Investing Ideas Newsletter

Below are updates on our seventeen current high-conviction long and short ideas. We have removed Nomad Foods (NOMD) from the long side. We have added Under Armour (UAA) and Las Vegas Sands (LVS) to the long side. We have also added ZoomInfo (ZI) to 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

There was a few relevant releases this week for Chewy (CHWY). WMT announced a new program called Walmart Pet Care a full-service, omnichannel pet care offering that includes walk services via Rover, pet insurance, and RX. 

The news took down CHWY some.  Then CHWY later announced compounding medications to go along with its connect with a vet offering.  This enables more customized offerings for it consumers.  Ultimately both of these retailers have a place in the pet market, but we see CHWY as better positioned in online and with higher service levels to capture the market opportunity for these product offerings. 

Also this week was a sell side initiation at buy with a $90 price target, we would generally agree with that stance in terms of the upside for CHWY.

ZM

We went Long Zoom (ZM) in the spring as our data indicated the market completely underestimated the size of the gains for Zoom. We stayed Long into the summer as F2Q still showed over 2x increase in invoices versus 1Q, and because the market misunderstood just how rich the incremental cash flows would be.

We stayed Long into the Fall as our tracker was showing no noticeable churn. On our FY22 revenue estimates and growth, the relative EV/S math puts the true north at ~where the stock made its 52-week high. Fundamentals continue to look good.

We are not seeing deterioration in units of billings, usage is sky high, and the education market is dominated by Zoom. The Webinar product makes sense for every company in the world that needs to host even medium sized sessions with employees or customers. And the longer we remain in a world of hybrid attendance at the office, the more the fixed phone infrastructure sitting at our desks looks silly and wasteful, and the more companies will simply turn on the Zoom phone app to enable an enterprise phone number for all employees wherever they may be.

NLS

Nautilus (NLS) reported earnings this week and it was a huge quarter for the company.  Net sales up 152%, accelerating from 94% last Q.  EBITDA was $35.7mm vs a loss of $5.5mm last year.  Direct sales were up 278% with gross margins up ~1900bps, Retail segment sales we up 108% with gross margins up 720bps. 

The company also booked an $8.3mm gain on its sale of Octane fitness (at a base price of $25mm). Management noted that in the quarter it saw 7x the new customers that it saw a year ago.  Management guided 2020 sales to be $540 million and $565 million and full year 2020 Adjusted EBITDA to be between $90 million and $100 million.  At the top end of that revenue range 4Q is guided to grow at 94% vs the street at +26%, and the EBITDA guide is almost 2x where the street was for the year headed into this event ($58mm).  Management also noted that with the elevated demand, it thinks it will be supply constrained until around 2Q21. 

Meanwhile the street only had 1% sales growth expected for 1H21.  Our stance on NLS has been that the industry demand would significantly exceed and outlast what consensus was expecting. This print clearly demonstrates that to be the case, meaning it is now known by the market. The problem is perhaps now there is too much clarity on the trend fundamentals, the street has moved much higher, and the color given my management seems to suggest a peak growth rate in 3Q. 

So we are likely to see slowing fundamentals from here.  We still thing the company is likely to beat the next couple quarters, but we could be inflecting from accelerations, to decelerations, which is less bullish for the trend.

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

We thought SunOpta (STKL) should sell a business segment and focus on the fast-growing plant-based business.  Well, the company did just that, just not the business we thought they would/should sell.

This week, SunOpta agreed to sell the Global Ingredients segment and related assets to an Amsterdam-based global commodity trading company, Amsterdam Commodities N.V. (ACNFF), for debt and cash-free consideration of €330M.  The transaction is expected to close by January 2021. 

The Global Ingredients business contributed $488M (or 39%) of net sales in 2020.  We estimate that SunOpta will do $1,272 billion in total revenues in 2020.  Proceeds will be used for capital investment primarily into the core Plant-Based Foods and Beverages segment and to pay down debt. 

At the end of 3Q20, the company had $443.8 million in debt.  According to the press release, "the transaction valuation represents an approximate 10x multiple of Adjusted EBITDA for the standalone business and is highly tax-efficient and is expected to be accretive to the company's long-term growth rate and margin profile further focusing the company on delivering more consistent financial results for shareholders."  We currently estimate the STKL is trading below that at 9.5x 2021 EV/EBITDA. 

IIPR

Texas State Senator-elect Roland Gutierrez (D-San Antonio) has pre-filed a bill that would legalize cannabis for both medical and recreational use if passed. In his campaign, Gutierrez made marijuana legalization a key part of his platform, pushing for the ensuing tax revenues to help fund teacher salaries, law enforcement, and border security instead of raising property taxes. "There is going to be a budget shortfall to affect all Texans' next legislation session; however, I look forward to working with my colleagues to offer a real solution," Gutierrez said. "Our state’s economic future is uncertain, and to best serve our state, we have to look at cannabis legalization as a solution and not keep going back to the taxpayers and raise their taxes."

Gutierrez has said that cannabis legalization in Texas could lead to an estimated $3.2 billion in state revenues and create 30,000 high-paying jobs. In a report from law firm Vicente Sederberg, Texas could generate $1.1 billion in tax revenues biannually through recreational legalization and following a taxation model like Colorado’s. Based on the assumption that more than 1.5 million Texans consume cannabis monthly, the report estimates adult-use cannabis sales to hit $2.7 billion annually. While the state has softened on cannabis in the past five years, it still maintains some of the country's strictest cannabis laws.

In 2015, state lawmakers passed the Texas Compassionate Use Act, which legalized medical cannabis oil with less than 0.5% THC for people with specific diagnoses, like multiple sclerosis and epilepsy. In 2019, Gov. Greg Abbot (R) signed a bill last summer to legalize industrial hemp. The states that just voted for legalization will open up several years of growth for IIPR, but legalization in Texas would be a tremendous market and would represent the growth in the out years.

We remain positive on our Innovative Industrial Properties (IIPR) thesis. 

EXPE

Vaccine headlines obviously had their impacts on the travel sector, and Expedia's (EXPE) was no exception and caught a strong bid.  Unlikely for MAR, where business travel is key to their ultimate recovery, EXPE is almost exclusively leisure and should see a more immediate benefit as travelers take advantage of the likely loosening of travel restrictions in the coming year (assuming the vaccine is rolled out in 1H’20). 

However, due to costs and the factors that make up the “new normal” it is highly unlikely that business travel will react so swiftly.  Outside of vaccine headlines, we offered our clients the following read thoughts after reviewing BKNG’s Q3 print – net-net, we still see a much stronger risk/reward for EXPE. 

To ours and other’s surprise BKNG put a real solid Q3, all things considered.  Strong performance in their ‘domestic’ travel segments driven by more robust alternative accommodation demand helped moved the needle in the quarter.  But what lies ahead for BKNG might not be exactly what holds true for EXPE and others in travel, and this was discussed last night.  BKNG with its heavy EU presence suggest room night bookings pace had slowed materially in October (-58% vs -43% in Q3), and then had slowed even more as they examined the last 7 days (-70% YoY vs -58% in OCT). 

There’s the obvious impact of Covid-19 and kudos to management for being open and realistic about the dynamics that are currently unfolding as investors surely are thinking about what the current impact from Covid actually looks like.  And while EXPE didn’t give as much granularity around their set up, we viewed their commentary as leaning more bullish on the current industry dynamics, but this is due most entirely to their exposure being more US focused, and less EU focused.  Of course, there’s the risk that Covid’s reacceleration in the US turns out to be just as bad as the EU and lockdowns shortly follow, which would naturally be bad for EXPE and all other travel names.  

But the key difference here is that EXPE ultimately has a lot more ‘control’ over their current story as they work on accelerating change at the company level, resetting their cost base lower (to the tune of $950MM+ lower), and also leveraging their crown jewel asset, VRBO.  BKNG could be in for a tougher ride over the near term, so we continue to favor EXPE as a top travel pick.    

BYD

Online real estate company Redfin published their Q3 housing migration report a few weeks back and included in the report were some interesting, though not overly surprising (to us) nuggets that pertain to the Las Vegas economy.  For a few years now we have been harping on the positive population migration trends into the Las Vegas, with major feeder states like CA and parts of the Midwest contributing both retirees and young professionals looking for better weather and lower taxes. 

Naturally the pandemic stymied out some of these trends and we saw little growth out of other migration proxies we track, but this latest report from Redfin solidifies that the Las Vegas valley is back and ranked 3^rd among all major metros in Redfin’s system in terms net user (homebuyer) inflow.  Separately, we have also noticed the trend in driver’s license surrenders (migration proxy) materially accelerate in recent months, and has shown no signs of a slowdown in October. 

All these trends should help offset continued weakness in the broader tourism economy (unemployment still high), but should really favor those operators that are leveraged to the core Las Vegas local economy.  Boyd Gaming (BYD) retains exposure to the market and are current Hedgeye best idea longs.        

UAA

Hedgeye CEO Keith McCullough is adding Under Armour (UAA) to the long side of Investing Ideas. Below is a brief note.

The uninformed volume that chased Monday morning's #vaccine highs just learned a great lesson about risk management... or did they?

Personally, I like buying things when they are on sale. Stocks do go down. And one of Retail analyst Brian McGough's new long ideas, Under Armour (UAA), is down -3% here into the close.

Here's a summary excerpt from Brian's recent Institutional Research note on the name:

Taking UAA higher on our Long Bias List. One step closer to being a Best Idea Long. The reality is that this brand has been left for dead. If you look at the company’s Apparel sales in the quarter – down 6% -- that rings true. But I was definitely encouraged by the 19% increase we saw in UAA’s footwear business in the quarter reported on Friday.  Footwear is a far more defendable business that apparel, and UA is seeing progress in that corner.

LVS

Hedgeye CEO Keith McCullough added Las Vegas Sands (LVS) to the long side of Investing Ideas this week. Below is a brief note.

Another stock that Gaming, Lodging, and Leisure analyst Todd Jordan likes (that also agrees with our Long China Consumer, CHIQ, Macro Team's view) is Las Vegas Sands (LVS).

Here's an excerpt from his Institutional Research notes on the name this week:

A full recovery may take some time, but we think Macau is at least at a positive pivot toward recovery.  While we actually took down our forward market revs a bit following 3 weeks of escalation (yes we got carried away), we remain positive on the stocks given the 2nd derivative, muted investment sentiment, and low valuations.  LVS remains our top idea in Macau but we also like WYNN which resides in our positive/long bias category.

MAR 

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

AXP

Recall, in our previous work on American Express (AXP), we highlighted the company's expanded lending operation in response to a slowdown in its core spend business, and presented its late-cycle, above-industry loan growth as a move down the credit ladder - a phenomenon we also observed in the lead up to the 2008 credit crisis.

Nonetheless, delinquencies moved lower y/y, reflecting the distortion of normal credit cycle dynamics by the size and speed of government and lender support programs rolled out in response to the pandemic.

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 on as a Best Idea Short. 

SMAR

Smartsheet (SMAR) was the first in the Project Management standalone category to go public. The PM category is highly competitive with little differentiation. But sticky when you land, which implies that there is upsell potential. And SMAR CEO Mader is good.

Until recently, the market believed in Mader + SMAR, went Long and gave them an adoption curve multiple. But there was no adoption curve. SMAR was adding 150k paying users per year for three straight years in a market that is supposed to be enormous (all knowledge workers) – that was our ‘tell’ that the market was small in reality. Our TAM work from this summer furthers that conclusion, and our original BB work shows the competitive dynamics which make it even more challenging. Tiny market, very competitive. 

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.

Bottom line, we think MDLA had a bit better 3Q post COVID recovery, went back to hiring, won some large new customers, and thus will notch a bit better organic sequential revenue growth in F4Q. If we are right, it should give all of us a chance to Short it again.

RL 

This week Dillard’s, one of Ralph Lauren’s largest wholesale customers, reported third quarter earnings. While the company put up a headline beat, it came from SG&A cuts and below-the-line items, as opposed to the operational strength that would otherwise help Ralph Lauren's (RL).

Comparable store sales were down 24%, which is nothing short of depressing, and inventories were down 22% (buying less branded product from vendors), which is bearish for the vendors like Ralph Lauren. Worth noting given that RL was up 13.7% on the week as a ‘reopening trade’ on vaccine news.

To be clear, there is absolutely nothing a return to ‘normal’ shopping patterns can do to help fix the Ralph Lauren brand, which we think is a melting ice cube due to lack of investment in R&D and marketing, and an over-focus in driving SG&A lower to drive the earnings algorithm.

WORK

Why is developer engagement falling for Slack (WORK)? We covered our active Short and went to the Bench in August as our data showed improving metrics into September. But the data now looks ho-hum. For now, we are stuck on Slack within investing ‘middle ground’. 

We are not on board with the call that Slack will go away due to Microsoft Teams. We find this thinking to be misguided because although some large company CIOs will switch to Teams it will only be CIOs who care singularly about the cost factor; anybody who is envisioning potential multiplier from their communications investment will be able to look beyond the cost difference, which as we’ve pointed out is a fairly small bill (can equip 1K employees with Slack for < the price of 1 year of an engineer in SV).  

ZI

Hedgeye CEO Keith McCullough is adding ZoomInfo (ZI) to the short side of Investing Ideas. Below is a brief note.

Aren't you glad you weren't scared to short more KSS or RL on green? Don't let your feelings get in the way of quality short selling opportunities...

Here's another high quality SELL idea that Ami Joseph has been rails on since the company's storytelling went public: ZoomInfo (ZI).

And here's an excerpt from Technology analyst Ami Joseph's Institutional Research note post this week's EPS report:

"The implication is the ongoing growth rate for ZI is less than you, or maybe even we, think. Easy comparison is behind, reality tests are ahead. Investors should gear up for a lot more M&A, a lot more capital raises, and a lot of 3rd party stock to be sold. Stay Short ZI."