Below are updates on our twenty six current high-conviction long and short ideas. We have removed Ralph Lauren (RL) from the short side. We have added AMN Healthcare (AMN), Trulieve Cannabis (TCNNF), Brink's Company (BCO), Visa (V), Fiserv (FISV), and Porsche Auto (POAHY) to the long side along with Stepan Company (SCL) and Kroger (KR) 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
Another solid quarter from Chewy (CHWY) reported this week. The company put up positive EBITDA of $5mm, well ahead of the Street’s estimate of a loss of $10mm. It beat revenue by 3%, and surprisingly took up 4Q sales guidance by nearly 10% as it noted accelerating trends into October.
Chewy added another 1.2mm customers this quarter, ahead of what we expected and spending per customer was up 4%, less than last Qs 9% growth, but growth in spend per customer is impressive given the large customer gains since new customers spend much less than retained customers historically. Autoship penetration remains high at 69.2% which was an improvement vs last quarter with still high customer acquisition (ie new customers must also be joining Autoship). The Chewy revenue machine is humming and the CEO shared a unique data point.
He said the 2Q 2020 cohort is 50% larger than the 2019 cohort of the same quarter and it’s spending 10% more. That step up in revenue on incremental customer wins is very bullish, there's still lots of good growth remaining. Management is also highlighting the pet pharma business stating that it is now at $500mm in online pet pharma revenue, noting that makes it the biggest online pet pharma business in the US after launching just a couple years ago. Gross margin was up 180bps, similar to last quarter on tougher compare as management noted a less promotional environment and private label penetration growth. The only negative we see is a slight slowdown in revenue from 47% to 45%, though guidance implies steady rate of change 4Q and we expect a beat which would mean a reacceleration.
The 4Q compare is much easier, so not reaccelerating would be a clear negative. The next big catalyst for CHWY will likely be International. Management is not detailing an International expansion yet, we think CHWY is putting the wheels in motion here, but is keeping the official announcement in its back pocket until it needs to show the next leg of growth. The good news is that Int’l expansion is not in the stock today – even with the stock pushing all time highs.
MP
It’s tempting to dismiss all SPACs as low-quality issues avoiding IPO scrutiny, but we don’t want to fight the SPAC tide if our investment process can remain intact. We’ve found some genuinely good companies amid the SPACophony. Take MP Materials (MP).
Chinese rare earths elements (REE) are extracted in a much more ecologically destructive manner than those at the Mountain Pass facility. By substituting MP’s surprisingly small environmental footprint for the Chinese REE Bigfoot, MP is producing lasting environmental gains relative to existing practices. Unlike NKLA, MP Materials is a profitable, growing company with top shelf management.
We added MP (FVAC at the time) as a Best Ideas long in August, with a favorable macro backdrop and quantitative signals increasing the odds of success. MP has been better than a double during de-SPAC.
STKL
Starbucks announced it will add oat milk to its menu across all locations nationwide in the Spring. This follows a successful test at 1,300 locations in the Midwest this year. In August, Starbucks added oat milk to its menu across Canada.
SunOpta (STKL) supplies Starbucks with soy, almond, and coconut milk. Oatly is the supplier of oat milk to Starbucks. Starbucks’ national store base could introduce oat milk to many customers who have not tried it. Howard Schultz is an investor in Oatly, which is probably why it has deviated from its usual practice for ingredient sourcing to purchase a more expensive brand in smaller package sizes. Oatly is supply constrained, so it is not clear if it can supply all of Starbucks.
Three weeks ago, SunOpta opened an expansion at its Alexandria, MN plant that will quadruple oat base production. This year oat milk overtook soy milk as the second most popular plant-based milk in the U.S.
IIPR
New Jersey Gov. Phil Murphy and state legislature leadership have reached an agreement on bills concerning the state’s regulatory framework on cannabis sales, giving more color to what the impending recreational market may look like. A vote to implement the bill is expected for December 17th.
The New Jersey Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act will cap the number of cultivation licenses at 37 during the first two years of the state’s recreational program; microlicenses for businesses with 10 or fewer employees are excluded from this cap. The bill proposes a 7% sales tax on cannabis purchases. Legalization in New Jersey could be a tipping point for the Northeast.
Both New York and Connecticut legislators have expressed a desire to have a similar legal framework for cannabis as the state borders are in such close proximity. Innovative Industrial Properties (IIPR) is well positioned to finance the growth in the Tri-State and Northeast region if legalization were to continue to spread.
EXPE
Following our deep dive presentation on ABNB and the alternative accommodation (AA) industry, we ran some scenario analyses to gauge what the ABNB IPO and its pending valuation could mean for the likes of Expedia (EXPE). In the analysis which we broke out below, we assume a range of stock prices for ABNB and determine what that would imply for its out year stabilized valuation (2025), and then applied those valuation ranges to EXPE's estimated EBITDA for their AA businesses. Sure, we can argue that ABNB will deserve to trade at a premium multiple vs peers given that it will grow faster and is a pure play in the space – all valid points. And we could also argue that the core business for EXPE and BKNG deserves to be trading at higher valuations than current, but that’s not the purpose of today’s analysis. What we really don’t know is how the market is implicitly valuing the AA businesses for EXPE (VRBO) – that’s what we’re trying to decipher below, but then apply the valuation that ABNB is getting to then indicate what kind of upside the other two AA players could see in their respective stock prices.
BYD
The early reporting states for regional gaming markets have started to filter in with both OH and MD reporting GGR in the last 24hrs, and the results were weaker than prior trend, particularly for OH. November was always going to be weaker vs October, given that the month lost almost a full weekend (Fri+Sat) vs the prior year. We had put out some work at the midpoint of the month to suggest that while there were risks in the system for the US casinos and Q4 could be somewhat in jeopardy, the data through the first 2 weeks had not shown any major signs of weakness. That said, Covid spread again and a number of states clamped down even further and urged citizens to stay home.
In November, MD revenues were fell 7.4% YoY, a deceleration from October’s -0.9% YoY, while OH was down -17.2% vs +6.8% in October. So more is at play than just the calendar. October was actually stronger vs our initial expectations when we add up all the data, but November is now proving to be pretty weak, and likely offsetting some of the positive gains. We’re going to run through our models in more detail today and tomorrow and see where we shake out, but if Q4 is off a smidge and Q1 is a little weaker we think the pent up demand factor would likely show up in months and quarters beyond that – as we so clearly saw in 2020. As of today, Boyd Gaming (BYD) remains our top pick in domestic gaming.
UAA
Good news for Under Armour (UAA) from a legal perspective, as Nike stepped in to endorse UCLA with its Jordan Brand. That matters because UCLA is suing UAA for $200mm in damages after UnderArmour backed out of the most expensive endorsement in college sports history.
The court date for UAA/UCLA has since been pushed out to May, and our sense is that, at most, it is on the hook for the difference between the $200mm deal and what Nike agreed to pay. NKE’s terms are not disclosed, but our sense is that it was in the $150mm range – likely over a 10-year duration. The important point here is that regardless, UAA is now far more likely to settle this one for a number that shareholders (and the balance sheet) will hardly notice as opposed to being held to a much higher/more costly number.
LVS
No change to our positive thesis on Macau despite the slow pace of the recovery. Investors should continue to look past the next few months to a period where access is less impeded. This is not a demand issue. Even with the restrictions, the underlying trends are improving, and it looks like November growth would’ve been a few percentage points higher if not for a low win % in the VIP segment. That trend has continued in December, apparently, but should normalize as it always does. We’re 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 and November.
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
Guardant Health (GH) claims continue to display an overall improvement week-over-week, likely suggesting that Guardant360 is expanding to more tumor types. A shift in the mix of diagnosis codes away from lung cancer may be a sign that Guardant is beginning to successfully penetrate additional markets.
Alongside the continued week-over-week improvement in Guardant360 billing, claims for Foundation’s FoundationOne CDx test have continued to improve as well. Foundation offers a notable private competitor to Guardant360. 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.
PEOs often rally 2x to 3x through a ‘hard’ pricing environment as the penetration growth story gets investors excited. That said, the stock comp was well in excess of previous, apparently ‘low’, levels, a benefit to adjusted numbers. No, we don’t buy that, but we can take the bad with the good.
In 4Q20, NSP is likely to see lower benefit costs and employment complexity driven pricing tailwinds. We expect the PEOs to continue to work into year-end. Like MP, we don't think NSP is a very well understood stock, yet...
BUD
According to IRI, year to date through November 1, beer category dollar sales grew 15.5% in the off-premise channel driven by on-premise restrictions. Yet, for most brewers sales are lower than in 2019 because of the loss of the on-premise business. This year, the flavored malt beverage (FMB) segment (includes hard seltzers) accounted for half the dollar sales growth.
FMBs grew 72.5% YTD, outpacing domestic super-premium growth of 20.1% and non-alcoholic beer growth of 38.9%. Craft beer grew 14.6%, imports grew 13.2%, cider grew 11%, and domestic sub-premium grew 1%. The three brand families that gained the most dollar share in the first ten months of 2020 were White Claw Hard Seltzer +2.5%, Truly +1.2%, and Bud Light Seltzer +.8%.
The Budweiser brand family lost the most share points at -2.1%, followed by Coors -0.5%, and Natural -0.5%. Michelob Ultra grew 23.7% in 2020, becoming the #2 beer brand. The Budweiser family grew 2.3% while the Natural brand increased by 0.6%. Looking out to 2021, after the vaccines are meaningfully distributed, on-premise sales will recover, but the scanner data investors see will look weak. It will be a reversal of this year, but investor's visibility in trends will seem markedly less.
We continue to be long 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
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.
AMN
Hedgeye CEO Keith McCullough added AMN Healthcare (AMN) to the long side of Investing Ideas this week. Below is a brief note.
You didn't think I was going to flip to net short in #Quad2 did you?
I'm looking for longs that are A) down on #decelerating volume that B) my analysts are building research edge in. One of those names is AMN Healthcare (AMN) today.
Here's a good summary on why from Healthcare analyst Tom Tobin's Healthcare Pro research note:
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COVID-19 vaccine news is dominating headlines, whether it be vaccine development and approval or some other angle like distribution/allocations, and cases continue to rise around the U.S. causing new lockdowns in some cases (e.g., LA County). What’s becoming clearer to us, from the data, is that there are some major headwinds and tailwinds forming. The pull-forward of flu vaccinations has sort of cleared the supply chain for the COVID vaccine, which is interesting, and there's the incremental demand/recovery of in-person care, pent-up surgeries, colonoscopies, etc. coming (don’t forget the ~100MM people in the high risk category, most of which have been avoiding care). As such, we remain bullish on AMN – one of our top Long ideas – and can see staffing being “hot” for at least the next 12 months. |
TCNNF
Hedgeye CEO Keith McCullough added Trulieve Cannabis (TCNNF) to the long side of Investing Ideas this week. Below is a brief note.
I've been waiting, patiently, for a pullback in some of Howard Penney's favorite Long Cannabis ideas. We're getting one in Trulieve Cannabis (TCNNF) in the past few days...
Here's Consumables analyst Howard Penney's recent recap from his Consumables Pro product on the name:
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Trulieve Q3 Earnings (TCNNF) TCNNF is on the Hedgeye Best Idea list as a long and posted a very strong 3Q20. Trulieve had a record quarterly revenue of $136.3 million, representing a sequential QoQ of 13% and a 93% increase YoY. Unaudited pro forma revenue, which includes PurePenn and Solevo and assumed the acquisitions had occurred on January 1, 2020, would have been $154.9 million for the current quarter and $392 million for the nine months ended September 30. In 3Q20, the shift to GAAP may be causing some differences to consensus numbers, but under GAAP, TCNNF had a gross margin of 75%. Operating income for the company was $43.4 million in 3Q20 compared to $37.5 million last quarter. Net income was $4.7 million for the third quarter compared to $6.6 million in Q2, resulting in EPS of $0.04. Under IFRS, for net income and EPS, it's important to note that if the fair value impact of biological assets and the revaluation of debt warrants were excluded, net income would increase to $33.3 million for the third quarter compared to $28.4 million in Q2, resulting in EPS of $0.30. Under GAAP, the fair value impact of biological assets accounting goes away, but the debt warrants' revaluation will remain. Under GAAP, net income was $17.4 million, resulting in EPS of $0.15 on a fully diluted basis. |
bco
Hedgeye CEO Keith McCullough added Brink's Company (BCO) to the long side of Investing Ideas this week. Below is a brief note.
There is a long list of #Quad2 Longs that I have been waiting on, patiently, to signal on red...
One of those names is another long from Industrials analyst Jay Van Sciver, Brink's Co (BCO). Here's a summary excerpt from his Best Ideas launch presentation (see his Industrials Pro product for details):
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"We see Brinks as a consolidation and outsourcing-driven growth play within business services. Brinks benefits from the structural advantages associated with top-tier asset-based logistics services providers, offering significant earnings growth potential in a post-pandemic world." |
V
Hedgeye CEO Keith McCullough added Visa (V) to the long side of Investing Ideas this week. Below is a brief note.
While the Financials (XLF) have been relative dogs as of late, they are longs in #Quad2…the growthier, the better...
One name that Financials analyst Josh Steiner still likes (both short and long term) is Visa (V) and it has recently corrected towards the low-end of its @Hedgeye Risk Range.
Here's a recent data update on Visa from Steiner's popular Financials Pro product:
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Several months removed from the expiration of enhanced UI benefits, domestic spending volumes slowed a bit on the margin, but are holding up relatively well in November, with debit spending volumes proving robust as the recovery in credit spending continues to make progress |
FISV
Hedgeye CEO Keith McCullough added Fiserv (FISV) to the long side of Investing Ideas this week. Below is a brief note.
Financials analyst Josh Steiner getting more ice time today because the Financials are lagging (i.e. for sale!)...
He got lucky this week because he added a new Best Idea Long, Fiserv (FISV), and KKR sold the Street some stock at $112/share, taking it to the low-end of its Risk Range.
Here's the intro to Steiner's research note on the name:
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We are adding Fiserv (FISV) as a Hedgeye Financials Best Idea Long Notwithstanding pandemic-related headwinds and strong equity price performance of the past month, we take confidence in Fiserv's unique position as a direct beneficiary of two separate and simultaneous secular tailwinds: (1) exposure through its merchant acceptance business to the ongoing and accelerated migration to electronic payments at home and abroad, and (2) the digital transformation underway in the banking industry and the increasing needs of regional and community banks for external IT solutions like those provided by Fiserv. |
POAHY
Hedgeye CEO Keith McCullough added Porsche Auto (POAHY) to the long side of Investing Ideas this week. Below is a brief note.
Our Industrials analyst Jay Van Sciver has one of the hottest hands on our stock picking team right now and he brought our Industrial Pro subscribers a great new idea in Porsche Auto (POAHY) this week.
Here's his teaser/intro, which I thought was quite good (think about what Tesla is "worth" relative to Porsche right now...):
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In a market where electric vehicles are a bubbly rage, shares of VW and Porsche have been oddly excluded. VW is betting hard on an EV future, from multiple product launches to charging networks to software. But VW shares have mostly lagged the market, as execution on margins and ESG-type initiatives hasn’t delivered. Value-unlock and sum-of-the-parts arguments, while economically reasonable, have failed to generate a commensurate share price in a skeptical market. Are shares of Porsche & VW likely to outperform as the company flexes its scale, distribution, and brand positions in an evolving competitive landscape? Will progress post-pandemic surprise investors, getting investors excited about VW’s green future and value creation opportunities? |
SMAR
Our Smartsheet (SMAR) bear thesis remains 100% intact: SMAR has slowing customer growth, while driving billings growth mainly via upsell, and already on the all-too-familiar acquisition path to supplement bps of growth.
Some evidence of slowing from the numbers: recovery organic billings will be ~30% Y/Y in F4Q, down from 58% Y/Y last year at this time (assuming F4Q billings beats the guidance midpoint by ~600bps). The smallest customer cohort of $5K continues to slow in absolute terms each quarter. This is the funnel for the larger $ cohorts. SMAR is getting later and later in its growth game. The company stopped disclosing total customers and will likely soon stop disclosing the size of the $5K cohort.
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.
On a medium to long term basis, we can see MDLA facing a future that includes churn of its largest and most sophisticated customers. We think MDLA organic revenue will be lower in five years than it is today. And, even acquired revenue may not provide that much lift as the real-world interpretation of CEO Leslie Stretch's "early stage winners in technology" is 'zombie companies who have stopped growing.
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
Inflation of Macro Quad2 can have negative effects on HBI’s margins. Cotton is one of the main raw materials for HBI goods. It has been rising, up over 50% from the bottom in the spring, and now up Y/Y. Hanesbrands (HBI) gross margin has about 40-60bps of change for every 10% YY move in cotton costs. There is about a 12 month lag for cotton price changes to flow through the P&L.
HBI does not have pricing power over its core retail partners (WMT, TGT, Department Stores) so it will have to eat the majority of the rising cotton prices especially when prices move rapidly, as they have this year. That will be a margin headwind into late 2021 when the street is looking for big margin expansion and YY earnings growth.
BYND
Beyond Meat (BYND) is benefiting from “flexitarians” looking to reduce their meat consumption for health benefits. There is a movement among some people that associate eating less meat with healthier outcomes.
At the same time there is another movement to eat less processed food. Plant-based meat is significantly more processed than animal meat. The second movement guarantees that plant-based meat will never be at the center of all health diets. There is a risk it is no longer considered healthier in which case it would be a more expensive, non-meat meat.
SCL
Hedgeye CEO Keith McCullough added Stepan Company (SCL) to the short side of Investing Ideas this week. Below is a brief note.
Looking for some smaller cap (pandemic winner) shorts like WING to hedge some of that Small Cap Long Factor Exposure you're carrying with your long MP, SAMA, etc. ideas?
Industrials analyst Jay Van Sciver's got a new SELL idea in Stepan (SCL):
"At best, SCL looks to us like a small, family-run player in an increasingly challenged industry facing a post-pandemic downturn."
KR
Hedgeye CEO Keith McCullough added Kroger (KR) to the short side of Investing Ideas this week. Below is a brief note.
Another recent SELL idea by our Independent Research (no banking or Old Wall) team has been Kroger (KR). Yes, it used to be a great COVID long - now it’s a short. Yes, we go both ways, and like it.
Here's Consumables analysts Howard Penney and Daniel Biolsi's summary excerpt from the recent KR report:
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Takeaway: KR is on our Best Idea Short list. Kroger reported FQ3 EPS of $.71 vs. consensus of $.67. ID sales ex.-fuel grew 10.9%, above consensus estimates of 9.3%. Digital sales grew 108% and contributed 4.6% to ID sales. During the current wave of lockdowns, the company is seeing further traffic declines offset by larger baskets. The week of Thanksgiving decelerated compared to the first two weeks of November. Taken together, November tracked at similar levels seen in FQ3 despite the new round of lockdowns. |
