Below are updates on our eighteen current high-conviction long and short ideas. We have removed Nautilus (NLS) from the long side and Slack (WORK) from the short side. We have added Armstrong World Industries (AWI) to the long side along with Hanesbrands (HBI) and Beyond Meat (BYND) 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
Chewy (CHWY) rallied to new highs this week. The environment remains strong for CHWY customer adoption. The accelerating Covid cases means consumer will be looking to do more shopping for their pets online this holiday.
That means more share for CHWY. Investors in CHWY may have some hesitation for CHWY to be able to “comp the comp” next year with its growth performance, however we think its more doable than most expect given how sticky the Chewy customer has been historically and how they tend to spend more in Years 2+ of their relationship with Chewy, not less.
CHWY also has some levers to pull to drive further customer acquisition with international expansion and accelerated marketing. We still think CHWY is one of the best long term growth stories in ecommerce.
mp
Fortress Value (FVAC) now trades under its new ticker (MP). Is there a bubble in alternative energy and electric vehicle names? Sure, maybe. MP isn't priced for the bubble, and why fight the foam? We like aspects of the business, and now MP offers some very expensive calls that can be written, if that is one’s thing. De-SPAC for NKLA, SPCE, RIDE and several other SPACs ended up being a period of substantial outperformance.
The ticker changed, market caps increased, and the equities started to hit various investor/fund/ETF mandates. Will it be different with so many SPACs out there? Maybe, but SPACs have raised a bit over $80 billion in 2020 – not so much compared to the total equity market. We’ll keep MP on a tight leash but like the odds from these levels over the near-term.
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 SPINS, plant-based milk makes up 16% of the total milk market, including dairy. That is up from 14% in 2019 and 13% in 2018. In the year ended Oct. 10, non-dairy milk sales have increased by 16.4% to $2.3B.
Oat milk has surpassed soy to be the #2 plant-based milk with a 10% share. Almond milk remains #1 with 63% of plant-based milk. Unilever announced this past week that it set a $1.2B target for its sales of meat and dairy alternatives over the next five to seven years, a fivefold increase. Danone’s target announced months earlier, is $6B by 2025. The National Milk Producers Federation has lobbied the FDA for years to enforce existing regulations to stop plant-based milk companies from using the term “milk” for their product.
A spokesperson for the FDA said, “The FDA shares the concern that the labeling of some plant-based dairy alternatives may lead consumers to believe that these products have the same key nutritional attributes as dairy products.” The FDA has said it is currently considering more guidance on products using “milk” to describe their product. SunOpta (STKL) has three planned expansion projects to increase its capacity and capabilities in plant-based milk. SunOpta is a top private label supplier to plant-based milk producers.
IIPR
Jushi Holdings, a vertically integrated, multi-state cannabis operator, announced plans to nearly double the square footage of its subsidiary’s grower-processor facility in Scranton, PA from approximately 90,000 sq. ft. to more than 160,000 sq. ft. in a phased expansion.
The majority of the approximate 70,000 sq. ft. expansion project will be focused on increasing the facility’s canopy space, which upon completion will nearly triple to approximately 98,000 sq. ft. The first phase of the expansion is expected to come online in mid-2021, and the final phase will be completed by the second quarter of 2022. In total, Jushi expects to invest approximately $50 million on the project. Jushi operates eight retail dispensaries in Pennsylvania under its Beyond/Hello brand.
Innovative Industrial Properties (IIPR) will partially finance the expansion project via an upsize to the existing lease agreement between the parties. Pennsylvania’s medical marijuana market is rapidly growing and has strong potential to go recreational in 2021, pending certain Republican lawmakers changing sentiment.
IIPR stands to gain from this market growth potential as a preferred capital provider under federal prohibition. Aside from Jushi, IIPR has agreements in Pennsylvania with public and private companies like Curaleaf (CURLF), Green Thumb Industries (GTBIF), Green Leaf Medical, Holistic Industries, PharmaCann, and Maitri Genetics. 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
A key topic that we have been focusing on during the recovery to date relates to the approach that hotels might take with OTAs and lower frequency leisure guests. It has been our contention that given the dearth of business travel demand and group demand, the hotels will be looking to lean heavily into the OTA channel (as they have done in prior downturns).
Based on data from Kalibri Labs through October (released yesterday), it appears that similar trends from the early recovery days are holding true; following property direct (walk-ins mostly), OTAs continue to recover the fastest among all the demand channels, and are still meaningfully exceeding the growth driven by brand.com (e.g. Marriott.com). In October, it looks like the gap vs the brand.com may have narrowed a touch, but the broader outperformance continues and this should be a relative benefit moving into ’21. More leisure demand will likely be stimulated as the vaccine is disbursed.
GDS and Group are more representative of business travel and those channels continue to be down 80-85% YoY, which is consistent with what we’re hearing from management teams so far. Overall demand remains soft, but we’re more focused on the trajectories across different channels, which for now favors the OTAs. We remain bullish on Expedia (EXPE) from here and still see considerable upside led by earnings revisions and potentially multiple expansion in the coming year.
BYD
Permanent cost reductions + the realization that many core costs are truly more variable than they once thought = ample opportunity for the company to still reimagine its business, and we like hearing that.
Even after assuming a solid ramp in OpEx as more gaming and non-gaming revenues come back, the base at which Boyd Gaming (BYD) is working from today should lend itself to nice operating leverage in the out quarters and years. We’re not going to assume the Q3 run rate for costs and margins is perfectly sustainable. Rather, we see costs rising as revenues improve, but nowhere near 2019 levels. Many cost reductions look permanent, and management’s optimism around the future, we had to hold back raising estimates even more.
UAA
Dick’s Sporting Goods (DKS) reported earnings this week. DKS is one of Under Armour’s biggest wholesale partners. Sales results for DKS were strong, with 3Q sales up 23%, and the company reporting it had its best in-store comparable sales growth ever. D
KS management called out athletic apparel strength several times, which is likely a good read for Under Armour’s sell through at retail. Even with the rally in the stock over the last couple months, the implied market expectations are still quite low for Under Armour (UAA). Historically when it shows growth UAA trades at a hefty premium and our view of the trend fundamentals remains bullish.
LVS
On Wednesday of this week, Sands China President Wilfred Wong offered some remarks at a media event in which discussed the potential timeline for the Londoner opening and also provided some color on the broader market.
For the Londoner, it appears that February 2021 is the target date for its opening, which is on track with their earlier expectation for construction to be completed in December and following a phased reopening starting in 2021. Components of the project won’t yet be entirely finished; for instance, the exterior and façade, but the inside and the premium suites at the Londoner Court (370 suites) should be complete for the time of opening. With the market inflecting and demand coming back into the market, the opening could be coming at a crucial time as Macau starts to serve a high degree of pent up Mainland China demand.
Fresh product that is geared towards the fastest improving segment (premium mass) should create a nice comparative advantage come 2021 and is still a major reason we feature Las Vegas Sands (LVS) as a Best Idea Long. Wong went on to discuss trends in the market suggesting that all their hotels could see ~40% OCC in December, and that he expects GGR to continue to trend higher. Higher end retail spending remains a bright spot and appears to be consistent with the color released on the Q3 calls earlier this month.
GH
There has been a heightened focus on Guardant Health (GH) following the pricing of its $1B convertible debt offering (due November 2027). The incremental attention prompted us to refresh our data and look for fundamental changes. From that subsequent analysis, we found an overall improvement in the claims trend week-over-week, and we continue to see a shift in the mix of diagnosis codes away from lung cancer. The mix shift may be a sign that Guardant is beginning to successfully penetrate additional markets.
Foundation’s FoundationOne CDx test is a notable private competitor to Guardant360. From our claims data, Foundation continues to look strong due to demand in lung cancer and many other major cancers. We do not foresee these results to be a headwind for GH, but rather a tailwind for genomic profiling demand across the space. We remain Long GH in the Hedgeye Health Care Position Monitor.
NSP
Our take on Insperity (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
Several states report tax data for on-premise alcohol sales comprising 12.5% of the country’s legal drinking age population. In April, on-premise spend on alcoholic beverages was down 84.4%. In August, the spending was down 38.6%. Since most of the states that report the data re-opened on-premise earlier, the country as a whole were likely weaker than the reported figure.
In Texas, alcoholic beverage taxes were down 24.2% in October compared to the prior year, improving from -24.2% in September, as seen in the chart below. On-premise trends were improving before some states passed some restrictions on bars and restaurants recently. Texas has a 14.95% on-premise tax on beer, 6.7% on liquor, and 14% on wine.
Anheuser Busch Inbev (BUD) remains a long.
AWI
Hedgeye CEO Keith McCullough added Armstrong World Industries (AWI) to the long side of Investing Ideas this week. Below is a brief note.
Here's a good example of what I wrote in the STKL alert. A name (AWI) that Industrials analyst Jay Van Sciver has on his Industrials Pro Best Ideas Long List, that is down on #decelerating volume today...
Jay has had a heck of a year finding names that aren't on the radar of consensus - here's an introductory excerpt to what got him into Armstrong World Industries (AWI):
AWI | Moving To Best Ideas Long
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As discussed in our September 17th black book (we planned to add AWI as a Best Ideas Long after 3Q20 earnings. Given that we are now past that problematic earnings report and, presumably, have visibility to the easing of some pandemic pressures on non-residential spaces, we’ll complete the move. AWI is an exceptionally good franchise within building products and this market failed to recover (much) from the GFC lows. |
Don’t chase. Buyem on red. Playing The Game is better that way.
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
This week one of Ralph Lauren's (RL). wholesale partners JWN (Nordstrom & Nordstrom Rack) reported earnings. The results were in aggregate better than expected, but the near term sales trend remains weak. We’re actually bullish on Nordstrom given the likelihood of highly elevated demand in 2021, low street numbers, and poor buy-side sentiment (high short interest), but for RL the pressure on sales remains.
Nordstrom permanently closed 16 full line stores this year which will help its own P&L, but will hurt long term distribution for RL. We see the earnings expectations for RL as too high, as the company needs to reinvest in the brand to support long term revenue growth. This is especially important as its traditional brick and mortar distribution is at risk, and the consumer shops more consistently online where brand relevance becomes more powerful given limitless product options.
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.
hbi
Hedgeye CEO Keith McCullough added Hanesbrands (HBI) to the short side of Investing Ideas this week. Below is a brief note.
There's obviously risk mgt #process-based reasoning on why I covered every single stock short (ex- WORK) pre SPY and IWM ripping all-time highs (yesterday)...
There's also plenty of reasons to come back to favorite shorts now that the VIX is signaling it's first higher-low of the week (as of this morning).
Hanesbrands (HBI) is at the top of my list to re-short. Retail analyst Brian McGough remains the long-term bear on the name.
BYND
Hedgeye CEO Keith McCullough added Beyond Meat (BYND) to the short side of Investing Ideas this week. Below is a brief note.
AFTER the US stock market ramped to all-time SPY and IWM highs, plenty of shorts got squeezed... and many short sellers feel shame...
For those of you who have been short selling for 20 years, you know the #behavioral part of The Game matters. When you "feel" like you can't short anything, ever again, is a great time to start feeling great about putting on more shorts.
One stock Consumer Staples analyst Howard Penney has had nothing but bad feelings (and data) about since the storytelling went LIVE @CNBC is Beyond Meat (BYND). Here's a good excerpt from one of Howard's recent Consumables Pro (#subscribe) notes on the name:
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DOES BYND HAVE A FAST FOOD "BURGER" CATEGORY PROBLEM? "MCD never tested the BYND product in the USA. The Canadian test of BYND lasted only a few months, and MCD had a few polite words after the trial ended. Then came the McPlant controversy leaving BYND with a permanent black eye because it will likely never be sold in an MCD store as a BYND "burger." Dr. Sylvain Charlebois, a professor at Dalhousie University in Nova Scotia, has sound reasoning why MCD is shunning BYND. "It's better than beef' rhetoric has hurt the brand and the category. Instead of positioning the product as unique or an alternative, Beyond Meat has become its own worst enemy by encouraging consumers to ditch meat. The reality is that most Canadians (and Americans) still enjoy traditional animal proteins. It is very much a part of our heritage." |
