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Long: CHWY, MP, STKL, IIPR, EXPE, BYD, UAA, LVS, GH, NSP, BUD, AWI, MTCH, AMN, TCNNF, BCO, V, FISV, POAHY, IHRT Short: ZI, HBI, BYND, SCL, KR, HD, EDU, SAM |
Below are updates on our twenty eight current high-conviction long and short ideas. We have removed Smartsheet (SMAR) and Medallia (MDLA) from the short side. We have added iHeartMedia (IHRT) to the long side along with Home Depot (HD), New Oriental (EDU), and Boston Beer (SAM) 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) crossed $100 this week, once again making new highs. Beyond the positive stock move there were some puts/takes in terms of news flow. There were some big insider sales, not bullish to see, but also hard to blame managers for taking some gains with the stock having done so well around solid execution during the pandemic. On the positive side, the CFO in an interview talked about the opportunity to monetize its recently launched Connect with a Vet service, which is currently free, by perhaps charging one side of the transaction (vet or customer) for the referral. That won’t matter for the P&L any time soon, but it shows how CHWY is thinking about building a pet consumer platform and monetizing the ecosystem. It proves it expects to be much more than an auto-ship food service, we tend to agree. The valuation of CHWY might be getting stretched, but Quad 2 loves high beta ecom names like CHWY and with revenue momentum continuing, valuation won’t be a catalyst for the stock to stop going higher.
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
Sales of non-dairy milks have risen over 60% in the last few years. The largest dairy company, Dean Foods, declared bankruptcy in 2019 as its borrowings and the revenue declines put too much pressure on the company. Lactose intolerance, health reasons, environmental reasons, and stories of animal use (do you remember Joaquin Phoenix’s Oscar speech) have all contributed to the decline in dairy sales. The impact to the dairy industry has been significant enough that dairy farmers have lobbied and sued to prevent plant-based milk producers from using the term “milk” to describe their product. SunOpta (STKL) is a leading supplier to the majority of plant-based milk producers. SunOpta has upside of $110M+ of EBITDA in 2021. That would represent an EV/EBITDA multiple of slightly more than 8x. SunOpta has visible HSD% organic revenue growth. Consumer staples companies growing at a LSD% rate have an average valuation range between 13-16x, highlighting the upside potential in the shares.
IIPR
Innovative Industrial Properties (IIPR) has entered into an amendment agreement with PharmaCann in Hamptonburgh, NY, making available $31.0 million in funding for significant enhancements in production capacity and additional upgrades at the 127,000 sq. ft. facility. Assuming full payment of the additional funding, IIPR’s total investment in the property will be $61.0 million. Aside from this NY facility, IIPR owns and leases to PharmaCann facilities in IL, MA, OH, and PA, comprising a total of 363,000 sq. ft. and has total investments in leased properties to PharmaCann of $167.5 million. According to BDS Analytics, medical marijuana sales in NY totaled $77 million in 2019 and are expected to reach $150 million in 2020 and close to $250 million in 2021. NY Gov. Cuomo (D) and the state’s top lawmakers on both sides of the aisle have expressed support for legalizing adult-use in 2021. The unlocking of NY as a recreational market will require an influx of growth capital, which IIPR is strategically poised to provide.
The company also announced its fourth-quarter 2020 dividend of $1.24 per share of common stock, representing an increase of 6% QoQ and 24% YoY. The dividend is equivalent to an annualized dividend of $4.96 per common share and is the ninth dividend increase since IIPR completed its initial public offering in December 2016.
EXPE
OTAs | CHANNEL MIX DATA SHOWS OTAs STILL LEADING
A key topic of focus for us for the recovery relates to the approach that hotels might take with OTAs and lower frequency leisure guests. Given the dearth of business and group travel demand, hotels have been and will continue to be leaning more heavily into the OTA channel. We saw this in ’09-’10, and then the share shift continued more aggressively into ’11-’14 as the OTAs then started to drive more repeat activity. Based on proprietary data from Kalibri Labs through November (released yesterday), it appears that similar trends from the early recovery days are holding true. Following property direct (walk-ins mostly), OTAs continue to outperform most other demand channels, and are still exceeding the growth driven by brand.com (e.g. Marriott.com). Since the summer, it looks like the gap vs the brand.com may have narrowed a touch, and that’s more a function of seasonal slowdown in leisure demand, but the broader outperformance continues and this should be a relative benefit moving into ’21 and more leisure demand can 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 the OTAs, particularly Expedia (EXPE) (top idea) but also BKNG as both should be able to drive both hotel and alternative accommodation demand through their platforms, which could be a nice benefit into ’21 and ’22.
BYD
Taking down numbers on a top stock pick may seem incongruous but Covid has been a challenge this quarter for most of the companies in gaming, lodging, and leisure. Investors are clearly looking past Q4 and past Covid to a more “normal” world. We still see regional gaming companies thriving in this post vaccine environment which is why we remain above the Street for 2021 and 2022. Yes, we’re now below Q4 Street estimates but there is a very bright spot in the quarter. Online sports betting (OSB) and iGaming is quickly becoming a real business and a contributor despite legal in only a handful of states. Since we added Boyd Gaming (BYD) to the Hedgeye Best Idea Long List a few months ago, we’ve seen a pathway to $60 and we’re not wavering. While it may not get there linearly, we’re not exactly stretching valuations to get there. The business model is stronger following the onset of Covid with a lower fixed and variable cost structure, but also top line catalysts including younger demographics and, of course, SB/iGaming.
UAA
On Friday Under Armour (UAA) completed the sale of its MyFitnessPal business to Francisco Partners. This was a smart move for UAA, which is streamlining its business lines, and getting rid of low-return (and unprofitable, in this case) assets as well as long-dated contractual liabilities (like athlete endorsements). The sale was for $345mm – while below the $475mm UA paid for the asset in 2015, it definitely needs the cash (and the tax loss won’t hurt). We continue to believe that UAA will emerge into 2021 as a company with better revenue momentum – particularly in footwear and International, with higher Gross Margins after exiting margin-dilutive off-price retail channels, on a streamlined SG&A and operating asset base – all of which are bullish for both its earnings and return profile.
LVS
MACAU | GOV’T NOT SO OPTIMISTIC ON VISITATION NEXT YEAR
In typical Macau fashion, the government provided a pretty downbeat forecast for both visitation and GGR for 2021 as part of their annual budgetary process. The GGR estimates are usually so far off that we’re not even going to comment on them, but the visitation forecasts have tended to be a little more accurate, at least directionally. For 2021 the Macau government is forecasting that about 14 million visitors from both the Mainland China and Hong Kong will make their way to Macau, which would be a significant YoY jump (anything would be, really), but would still represent a 60% drawdown in visitation from 2019 levels. Do we buy that forecast? No, not at all. We think at a certain point, probably around the spring or early summer time there will be a major inflection in visitation and GGR for Macau, and these numbers will look much too conservative. But even still, in the early days of 2021, we’d still expect GGR to materially outperform visitation as premium mass retains a higher % of the overall mix in Macau.
To be clear, we’re not calling for an imminent sea change in the Macau data just yet, but the 2nd derivative should generally be positive and for the stocks positioned well with new or outperforming hardware, the set up looks decent – Las Vegas Sands (LVS) and WYNN are highest on our list of Longs, with LVS featured as a best idea Long.
GH
We continue to see an overall improvement in claims volume for Guardant Health (GH) week-over-week, which suggests that Guardant360, the first FDA-approved comprehensive liquid biopsy test, is expanding beyond its initial application in lung cancer. A shift in the mix of diagnosis codes away from lung cancer supports the view that Guardant360 is beginning to successfully penetrate additional indications, and feedback from recent interviews suggests that oncologists have started sending tissue and plasma (blood) out at the same time due to the time-to-result differential (tissue testing remains the "gold standard," but the sensitivity and specificity of liquid biopsy are well-understood, and the time-to-result is often a few days faster). As more targeted therapies are studied and approved by the FDA, demand for companion diagnostics (CDx), including Guardant's, will only increase. Layer on the optionality that could come with Lunar 1 & 2, and we like the setup even more.
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
The British Beer & Pub Association said its research shows that pub beer sales will be down as much as 90% this month. That represents 270M fewer pints. This December, England’s Tier 2 system requires pubs only to serve alcohol with a substantial meal. England’s hospitality industry usually earns about 40% of its revenues between Halloween and New Year’s Eve. On Wednesday, London is moving into Tier 3, its strictest level of restrictions. For pubs, bars, and restaurants, Tier 3 requires them only to be open for takeaway, delivery, or click and collect services. Molson Coors, Anheuser Busch InBev, and Heineken all have roughly 17% share of the U.K. market. The U.K. market is much more driven by the on-premise channel than the U.S. where retail sales are compensating for the loss of bar and restaurant sales. These trends will reverse when the vaccines are more readily available. We remain bullish 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.
Despite market enthusiasm for the electric vehicle revolution VW remains oversold. Some recovery names (e.g. BCO) have started to move, but AWI remains a long idea and ‘down’. Aerospace defense is also out of favor. Many ‘old’ industrials look overbought to us with investor trying to position for an industrial recovery that is OLD NEWS for markets.
MTCH
Hinge continues to post strong growth with revenue* +200% YoY in November after launching two a la carte features in 3Q20. This growth rate is consistent with the 200% YoY direct revenue growth rate Match Group (MTCH) reported in 3Q20 for Hinge (ARPU +100% YoY). Meanwhile, Tinder revenue growth is tracking at a healthy +17%* QTD YoY, albeit a slight deceleration from 22%* YoY in 3Q20. Overall, the data is tracking in our favor QTD, supporting our bullish thesis that calls for non-Tinder growth to accelerate.
*Mobile App Revenue
AMN
This past week, we moved AMN Healthcare (AMN) to our top long spot on the position monitor based on recent data updates which support its favorable setup (MicroQuad 2) heading into 1Q21. Some of the data that gave us confidence to make this move were active earnings and hours up nicely and the JOLTS data – as of October – looks supportive of a continued recovery as we head into a period where demand for staffing will be high as people are needed to delivery care.
As if there is not enough strain on health systems, we highlighted the recent workers’ strikes across 3 HCA hospitals in California in a recent Health Care Morning Brief. The strike is expected to last from Christmas Eve through the new year. Reasons for the strike include aggressive rationing of personal protective equipment and used or dirty PPE causing staff members to become ill, as well as insufficient COVID-19 testing of patients and workers, inadequate nurse-to-patient ratios, and dangerous co-mingling of patients and workers. In the event that the strike does occur, these hospitals would be forced to bring in temporary staffing from agencies such as AMN at significantly higher rates than in the past (as a result of the pandemic).
TCNNF
For the week ending December 10th, the number of qualified patients in Florida’s medical marijuana program grew 0.8% week over week or 50.8% YTD to 450,983 qualified patients with active ID cards. Sales volume for THC and CBD fell to below-average levels. WoW, while flower had a more subdued decrease in line with average weekly sales volume. THC in mgs sold fell -14.6% WoW to 124.1 million mgs, CBD in mgs sold fell -21.1% WoW to 2.8 million mgs, and flower in oz. sold fell -9.7% WoW to 14,748 oz. sold. Four dispensing locations were approved by the state, bringing the total to 298: with Trulieve receiving two more. Last week’s sales volume data was exceptional due to Trulieve Cannabis' (TCNNF) technical issues backing up Thanksgiving holiday orders into the following reporting period. For this week’s reporting period, Trulieve drove the decrease in THC sales volume, capturing only 43.4% of THC market share where it typically averaged over 50%, but it is still a market-leading position. Trulieve’s productivity per store vastly exceeds the competition in the state as seen in the following chart.
Florida’s medical marijuana marketplace has strong potential – the state’s medical marijuana program still has a runway for population penetration, edibles were just introduced to the market in August, and there’s a broad range of qualifying medical conditions, notably ‘severe and chronic pain.’ The rising tide that is patient volume growth lifts all ships.
BCO
Brink's Company (BCO) is already a dominant route-based business services franchise, ignored by the market. The ongoing transformation of Brinks is likely to prove durable, as a larger footprint and broader solutions package drives route density, branding, compelling strategic acquisitions, and other scale advantages. Management has demonstrated competence, executing continuous improvement programs while furthering long-term strategic initiatives. Exceptional execution in otherwise boring industries often delivers fantastic investor returns.
After the pandemic, we would expect a surge in attendance at cash venues and retailers, and less investor concern about electronic payments. The underlying profit growth and business opportunities for BCO merit a multiple in-line with other dominant, structurally advantaged business services names. Those typically trade for 2x to 3x BCO’s multiples.
V
While the Financials (XLF) have been relative dogs as of late, they are longs in #Quad2…the growthier, the better... Just look at Visa (V).
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.
Cross-border volumes remain severely depressed; however, cross-border e-commerce appears to have helped drive somewhat of a recovery in late November despite travel-related spending remaining deeply in the red. With little prospect for a broad lift in travel restrictions, cross-border travel spend is unlikely to meaningfully rebound until sometime in 2022, especially when taking into account the approximately three years required for international travel to recover following the September 11th attacks.
FISV
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.
Moreover, with the added benefit of the company's strong synergy execution from its merger with First Data last year, we greatly favor Fiserv's (FISV) offer of solid, defensive growth at a reasonable price in the payments / fintech space.
POAHY
In a market where electric vehicles are a bubbly rage, shares of VW and Porsche Auto (POAHY) 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?
IHRT
Hedgeye CEO Keith McCullough added iHeartMedia (IHRT) to the long side of Investing Ideas. Below is a brief note.
While lots of people continue to miss this #Quad2 stock market ramp, there are plenty of buying opportunities underneath the hood of the market, especially in smaller cap names.
One name that Communications analyst Andrew Freedman likes (iHeartMedia, IHRT) is for sale on #decelerating volume today. Here's an intro to the idea from his Communications Pro research product:
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iHeartRadio (IHRT) - We are adding IHRT to the long bench in the Hedgeye Communications Position Monitor. We believe growth in digital and podcasts, combined with a cyclical recovery in ad-spend, is likely to drive IHRT higher in the next 12-months. While the radio broadcast market is mature, it is highly localized and therefore less at-risk of disruption from streaming in the near-term. Meanwhile, we like Liberty Media's involvement, having received DOJ approval to increase their ownership stake from 5% to up to 50%. |
ZI
ZoomInfo's (ZI) CEO gets passionate on the subject of stale CRM data, and the lack of actionable process in corporate sales and marketing systems. On this point, we concur. ZoomInfo sells an actionable data set that is not stale like most CRM data. But as the seller of information, there is no difference between ZI selling you access to the cell phone number of a C-Suite executive, compared to the same information from a competing provider.
Unlike software, the functionality is identical and the performance irrelevant. The Internet becomes more powerful every day with more data readily available to be found by computers with increasing capacity. ZI is just the highest priced seller of a data set whose walls erode over time; a company that also bares tail risk for the method in which ZI surreptitiously carries your information out of an unsuspecting email sent over to a friend or colleague.
HBI
For nearly a decade the Hanesbrands (HBI) strategy had been one of buying brands occasionally at elevated prices and milking them for profit vs investing in their growth. That put HBI in its recent predicament of organic sales decline, high leverage, and under investment. The prior officers of the company took advertising and R&D down, squeezing 200-250bps of margin from them, but sacrificed product quality and brand relevance with the consumer. The new CEO knows to get back to healthy growth, he needs to reinvest in the core brands, that means taking those expense levels back up. Margins are going lower and we think HBI’s stock will revert lower when management signals expectations to be right sized.
BYND
Beyond Meat (BYND) benefited from the pandemic. Consumers’ stockpiling emptied grocers’ shelves of meat. Many grocers added plant-based meat alternatives to the empty shelves to help fill in empty shelves. Beyond Meat saw a significant increase in its distribution in stores. Meat plants have returned for the most part to pre-pandemic levels in recent months. Beyond Meat continues to see distribution in the retail channel grow year over year based on the gains earlier in the year. However, sales growth of key categories like fresh patties in the retail channel have turned negative in November. If sales growth continues to decrease despite the distribution gains it is likely the company will see shelf space be reduced in 2021.
SCL
With a vaccine on the horizon and the Dupont N&B deal likely to increasingly dominate the narrative, we’re going to take our duty-free and go home. We’d like Stepan (SCL) as a Materials short, a maker of surfactants that benefited significantly from the pandemic but now faces excess capacity and exceptionally challenging compares. IFF holders should be mindful of the dubious aspects of the Frutarom deal, potential PFAS headline risk, and the ongoing issues with receivables collections.
KR
Retail sales fell 1.1% seasonally adjusted in November from the prior month. October was revised to a 0.1% decline from a 0.3% increase. Sales in November were up 4.1% compared to a year ago. Grocery store sales increased by 10.5% in November compared to the prior year, as seen in the chart below, accelerating 8.8% in October. November’s grocery store sales growth rate was the highest since July.
Foodservice and drinking places sales decreased by 17.2% YOY in November, weakening from October’s 14.6% YOY decline. Despite the weaker Thanksgiving holiday week, grocery store sales accelerated in November as more restrictions went into effect. Grocery sales increase with more restrictions, so as the COVID-19 vaccines are more widely distributed sales trends will reverse.
We remain short Kroger (KR).
HD
Hedgeye CEO Keith McCullough added Home Depot (HD) to the short side of Investing Ideas this week. Below is a brief note.
You didn't think I gave up on short-selling, did you? I love short selling!
I have been waiting, patiently, on Home Depot (HD) to pop towards the top-end of my Risk Range. Retail analyst Brian McGough made a stealth SELL call on is back in November - here's an excerpt from his Retail Pro note on why:
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Takeaway: Revs slowing, costs rising, cash flow meh, and bullish narratives morphing. Overloved, undershorted, fully valued, rate of change is weak. Getting Bearish On Depot and Lowe’s. More of the same from HD and LOW this quarter – absolutely blistering comps with no love from the market. This bullish ‘long the Home’ trade is getting razor thin. Nothing but red on my Home Improvement stock screen. With Depot, it put up an impressive 24% comp. Think about that…this is a company with a revenue base of $110bn last year, and it just comped 24%...that’s the equivalent of adding $26bn in net sales on an annualized basis. Not to be outdone, Lowe’s comped 30%, which naturally led to an 8% sell off in the stock as the headline EPS number was $1.98 – two cents shy of the consensus. The only way you put up a that kind of comp and miss is if the Street is simply sitting on sky-high expectations for both comp and flow through. But flow through was a problem for both retailers. |
EDU
Hedgeye CEO Keith McCullough added New Oriental (EDU) to the short side of Investing Ideas this week. Below is a brief note.
On The Call @Hedgeye, for the past 1.5 weeks we've been discussing ways to get “less-long” of China (top-down) and start adding back some bottom-up China Research Shorts.
One of China analyst Felix Wang's Best Ideas (Institutional Research product) is New Oriental Education (EDU) and it's at the top-end of its @Hedgeye Risk Range.
sam
Hedgeye CEO Keith McCullough is adding Boston Beer (SAM) to the short side of Investing Ideas. Below is a brief note.
Want to make short selling great again? Here's a checklist for #Quad2:
A) Consumer Staples (underweight in #Quad2)
B) COVID winners (tough 2021 comps)
C) Top end of the Canadian guy's Risk Range
As subscriber's to both The Call @Hedgeye and Consumables Pro are well aware, Consumables analysts Howard Penney and Daniel Biolsi just went negative on a name that checks all 3 of those boxes: Boston Beer (SAM).
