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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 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) stock has simply been on fire. Rarely sees a down day. When we made it a Best Idea Long this Spring, we noted that $80-$90 was a realistic price within 12 months. Nine months later (just this week) it broke $100. We need to stay disciplined to our valuation methodology and not get too greedy or complacent long side. After all, at 4.9x Sales it’s now trading at a 20% premium to AMZN. The performance plus the valuation gives us pause long side. But on the flip side, compared to when we first made the call the Telemedicine and ‘Pet Rx’ part of the story has become stronger, and to boot, management still has International growth in its back pocket that it has yet to unleash that will drive a multi-year leg of growth. The day will come where we’ll get off this call – but the growth optionality from here is too great for us to throw in the towel. We’ll rely on Keith’s risk management levels combined with the fundamental trajectory of revenue and cash flow to time our exit. For now, it remains a Best Idea Long.
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
While plant-based meat alternatives have received the bulk of the attention on chain menus, nondairy milk has also been picked up. The latest and fastest-growing nondairy milk is oatmilk. According to Technomic, menu items with oat milk have increased 50% this year in the U.S. In Canada, “oat milk” has increased 300%. In Canada, Second Cup Coffee recently rolled out Oatmilk Mocca Flash Cold Brew, and Starbucks announced that it would launch oat milk across the country this fall. Dunkin’ Donuts added oat milk to its menu across all U.S. locations. Starbucks offers coconut, soy, and almond milk on its menu. Starbucks recently announced it will roll out oatmilk nationwide after a Midwest test. Peet’s has a limited time Oat Milk Horchata Latte and Original Cold Brew Oat Latte on its menu. Helping to drive demand for coffee is a common complaint that almond and soy milk curdle when poured into coffee. Both also have a more pungent taste that can overwhelm the coffee taste. Oat milk’s proponents claim it has a creamy texture and less distinguishable taste. SunOpta (STKL) is growing its extraction capabilities by four-fold to keep up with the demand growth of plant-based milk.
IIPR
Senate Majority Leader Mitch McConnel cheered the lack of marijuana banking protections in the coronavirus relief bill. The cannabis industry is looking for legislation that would protect banks that service state-legal marijuana businesses from being penalized by federal regulators.
The lack of protection limits the industry’s access to financing. Innovative Industrial Properties (IIPR) has filled the need for financing with its sale-leaseback arrangements with many companies in the cannabis industry. The lack of alternatives has enabled IIPR to earn outsized returns on the sale-leaseback transactions. McConnel’s comments clearly signal that he is against banking reform for the cannabis industry.
It is McConnel’s position as Senate Majority leader that ultimately determines whether bills reach the floor if Republicans stay in power after the Georgia elections next month. Senate Minority leader Chuck Schumer did have the marijuana banking reform in his relief bill.
EXPE
Hotels will need OTAs, Expedia (EXPE) will be there to help…
With business travel facing a tough road ahead as corporate budgets stay tight and restrictions and health protocols remain in place, the OTAs with strong hotel connections should become a beacon for occupancy recoveries. Under various scenarios for reductions in business travel and share shift, we think the OTAs could have an incremental 100MM+ room nights opportunity going forward, which could represent close to 15% growth off the 2019 base.
Hotels need heads in beds, and with the brands lacking the dry powder to spend on advertising, the OTAs fit in perfectly. This happened in 2009-2015, and we’d expect this time around to be no different. If anything, we could see hotels lean into the OTAs even more, depending how long it takes group meetings and corporate transient to recover (if ever).
BYD
Possibly aided by folks looking for entertainment while confined to their homes, SB and iGaming growth seems to have accelerated in Q4 as can be seen in the following chart. Only 6 of Boyd Gaming's (BYD) 18 Midwest & South properties are allowed to operate SB and/or iGaming businesses and all are in their infancy yet, these revenues (net to BYD) should comprise ~6% of BYD’s total net revenues. SB/iGaming revenues are likely to show growth of 25% QoQ. Additionally, because of the structure of the relationship with FanDuel and the nature of iGaming, these revenues provide a decent profitability margin to BYD, unlike other operators. Finally, BYD owns a 5% stake in the equity of FanDuel which doesn’t appear to be fully reflected in its stock. BYD remains a Best Idea Long.
UAA
Last week Under Armour (UAA) released the Steph Curry 8 ‘Flow’, which is the first shoe launched with revamped logos under the new Steph Curry brand. We rarely take notice of a single shoe – usually a non-event in the grand scheme of a company that sells tens of millions of pair a year. But we were impressed with the marketing of the product as it went into specific detail as to the technical merits of the product, and how it allows Currey to perform on court relative to previous iterations of the shoe. Most companies out there – including Nike – fail to address the real technical merits of a product its athletes wear on court. That’s a big marketing #fail – even for the vaunted Nike. Granted…As it relates to Curry, his game has been less than stellar lately, but that won’t impact sales of the shoe. I still think that UA turning Curry into a platform instead of a singular product is a money move. As an athlete, he’s definitely one of the NBA’s top ten – but he lacks the Street cred to become a mega-brand like Jordan. But that’s irrelevant. All this deal needs is a few hundred million in apparel sales and it takes the Curry endorsement from a liability to an asset to the P&L. The Sports Marketing department at UAA rarely impresses me – but this time they pulled out a winner. They’re driving incremental EBIT dollars, which is all UAA needs to keep working long side.
LVS
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
Following our Natera (NTRA) Black Book last week, we checked in with clients concerning the strategy around our liquid biopsy and NGS exposure in the Hedgeye Health Care Position Monitor. It is apparent from our seat that the race for legitimate (high specificity and sensitivity) cancer- targeted liquid biopsy alternatives is heating up. With this in mind, recent data updates which continue to show an overall improvement in claims volume for Guardant (GH) week-over-week are promising for our long thesis.
The data 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.
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
Anheuser Busch Inbev (BUD) announced that it is selling a 49.9% stake in its U.S. based metal container plants for $3B to Apollo and a group of institutional investors. AB InBev will retain operational control and flexibility. Cans are in short supply during the pandemic. The shift to off-premise consumption requiring either can or bottle packaging instead of kegs, the growth of hard seltzer, and the perceived environmentally friendly aspect of aluminum recycling had created a demand surge in 2020, as seen in the following chart courtesy of Hedgeye Industrials analyst Jay Van Sciver.
AB InBev sold its Australian subsidiary Carlton & United Breweries in June for $11.3B. The company has more assets; it can similarly monetize to achieve the targeted leverage of 2x from 4.9x. Getting below 4x levered will likely be rewarded by investors with a higher multiple.
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
Throughout 2020, we have continued monitoring the daily COVID-19 caseloads and hospitalizations data as it rolls in each week. The cumulative laboratory-confirmed COVID-19-associated hospitalizations are up to 295.8 per 100,000 population through December 12, 2020 (up from 278.7/100k in last week’s update). Although this data does appear slightly better week-over-week, hospitalizations hovering around the 100k level will lead to pockets of risk or strain on healthcare systems that are worth watching (e.g., CA and TX, 65+, and Hispanic/Latino communities).
As such, the mad dash to distribute and administer the vaccine, continue routine COVID-19 testing, and address pent-up demand resulting from previous lockdowns will continue. These factors make up the favorable setup which prompted us to move AMN Healthcare (AMN) to our top long spot on the position monitor (MicroQuad 2) heading into 1Q21.
TCNNF
Unlike other MSOs, Trulieve Cannabis (TCNNF) hasn’t rushed its expansion efforts. Its steady domination in the Florida market has come about with a replicable operating strategy and a vocal prioritizing of patients before profits.
Three states where Trulieve has expanded to so far are earlier stage; pending regulation hasn’t allowed Trulieve to build the same competitive moat as they have in Florida. When Florida eventually legalizes adult use, Trulieve will see a significant increase in sales. Given the strength of their success in Florida, we are confident that management can effectively scale operations in states outside of Florida.
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
We believe growth in digital and podcasts, combined with a cyclical recovery in ad-spend, is likely to drive iHeartRadio (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
The next catalyst big catalyst for Hanesbrands (HBI) will likely be when the company sets its new strategic plan and guides near term and long term revenue and operating margins. The question is where will margins be rebased to? If we look at where HBI competitor’s brands have been at retail, Fruit of the Loom and Gildan brands are probably the most relevant to view. Fruit is owned by Berkshire, the company had its apparel segment disclosed back in 2014.
Its margins were roughly 500bps lower than HBI back then, coming in around 10%. Gildan when it broke out its branded retail business was seeing margins around 8-9%. We think HBI has to come down to at least 10% should it be investing properly to return to healthy growth. The street is currently estimating margins in 21/22 around 12.5%. We think that will prove to be too high and numbers will come down before the strategic change will have its chance to drive numbers higher.
BYND
Beyond Meat's (BYND) sales benefited from the pandemic in several ways. As consumers increased their home meal consumption, beef was the top sales driver for food retailers, as seen in the chart below.
Beef added more to sales than any other category in August and September. Beyond Meat gained space on the grocers’ bare meat shelves. Beyond Meat’s distribution points were up 68% YOY for the trailing four weeks ended Nov. 28. As meat inventory levels have returned closer to pre-pandemic levels, promotion levels have increased, but prices are still higher than pre-pandemic levels.
The number of meat buyers and trips have decelerated from May as seen in the following chart. Beyond Meat’s, YOY sales growth has decelerated to +39% for the 4-week period ended Nov. 28 compared to +78% for the 4-week period ended July 11. Beyond Meat’s POS has slowed even more than the meat category.
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
A significant challenge for Kroger (KR) is that it competes against the largest retailers that compete in food in order to drive traffic. Amazon, Walmart, Costco, and Target all enjoy higher margins in other parts of their businesses while Kroger is almost entirely a food retailer. Walmart’s aggressive pricing limits what other grocers can charge in local markets. Walmart is Kroger’s largest competitor in the majority of its markets. Even with outsized growth during the pandemic Kroger has been the only grocer to not report meaningful gross margin expansion.
HD
Home Depot (HD) had several significant business tailwinds in 2020. Share opportunity from being an essential retailer, the consumer shifting to spending in goods as services and experiences were largely turned off, most of the goods spending went to home given that’s where consumer were forced to spend a lot of their time, and a big jump in housing activity/pricing from falling rates and de-urbanization meant further demand and home improvement investment.
The housing cycle is at peak, mortgage rates are at trough. At a minimum in 2021 HD will have a year absent of these big tailwinds, but as we look at the potential for rising rates and a consumer wallet shift back towards services, HD may very well have significant growth headwinds while parts of its cost structure (like employee wages) were revised permanently higher under Covid. Quad 2 is where home improvement and HD have its worst relative performance so we like the Trend setup for being short HD.
EDU
On The Call @Hedgeye, for the past 2.5 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 we like it at the top-end of its @Hedgeye Risk Range.
SAM
The stimulus bill includes language to make the temporary federal excise tax cuts that small brewers and importers have benefited from over the past three years permanent. The excise tax rate was halved from $7 per barrel for domestic brewers producing less than 2M barrels per year. The tax rate will remain $16 per barrel on the first 6M barrels for larger brewers and importers and $18 per barrel above that.
The small 8,300 craft brewers will collectively save $80M annually. Wineries and craft spirits are also included in the lower excise taxes. Distillers currently pay $2.70 a proof gallon instead of the former $13.50 on the first 100,000 gallons. Wineries producing 30,000 gallons or less are currently paying $2,100 per year instead of $5,100. For wineries producing more than 2M gallons (840,000 cases), the excise tax is $1.68M instead of $2.14M. Boston Beer (SAM) produced 5.3M barrels last year. The growth of Truly this year puts it over 6M barrels of annual production and into the highest tax bracket.
