Below are updates on our nineteen current high-conviction long and short ideas. We have added Match Group (MTCH) 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
The various news reports of Black Friday results have been coming in this week, and the clear conclusion is that brick and mortar was ugly while ecommerce continued its share gain. Brick and mortar was reported as bad as down 50% on Black Friday, and online data points are in the area of 20-30% growth, which is similar to the growth rates seen for the last 6 months or so.
Every new customer win for Chewy (CHWY) during the cyber 5 sales (Thanksgiving to Cyber Monday) is not simply a won transaction, but rather an opportunity to drive a valuable long term customer. The Covid cases continue to rise and it will be a while before we are back at store traffic levels we saw before the pandemic. That leaves a lot of time to drive outsized customer wins and bring more share and profits onto the Chewy platform for good.
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
SunOpta (STKL) recently opened the expansion at its Alexandria, Minnesota oat base processing facility. The expansion cost $26M. The process at the plant to produce oat base for the milk is similar to making a bowl of oatmeal.
Water is added whole oats, particles and larger lumps are stirred to create a smoother texture then cooled before being shipped to other facilities to be mixed as oat milk. The expansion will quadruple the oat base production at the facility. SunOpta needs the capacity in order to keep up with demand.
Over the past year, the oat milk market in the United States has grown more than 250% and is now the second most popular plant-based milk in the country after almond milk, according to Nielsen,
IIPR
This week Ayr Strategies announced a $75M senior secured debt financing. The company is one of a small number of cannabis companies to be able to issue public debt. The interest rate on the notes will be 12.5%.
The high interest rate is a reflection of the difficult access cannabis companies have to financing and not the fundamentals of the company. The interest rate on Ayr Strategies’ notes is on the lower end of the range for cannabis companies.
For many companies without access to public debt financing a sale leaseback is one of the most appealing ways to raise capital. With many cannabis companies seeking to expand operations finding financing is crucial. Innovative Industrial Properties (IIPR) is well positioned to finance the growth in the industry at very favorable returns.
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
Covid has decimated families and business across the world but the net impact has been decidedly positive for at least one industry – regional gaming. In addition to forcing the operators to streamline their business and focus on their core, and most profitable revenue driver – gambling – Covid has also pulled forward the growth of on line sports betting (SB) and internet gaming (iGaming). States are facing big budget deficits due to Covid and our looking for new tax sources.
On line sports betting could be introduced in the legislatures of two big states, Ohio and New York, in December. Boyd Gaming (BYD) would stand to benefit. 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
Under Armour (UAA) launched a new Curry Brand this week. It’s a good move by UA to double down on an asset and leverage the cost — keeping in mind that they’re cutting bait on other endorsements like university sports teams that have weaker returns.
As of now Curry is limited to a shoe — makes sense to leverage it into apparel like they’ve successfully done with The Rock. The apparel is starting in basketball and golf (Curry actually has a decent golf game and leverages his celebrity status in high profile celebrity golf events). People will compare the opportunity for Curry to the Jordan brand. Does Steph have the street cred to be another Jordan (who’s brand did $3.6bn in wholesales equivalent revenue last year)?
Not in a million years. But he doesn’t have to do that. All this needs to do is add $200-$300mm in apparel sales and it’s a big deal for UA. It’s definitely a positive for the UAA stock.
LVS
No change to our positive thesis on Macau. encouraged by the increasing visitation numbers and anecdotal color on the casino floors that could suggest base mass is starting to accelerate. With fairly negligible VIP activity, the customer mix bodes well for continued profitability following a mostly cash flow positive October.
Of course, we’d certainly like to see more sequential progress, but the 2nd derivative trade is alive and well and the stocks should continue to grind higher. To the extent the Macau government and concessionaires are successful with their mainland marketing campaign to promote Macau as safe and accessible, and there is limited fallout from recent limitations on “outbound” China travel, visitation growth to Macau could really start to accelerate.
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 today’s data point, we remain positive on the stocks given the 2nd derivative, muted investment sentiment, and low valuations. Las Vegas Sands (LVS) remains our top idea in Macau.
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
In a Bullish #Quad2 portfolio strategy, you want to be looking for A) Bullish @Hedgeye TREND stocks that are B) down on #decelerating volume. Insperity (NSP) is a good example of that.
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
According to BeerBoard, the on-premise business open rate fell to 85% for the weekend of Nov. 20-22, the lowest since June, as seen in the chart below. BeerBoard manages over $1B in retail draft beer sales through its digital platform. The volume of draft beer poured decreased 50% YOY for the weekend of Nov. 20-22 and decreased 12.9% compared with the weekend of Nov. 6-8.
Texas reports its alcoholic beverages sales tax receipts monthly. In November, alcoholic beverage spending declined 19% YOY, improving from -25% in October and -34% in September, as seen in the chart below. On-premise trends were improving before some states passed restrictions on bars and restaurants recently. In Texas, bars were shut down in mid-March then allowed to re-open on May 22 with capacity limits. In late June, bars were shut down again then allowed to re-open once again in October by county. Bars were also allowed to reclassify as restaurants since June as long as food sales exceeded alcohol sales. The on-premise recovery will happen as soon as governments permit it as seen in the Texas example. We remain long on Anheuser Busch Inbev (BUD).
AWI
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). Armstrong World Industries (AWI) is an exceptionally good franchise within building products and this market failed to recover (much) from the GFC lows.
MTCH
Hedgeye CEO Keith McCullough added Match Group (MTCH) to the long side of Investing Ideas this week. Below is a brief note.
#Quad2 Bull markets are a lot of fun.
Subscribers to both The Call @Hedgeye and Andrew Freedman's Communications Pro product know that Match Group (MTCH) is one of his Best Ideas on the long side right now.
It's corrected in the last few days, so that's when you buy-more.
Here's the headline from the note he published to subscribers on September 25th, 2020:
|
LONG MATCH GROUP (MTCH); +40% UPSIDE We are adding Match Group, Inc. (MTCH) as an active Long in the Hedgeye Communications Position Monitor. We believe MTCH's portfolio strength will be put on display in the coming years, with Hinge leading the next phase of growth. Tinder will continue to be the portfolio anchor but will become a less meaningful contributor to revenue and EBITDA growth. |
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
F3Q and F4Q data for Medallia (MDLA) appears to be improving likely due to improving hotels + auto + consumer end markets, and also due to some recent wins with large customers. The combination of an oddly timed crowding of the Short and the improving data caused us a day or two of palpitations. The next 2-3 quarters are MDLA's last gasp at organic sea-level (20%+) growth.
Just as CEO Leslie Stretch used the last accel period to exit in an IPO, he will make one final push to sell MDLA to the greater fool (IBM comes to mind). However, in this timeframe he knows he must keep the music going. Our thought is that he will have to pay up for a ~$300MM acquisition netting him $50-60MM of zombie, uncorrelated revenue (accounting software, graph DBaaS, other mementos from his past come to mind), followed by another $100M+ acquisition by late summer to fuel the back of the next fiscal year.
RL
The Gap Between PVH and RL is Widening. PVH puts up $1.32 for the quarter – crushing consensus of $0.24. Real expectations (whisper) was closer to $0.50. Beat was largely revenue and SG&A-driven. Don’t get me wrong – still horrendous with sales -18% yy, and EBIT off by better than 50% -- but still a nice sequential uptick. International, most notably, was flat yy, while the US wholesale biz remains under pressure. E-comm – the stat I care about most – was up 70% during the quarter. Gross margin missed – contracting by 260bp despite tight inventory, which was greater than we expected.
Probably the biggest callout of the quarter. Guided 4Q down 20%, as 4QTD DTC trends decelerated from 3Q (-25%, down meaningfully from 11% in 3Q). The gap between PVH (bullish) and RL (bearish) is becoming more apparent as every quarter passes. It used to be that Ralph Lauren's (RL) was the higher quality name, with PVH as its little brother. But today, PVH simply has better brands, better/deeper management, a better operating plan/strategy, and better momentum with the consumer.
We’re short RL, and these PVH results makes me more confident in that view. Still wouldn’t own PVH here, but the fact that RL carries a higher multiple than PVH seems ludicrous.
ZI
If ZoomInfo (ZI) can unlock this market and accelerate paid customer count from ~16k today to 2x that number organically in the next couple of years then we will be wrong about the Short. While in theory we can imagine this to be so, we wonder why this company has been acquiring (and re-pricing) so aggressively in the last couple of years. Typically when organic growth is strong, companies don't substitute or supplement it with acquisitions. 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.
HBI
Hanesbrands (HBI) is one of the few apparel brands that will actually have difficult comparison heading into 2021. The comparison problem comes from about a billion dollars of PPE (Personal Protective Equipment) that the company made and sold, mainly to the government, at healthy margins. That will create big y/y earnings pressure in 2Q and 3Q of 2021 even if the business has recovered.
The company has a new CEO, and his plan is to try to drive top line growth by investing in the brands. That means margins will be going down. He clearly signaled his interest in investing, but the company hasn’t explicitly guided how much. Our analysis showed HBI to be over earning for years before the pandemic, and the margin reset to reinvest is likely much larger than the street expects.
A big guide down, heading into tough compares, for a levered stock like HBI will be a negative stock event.
BYND
There are a number of companies entering the plant-based meat category. There are few barriers to entry as seen in the number of new start-up entrants in the young category. With each new entrant it becomes more clear that Beyond Meat and Impossible Foods do not have a significant technological advantage, but instead have a head start and more brand recognition. The large food conglomerates can spend to get both name recognition as well as distribution. 2021 will bring new challenges for Beyond Meat (BYND) as it benefited from the meat shortages during the pandemic to get more shelf space.
