Below are updates on our eighteen current high-conviction long and short ideas. We have removed Acushnet Holdings (GOLF) from the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
Click here to read our analyst's original report for Chewy
Big week for Chewy (CHWY), trading up over 10% on the week. EV/Sales is now pushing 3.4x – close to the narrowest gap we’ve seen between CHWY and AMZN (4.0x) in years. To be clear, we’re not arguing that CHWY deserves a higher multiple, but rather upwards estimate revisions, which is the key factor that we think will drive the stock to the $80-$90 range over a TAIL duration.
This year it should break through to positive EBITDA, then the following year positive GAAP EPS as we see increased spending per customer and the company makes its first move overseas.
Click here to read our analyst's original report for Nomad Foods.
For the week ended October 3rd total CPG sales grew 8% YOY in the U.K., decelerating from +10% the previous week. COVID-19 cases have resurged in the U.K. with cases per million exceeding the U.S., prompting more restrictions.
Notably the “surge” in grocery purchases was a rather limited one-week bump as seen below. The restrictions on closing bars earlier likely led to an increase in alcohol beverage purchases in grocery stores as the category led all other categories. Beer sales grew 19% in the four-week period ended Oct. 3 according to Nielsen.
The second fastest growing category was frozen food up 16% for the four-week period. The frozen category decelerated to +14% from +21% the previous week as the mini stockpiling was short lived. Our Nomad Food’s (NOMD) investment thesis does not rely on another COVID-19 wave, but it does help sales of frozen food. The U.K. is Nomad Food's largest country by sales, representing 31% of overall sales.
The most important metric Zoom's (ZM) can disclose at the Analyst Day is one that (for bulls) shows the opportunity set as still under-penetrated in key enterprise accounts. At the time of Zoom's IPO the company had at least one paid host (single license) in 55% of F500 companies but only 5% of the F500 were in Zoom’s “large customer” category (>$100K TTM Revenue). An update on this metric (also presented at Zoomtopia 2019) would be a signal that enterprise revenue growth is still ahead of the company, despite the enormous success of the last several quarters.
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. Zoom is the best tool in the category on key factors (adoption, ease of use, & stability) as well as single pane management for companies ZM follow on product creates a compelling roadmap for customers to easily unburden themselves of older telephony systems and should have significant COVID tailwinds.
Nautilus (NLS) on Wednesday announced the sale of its Octane Fitness brand for $25 million to TRUE Fitness Technology Inc. The sale is part of a strategy to focus on the home-fitness market, which is red hot during the pandemic.
Octane Fitness focuses more on the commercial side of the business – not where the heat is right now. NLS’ remaining brands include its core Nautilus brand, Schwinn and Bowflex.
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.
The sharp reopening snap-back in 3Q20 is likely giving way to stalling or backsliding in 4Q20 with a ‘Quad 4’ macro backdrop. While delayed stimulus and second wave virus fears contribute, prolonged changes in several industries may take longer to unwind. While consumer-oriented colleagues often speak of a K-shaped recovery from an income perspective, industries within our coverage are diverging for many specific reasons.
When the market gets messy, we prefer to focus on more idiosyncratic exposures – like Fortress Value (FVAC).
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.
Strawberry prices, as measured by ProduceIQ, have reached a 15 year high for this time of the year, as seen in the chart below. According to the US Foods Farmer’s report, supplies are limited with good demand. The fires in California have hurt supply with ash falling on some acres ahead of the harvest. Through August 20th, nearly 75% of the strawberry volume in the U.S. Frozen strawberries represent more than two-thirds of SunOpta's (STKL) Fruit-Based Foods & Beverage division.
The shortage of the strawberry harvest in 2019 has depressed margins in 2020. The greater demand for fresh strawberries driven by increased retail demand was expected to reduce the frozen supply by 15-20%. We believe SunOpta could seek strategic alternatives for the division when the harvest has returned to historical norms, but this year’s harvest looks to be another unfavorable one.
There are five states with legalization initiatives on the ballot in the November elections. The largest markets are New Jersey and Arizona where the initiatives are both polling likely to pass. If Democrats pick up more seats in Congress, the Senate or the White House more legalization efforts are expected to follow.
Innovative Industrial Properties (IIPR) is the only publicly traded REIT in the cannabis sector. New expansion would drive more investments in cannabis which the REIT is almost exclusively able to provide to the industry.
Constellation Brands (STZ) announced that Victoria would be the official beer of SummerSlam, the WWE’s second-largest event of the year, in August 2021. Constellation Brands said, “Victoria consumers are huge fans of WWE action and its Superstars, so we can’t wait to be a part of SummerSlam and other activations throughout the year.” In Mexico, Victoria has a long history of sponsoring Lucha libre (freestyle professional wrestling).
WWE’s audience is 20% Hispanic, and the #4 ranked cable program among U.S. Hispanics. When Constellation Brands purchased Crown Imports, Modelo Especial was seen as the growth engine and the “next” Corona with Pacifico years away in the wings. In recent years Pacifico has received increasing marketing support and growth. Pacifico sold 10M cases in 2019 and is the seventh-largest beer brand in California.
This year Victoria sales are down 7% in the convenience store channel as the production shutdown impacted it. Victoria now looks to be receiving more marketing support. Victoria is getting ready to be the “next” Pacifico.
Expedia (EXPE) has had a tough last couple days, both relative and absolute, following a period of outperformance. We think the weakness has been driven by a few factors – some sell side price target and ratings adjustments (and general apathy towards the space), the tempering of near term expectations (Q3 coming up + hotel data has been soft), and also the resurgence of Covid across most of Western Europe and developing hotspots here in the US.
Definitely some headwinds out there for travel related stocks, but we generally don’t think this overly pessimistic narrative fits the data. For instance, the core tenets of the EXPE recovery story remain solidly intact – leisure travel continues to materially outperform the industry, alternative accommodation (AA) is crushing it domestically, EXPE’s VRBO is gaining share per our data, and traffic data trends suggest that EXPE’s other platforms are gaining share globally (see chart below).
We do see near term risks for the broader industry, particularly those OTA platforms more geared towards intl. markets, but EXPE seems to be outperforming and this should result in more positive commentary on their upcoming Q3 call. To us, EXPE remains in an inexpensive way to play both the faster leisure travel recovery + a secular company story where earnings power should be materially enhanced over the NTM and into the out years. We’re buyers of the dip on EXPE.
The consensus remains decidedly bearish on Michaels (MIK), with sell-side ratings split evenly between buy, sell, and hold at 33% each. Though that might seem balanced, its far more bearish a dispersion than we see for your average retail stock.
Furthermore, the consensus price target is only $11.78, which is only 10% above the current share price. We think it will capture more than that gap on the next earnings print alone.
But the buy side is far more downbeat on the name with 44% of the float short. We continue to think that management set overly conservative targets at its recent analyst meeting, and downplayed the heat that the category is currently enjoying.
Click here to read our analyst's original report for Marriott.
We believe there is downside left in Marriott (MAR) as expectations for net unit growth, fees, and EBITDA remain too high. Earnings estimates and the valuation multiple is likely heading lower, in our opinion. We continue see earnings downside in MAR EBITDA and EPS of 7-10% for both ’21 and ’22 vs current consensus. Based on our revised SOTP against ’22 estimates, we see close to 20%+ downside in MAR and reiterate it as a Best Idea Short.
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.
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 and are thus keeping AXP.
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.
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? 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.
While profits improved into 2020, Medallia (MDLA) will confess (after they raise the convert, not before) that 2021 will be ‘an investment year’ and profitability will not improve. How do we know? Because incremental revenue driven inorganically doesn’t waterfall profit the way organic revenue does, and because the two companies most recently acquired are in cash-burn mode.
The 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 CEO Leslie Stretch will be sure to remind all of us that he only does technology tuck-ins.
We’re still two weeks away from Ralph Lauren's (RL) 2Q21 earnings release (on October 29). The consensus number of $0.78 per share looks on the high side to us.
Recall that RL does not have the robust e-comm model that other competitors do to offset wholesale weakness and a slowdown in company store traffic.
The company missed both the March and June quarters, and based on the consensus expectations we’re looking at for RL’s 2Q, we think it’ll miss a third quarter in a row.
While Slack (WORK) has hinted at some amazing potential roadmap products, the progress from imagination and hyperbole to actuality has not been the Ferrari pace that might inspire us. We have listened to management describe a Slack-first universe and we have read blog posts from technologists who can describe a Slack-first world, but as of August 2020, it still seems a little bit like science fiction.
We struggle to get excited about current products and while we are theoretically excited for rumored products, we are still waiting for the science part of the science-fiction story to come through.