Below are updates on our eighteen current high-conviction long and short ideas. We have removed ZoomInfo (ZI) from the short side. We have also added Sprouts Farmers Market (SFM) to 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
Chewy (CHWY) caught an upgrade with a $100 PT from Old Wall this week. We’re now looking at 71% of the ratings are Buy, with 0% Sell. Short interest has come down on the margin as well, suggesting that the buy side is getting incrementally less bearish – now sitting at 16% of the float.
That’s still above the all-important 12% threshold that we use at Hedgeye for our (and Keith’s) risk management process. Do I get worried that our bullish call is becoming consensus? Perhaps a little, but not until the Street’s models catch up with our revenue forecast for the next two years which includes a meaningful step-up in spending per customer, as well as the foray into International.
The consensus price target is $71.50, which we see fair value closer to $90. In other words, the Street is catching up – slowly – but we’re still facing an upward revision cycle which should push the stock higher.
NOMD
Click here to read our analyst's original report for Nomad Foods.
For the week ended October 10, the CPG demand index was up 7% YOY, down from 8% in the prior week. Demand for frozen food remained at +14% for the second consecutive week, as seen in the following chart.
Frozen food demand remains elevated as consumers shift more meal consumption to their homes. The U.K. is Nomad Food’s (NOMD) largest country by sales, representing 31% of overall sales.
ZM
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.
NLS
Nautilus (NLS) has been working like a charm for us – but unlike CHWY we’ve been seeing both estimates headed higher as well as multiple expansion. The stock is sitting at 1.7x EV/Sales and 28x Earnings – about as high as I can expect from NLS.
But on the flip side, the short interest just hit an all-time high at 18% of the float – the buy side clearly starting to bet against it. Demand continues to chase NLS as well as other home fitness names, and I think it’s a critical mistake to assume that this trend comes to an end once we anniversary the start of Covid early next year.
The ‘workout from home’ trend is here to stay. This is a multi-year trend, and we think that the model still has upside from here. I don’t want to get too greedy on this one given that we hopped on at $6 and the stock is sitting at $22 just six months later.
But we’ll be hyperfocused on the earnings model as well as Keith’s risk management levels in managing this position. It’s funny, no one cared when we called this out at $6. But over $20, institutions start coming out the woodwork as its finally big enough for them to buy. PTON providing a massive halo from a valuation perspective here.
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.
Cyclical opportunities look favorable for Zendesk as data + checks support sustaining strength since June on a combination of digital commerce growth driving some new customers (June/July commentary) and existing customers increasing their spending with Zendesk (October).
FVAC
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.
STKL
SunOpta's (STKL) reports Q3 results this week. We are looking for a strong result in SunOpta's plant-based foods division driven by the significant growth in oat milk. The company is significantly increasing its oat milk capacity and supplying a number of brands.
Management will update the market on the state of the strawberry harvest which is the company's biggest headwind. Strawberry harvests have been challenging in recent years and this year’s fires in California presented some supply issues.
Demand for fresh strawberries has also significantly increased with the strength in the grocery channel. Strawberries are the largest fruit by far for the fruit based foods division. We believe the company would seek to sell the business once there is a more “normal” harvest.
IIPR
There are five states with legalization initiatives on the ballot in the November elections. There are other states that will also see legalization efforts advance outside the election. In New York, an advisor to Governor Cuomo said legislation will be brought up through the state budget with the goal to enact recreational legislation by April.
This past week Virginia and Missouri launched medical marijuana programs over the weekend, becoming the 33rd and 34th states to having operating medical marijuana programs, respectively. Most states approve recreational use a couple of years after medical use is legalized. New expansion will drive more investments in cannabis which the REIT is almost exclusively able to provide to the industry.
No matter the outcomes of the November elections more states will be legalizing cannabis, leading to more development, and more financing needs.
Innovative Industrial Properties (IIPR) remains a long.
STZ
Consumer spending on domestic wine, including bulk imports, fell 7% in the year ended September. Including imports, wine sales decreased by 9%. Sales in September decreased by 2.5%, as seen in the following chart on the left.
Off-premise (which has been the strongest channel throughout the pandemic) wine sales were up 11% YOY in September, as seen in the following chart on the right. Sales of domestic wines through Nielsen measured off-premise outlets (which represent 45% of the volume and 23% of the dollars of the total U.S. wine market) grew 16% in the four weeks ended September 5.
The $11-14.99 price points had the strongest growth rate, but greater than $20 grew more than 30%. The strength at the higher price points is one of the top reasons Constellation Brands is selling its lower-priced brands to E&J Gallo. The other benefit from the sale to E&J Gallo is that it increases Constellation Brands' (STZ) overall mix of business to the faster growing beer business.
We expect the delayed sale to be completed this year. Restaurant wine sales in the 52 weeks ended August 8th decreased 31%. Direct to consumer shipments of wine increased 17% in September, decelerating as more restaurants have reopened.
EXPE
Finding sustainable growth in hotel land is difficult but alternative accommodation (AA) fits the bill. Perhaps more importantly, the impressive growth realized during the summer has proved resilient looking at early Q4 bookings.
On a 7 day moving average basis, forward bookings into the Florida AA market are tracking up 25%+ 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 compares to +18% so far in Q4-TD.
Though Florida is not a perfect proxy, it is still pretty good for the AA market and should be a solid contributing factor to EXPE’s VRBO platform. We’ll have more to share ahead of the Q3 earnings report in a more detailed preview early next week, but as we discussed late last week we like the stock on weakness and believe AA is a significant catalyst for the OTA industry and particularly for Expedia (EXPE).
There might be some choppiness on the hotel side for EXPE (though leisure outperforming), but provided there’s solid rate of change improvement, we expect commentary on the outlook will be good enough to appease investors. More to come next week. EXPE = best idea long.
MIK
A particularly volatile week for MIK, with peak to trough trading of 12%. I still think Michaels' (MIK) business/comp is running 10x its long term targets, but the question in my mind is whether people are discounting that its too near-term focused and will mean revert as we anniversary covid early next year.
Once that happens, we’re left with a slightly lower margin profile that is scaring some people off. But with 33% of the sell-side ratings clocking in at ‘Sell’ and 46% of the float held, the sheer number of people betting against MIK is too much to count.
All it takes is one solid EPS beat for a nice squeeze to the upside. I think we’ll get at least two.
SFM
Hedgeye CEO Keith McCullough added Sprouts Farmers Market (SFM) to the long side of Investing Ideas this week. Below is a brief note.
Here's one for everyone who listened to The Call @Hedgeye this morning and took good research notes, as grocery guru and Consumer Staples analyst Daniel Biolsi dropped knowledge: Sprouts Farmers Market (SFM).
Here's a good excerpt from a recent Consumables Pro product note too:
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One of the main reasons promotions are lower is that the breadth and depth of products are lower due to the increased demand exceeding production capabilities. The following chart depicts the total distribution points, as reported by Nielsen. For the week ended Oct. 3rd, the total distribution points were down 5.3%. Sprouts Farmers Market has pulled back on promotions in its produce section, a major category in which it previously used to drive traffic into the stores, driving 450bps of gross margin expansion in the most recent quarter. In contrast, Kroger only had 5bps of gross margin expansion in its most recent quarter. |
MAR
Click here to read our analyst's original report for Marriott.
Hotel News Now published a timely chart relating to hotel development and the composition of hotel pipelines, in particular. A topic we have been discussing with clients during this Covid downturn and early recovery is the resiliency of hotel development pipeline activity and how it impacts new construction.
The below chart does not address the risks to various pipeline buckets during downturns, but it does shed light on a key risk for hotel development, even during normal times. That’s right, even during normal times (’13-’16) there is still a great deal of deal attrition across the various pipeline segments – no surprise, hotels in earlier stages of development are more likely to be abandoned.
But imagine the attrition rates in normal times when RevPAR growth is growing steadily like it was in ’13-’16, and compare it to today when RevPAR is tracking down ~50% in the YTD, delinquency rates on existing units are surging, and financing is tightening. We think this upcoming quarter will shed a lot of light on the major risks that industry pipelines, particularly for the projects without shovels in the ground, but even for those projects, delays and potential attrition risks could be significantly higher than the norm.
As we laid out in a piece last week on MAR vs HLT, we see Marriott (MAR) as most at risk among the big C-Corps given a lower % of their pipeline being under construction, exposure to weaker brands (certainly vs HLT), but also exposure to more full service development vs focused service (the latter units are easier to build).
AXP
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 (AXP) and are thus keeping AXP.
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? 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.
MDLA
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.
RL
KSS announced this week that it’s going to shift its mix to athletic/athleisure – from 20% of the store to 30% -- and will also triple the size of its beauty department (which I find bearish for ULTA – as well as the fact that 690 JCP stores with Sephora shops are remaining open in its restructuring).
But back to RL…the company also announced that its going to cut additional brands previously deemed as core). One of those brands is Chaps. KSS did not say that it is getting rid of Chaps, but made it clear that anything and everything is on the table.
The Chaps brand (which is a Ralph Lauren's (RL) license) hardly has the cachet it once did. And this week, the potential for being cut from KSS got taken up a notch. That’s would not be a massive thesis buster for the bulls, but would be fly in the ointment for a company that is struggling to put up and semblance of top line growth.
WORK
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.
