Below are updates on our seventeen current high-conviction long and short ideas. We have removed Zoom (ZM) from the long side along with Marriott (MAR) and American Express (AXP) from the short side. We have added Guardant Health (GH), Insperity (NSP), and Anheuser Busch Inbev (BUD) 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
In an interesting turn in the competitive landscape for pet products, Petco Animal Supplies announced this week that it is likely to go public, after filing confidentially with the SEC for an IPO. Timing here is a double edged sword…on one hand, the physical store model in pet care is under tremendous pressure due to the pandemic, as evidenced by last week’s bankruptcy and liquidation of Pet Valu, which operated 358 stores in the US.
On the flip side, the pandemic caused a huge surge in pet adoptions, and a subsequent boom in demand for all things pet-related. Chewy (CHWY) and Amazon have the e-commerce infrastructure to run a duopoly in this industry – interesting in that the former duopoly was between Petco and PetSmart. But there’s still room for brick and mortar players to compete. The private equity owners are looking at a $6bn price tag for Petco – not bad given their $4.6bn purchase price in 2016. It makes sense…the secular trend is so powerful here and in favor of the online segment of the market, which favors CHWY.
But owners of secularly challenged brick & mortar retailers like Petco are smart to sell while the underlying demand market demand is peaking, and likely to see an incremental demand pop once the US is in full vaccine recovery mode. Petco operates 1,500 stores in the US, Puerto Rico and Mexico, and has about 5% of the ~$100bn market for pet products in the US. The capital is likely to go directly to the current owners, as opposed to reinvesting back into the concept to make it more competitive with CHWY. We’re not concerned about this as it relates to our CHWY long positioning.
NLS
On Wednesday Nautilus (NLS) and Vi Labs announced an enhanced partnership to embed Vi’s technology across the Bowflex cardio equipment line. Nine months after launching the joint real-time coaching experience and seeing a 350% increase in usage, the Vi coaching experience (which powers real-time, personalized workout experiences at home) will be integrated with Bowflex treadmills, indoor cycling bikes and Max Trainer machines.
Good read here for how Nautilus is managing its brand amidst the pandemic, in that it is investing in the technology to make it competitive with the Peloton’s of the world long after the pandemic ends. While not a game changer for the brand and the company (and the stock), it’s definitely a welcome development on the margin as it relates to keeping the brand increasingly hot in a dynamic operating environment.
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
So Good So You raised $14.5M in its largest funding round to date. The company provides plant-based beverages that are cold-pressed with natural ingredients known to improve the immune system. Rita Katona, the co-founder, said, “Being in the CPG beverage category, we need to grow at a certain rate, or we won’t be around.”
Juice shots and refrigerated shots did not exist four years ago, but the market is now estimated to be between $80 and $340M. In the past 18 months, So Good So You has grown more than 380%. The company said it had not reached 50% penetration in the grocery channel yet.
The company closed its cafes in 2019 and shifted to wholesale. Plant-based drinks, meats, etc., have seen a growth spurt during the pandemic seizing on increased health awareness. The juice shot market has numerous competitors now, including Jamba Juice, too many unless the market size can grow. It’s probably better to be an ingredient supplier to some of the competitors as SunOpta (STKL) is positioned than trying to pick the ultimate winner in the category.
IIPR
Innovative Industrial Properties (IIPR) announced that it is extending its long-term real estate relationship with Kings Garden, one of California’s top cannabis producers, with the acquisition of a Southern California property, which comprises approximately 192,000 square feet of industrial space. The purchase price for the property was approximately $25.4 million (excl. transaction costs).
Kings Garden intends to operate the property as a licensed cannabis cultivation and distribution facility upon completion of redevelopment. IIPR has agreed to provide reimbursement of up to $25 million. IIPR’s latest financing round was in May for gross proceeds of $100M. In the current growth environment the company is quickly putting its capital to work.
Including this property, IIPR leases six properties to Kings Garden, representing approximately 364,000 square feet of industrial space and a total commitment (including purchase prices and commitments to fund tenant improvements, but excluding transaction costs) of approximately $95 million. IIPR stands in a unique position at the intersection of the cannabis industry and the REIT space in a rapidly changing legislative landscape, earning outsized returns in the current environment with few competitors.
EXPE
Looking ahead, we’re well ahead of Street expectations on the top and bottom line expectations, and that’s even after ratcheting back our top line expectations due to weaker Agency bookings (air travel). The big delta between us and the Street is that we’re expecting significantly improved flow through on these future revenues moving into ’22 and ’23.
As we have been harping on since we elevated Expedia (EXPE) to Best Idea long status back in July, the cost opportunity is so big for EXPE and that against a backdrop of leisure travel oriented share gains and its explosive growth coming out of VRBO. The “new” EXPE is a different animal and investors will be taking notice in due time.
We see upside of 20-30% over the next 12-18 months as numbers grind higher and leisure travel sentiment continues to improve.
BYD
Over the last two weeks we heard some negative narratives regarding regional gaming and an apparent steep fall off in demand in November, so naturally we did some investigating of our own. We put out a more complete piece yesterday evening that dissects all of our findings in our quarter to date review, but the conclusions we found from both our channel checks and our review of QTD data suggest that investors should remain calm and long regional gaming stocks.
Sure, casino closures in MI and IL are a risk for Q4 earnings, but with the majority of other markets performing at or better than Q3 pace + margins holding strong + other gaming revenue levers like sports and iGaming kicking into gear, Q4 might not look as bad as some fear.
But even if Q4 brings more closures, we think investors will be willing to look past it, as the set up for ’21 and ’22 remains very robust as more states adopt sports betting, iGaming ramps up, and cost savings and margin improvement prove to be sticky. We like the regional stocks on any pull back, with Boyd Gaming (BYD) atop of our list.
UAA
Under Armour (UAA) made another smart move to get out of an unprofitable college endorsement deal – this time a $50mm deal with the University of Cincinnati. This comes on the heels of other cost-cutting measures like getting out of its deals with Berkeley and UCLA, cancelling its plans for the NYC flagship store, and selling off MyFitnessPal.
Unlike the UCLA deal, which has gotten outright nasty with each party suing the other (that $280mm deal was the richest in college sports history – and UCLA is suing for $200mm), this one looks very well-thought-out and agreeable to both parties. UA is buying out its 5-year deal for $9.75mm in cash (exit fee) and is providing $3.7mm worth of product through June of 2021. Is this a blockbuster move for UAA’s P&L?
No…but it’s yet another step in the right direction to right-size a bloated cost structure and focus only on revenue drivers. We think that consensus estimates are too low next year, as the footwear business has recently picked up momentum and the company is shifting towards higher-margin business by culling its off-price book of sales.
Not a Best Idea yet, but we definitely still prefer UAA long-side here. Management (CEO Patrick Frisk, not Plank) is making the right moves to undo 20-years of margin degrading mistakes.
LVS
Macau is still in its early days of recovery, but almost on a daily basis we’re presented with minor green shoots that are starting to add up into a positive trend. Our contacts on the ground reported that last week showed a slight step back in the GGR/day pace, but that step back was mostly hold related so not much to fuss about, especially since visitation continues to improve sequentially despite what should be a slower month in November seasonally.
With visitation almost reaching 21K per day, above October’s preliminary estimate of 19K per day, we’re encouraged by the sequential uptick and what it could mean when the border really starts to loosen in the coming year. Further, hotel occupancies reportedly were tracking in the 35-40%+ range so far in November, which is in line to slightly higher than the high 30%’s estimate for October – again, still a long way to go, but the positive 2nd derivative move remains unabated. Then finally to top it off for today’s news, the Macau Airport is reportedly adding another 10 daily flights in Macau this November (total of 40 vs 30 in Oct). On the margin, all these little improvements do matter.
We like the continued 2nd derivative trade and note that the visitation and anecdotal evidence suggests the overwhelming bulk of visitors are from the mass segment. The casinos were already EBITDA positive in October and the incremental mass customers should provide high flow through demand. We remain positive on the Macau turnaround story and feature Las Vegas Sands (LVS) as our top pick.
GH
Hedgeye CEO Keith McCullough added Guardant Health (GH) to the long side of Investing Ideas this week. Below is a brief note.
I call "selling-some" (in something that's up) and "buying-some" (in something that's down) "pruning and planting" within your portfolio...
The more ideas you have, the more asymmetry your portfolio has. My team has plenty of ideas.
While some people are chasing MTCH's chart today, others are selling Guardant Health (GH) on the news of their convertible offering. That's happening on light volume, so the #process says take advantage of that buying opportunity.
Here's Healthcare analyst Tom Tobin's latest summary of GH's recent quarter:
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Guardant reported 3Q20 revenue of $74.6M consensus of $65.9M [7 est. $62.0-69.0M]. Based on our Claims Index trend we had expected upside to clinical testing. The sequential uptick in volume at Guardant has also been seen across several of the companies we track. Anecdotally, we have heard several comments that cancer testing has been accelerating in recent weeks despite the reacceleration of COVID19. The updates on their clinical programs in colorectal cancer screening and expanded use were not meaningfully different than prior comments they’ve made. |
NSP
Hedgeye CEO Keith McCullough added Insperity (NSP) to the long side of Investing Ideas this week. Below is a brief note.
Now that we're into Day 3 of a US stock market correction (that we proactively prepared for using our volatility signals)... we can add to names that have corrected.
One of those names is a Industrials analyst Jay Van Sciver idea that continues to work, Insperity (NSP). Here's a good excerpt from his recent Institutional Research on the name:
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NSP | It’s The Pricing Our take on NSP, TNET and PEOs in general is that the intensifying complexity of employment under CARES & other COVID-19 packages, the stresses created by the pandemic itself, and a potential new administration/state regulations (e.g. Prop 22) would generate a favorable demand and pricing environment. In the interim, falling healthcare utilization because of the pandemic would generate significant insurance profitability, allowing these companies to exceed (unreasonably low) consensus estimates. Like MP, we don't think NSP is a very well understood stock, yet... |
BUD
Hedgeye CEO Keith McCullough added Anheuser Busch Inbev (BUD) to the long side of Investing Ideas this week. Below is a brief note.
Who likes beer? I am Canadian... so I love beer!
Consumer Staples analysts Howard Penney and Daniel Biolsi can't drink as many beers as this hockey player can, but they can analyze stocks. And they moved BUD up on their Longs list on The Call @Hedgeye this morning.
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"We are raising Anheuser Busch InBev on our Long Bias list as we look out to 2021, anticipating improving on-premise trends, continued gains in hard seltzer, and less leverage. The company's on-premise mix is less than 20% in the US, but several countries operate with a much higher on-premise mix, as seen in the following chart." |
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
Medallia (MDLA) is losing in their core market, has been losing to pure software and lighter weight approaches for some time, and on a forward look, is at risk of totally losing the market to the API centric players like Segment (acquired by Twilio) in CDP who can integrate data via API with a click rather than a many months integration by Professional Services. [For those who missed our Themes deck this summer, it is a must-review where we explain how the software market is pivoting to an API-First approach, and the implications of that pivot].
MDLA will not be able to turn revenue into a rich FCF stream with its current business model. 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
Kohl’s announced in its conference call this week that it will stop carrying the Chaps brand, which is a blow to brand-owner Ralph Lauren (RL). Per KSS’ CEO “Looking ahead, we feel good about our ability to show continued progress. In 2021 we will further iterate and evolve the portfolio to drive even more relevancy. This will include moving away from the partment 9 brand in Women’s as we shift our focus to Nine West, and exiting the Chaps brand altogether.
We are going to manage the brand portfolio and will exit additional down trending brands to make room for new relevant brand introductions.” Being kicked out of Kohl’s is like a double slap in the face. It’s the marginal mid-tier retailer where good brands go to die.
And Chaps was once a good brand. Not clear what RL does with that brand from here, but this substantiates our view that RL is underinvesting in its content, which challenges its top line trajectory on a go forward basis.
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
It wasn't that long ago when ZoomInfo (ZI) CEO Henry Schuck spoke at an awards night and passionately embraced that DiscoverOrg obtained its core asset through the hard work of many employees making many phone calls, rather than through the tricks of a hidden software. At that time, DO was some light version of 'anti-tech'. So the fact that a few short years later, just 19 months after Henry acquired his first technology platform, we are expected to believe that ZI has become a software dynamo is a critical wrinkle that causes us to sit outside the cheering station.
It is not that ZI cannot become a software company; it is just that we haven’t seen companies successfully turn into multi-billion dollar software companies via acquisition – not to say its impossible but there is a road to get there. Software M&A is good. It gets ZI further away from just being a 'dataset'. But software M&A is also complicated, especially when it comes to integrating machine learning algorithms and predictive data sets from various entities.
Right now, we think ZI is the most expensive tool in a market that gets harder to compete in each day and the customer count stagnation shows us at least for now there is some level of saturation in that market, at this price.
