Keith McCullough added Slack (WORK) to the short side of Investing Ideas this week. Below is a brief note.

So, now what? 

After a big 2-3 day ramp for the NASDAQ (from our #oversold signals), you're not chasing it (especially with #NazVol at 35 signaling higher-lows)!

You're looking for good Tech Bubble Shorts that are up towards the top-end of their Risk Range on #decelerating volume. Slack (WORK) checks those boxes. 

Here's a good Institutional Research excerpt from Technology analyst Ami Joseph on the name: