|
Long: CHWY, MP, STKL, IIPR, EXPE, BYD, UAA, LVS, GH, 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 seven current high-conviction long and short ideas. We have removed Insperity (NSP) from 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.
Chewy (CHWY) saw a big selloff this week -- down 13%. There has been plenty of volatility lately in this stock, both to the upside and downside. In recent months it’s been very much to the benefit of the long side. This week saw a selloff in several “covid beneficiary” ecommerce names like Wayfair and Etsy, the former being one we like short side and a pair to CHWY (if you like pair trades).
When we made CHWY a Best Idea Long this Spring, we noted that $80-$90 was a realistic price within 12 months. The stock hit $108 about a week ago. We need to stay disciplined to our valuation methodology and not get too greedy or complacent long side. It’s now trading nearly at a 20% premium to AMZN. The performance plus the valuation gives us some pause long side and the names has been slowly falling from previously being at the top of our Best Idea Long list.
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.
But today is definitely not that day – especially after this week’s selloff. Too many growth drivers here to convert the 17% of the float that’s short. Especially given that this week’s selloff ended the week lower on decelerating volume (1/2 its 10-day avg) meaning a low-conviction sale. We’ll take the other side of that trade.
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 Materials's (MP) 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, 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 is selling its Global Ingredients segment and a sale of the fruit-based segment also seems likely in the future. As a pure play plant-based producer the company’s multiple could double based on the valuation of others in the new industry.
IIPR
AFC Gamma Inc., a commercial mortgage cannabis REIT, has filed an S-11 to go public on the NASDAQ to raise up to $115 million in an IPO. Upon successfully listing, the company would be the second non-plant touching cannabis REIT publicly traded on a U.S. stock exchange – Innovative Industrial Properties (IIPR) debuted on the NYSE in December 2016. Over the summer, AFC Gamma raised over $80 million in equity from more than 20 family offices. Additionally, AFC Gamma has a credit line of up to $40 million, providing the REIT with approximately $120 million of capacity to lend to cannabis operators.
As of December 26, 2020, the company has originated and funded $135 million in loans. The company has funded approximately $92.5 million in loans with commitments for an additional $19.8 million – in their filing, AFC Gamma noted that it has roughly $485.2 million of potential loans actively under review in their pipeline. The company's loans are primarily secured by real property and certain personal property, including licenses, equipment, and other assets.
IIPR has enjoyed its position at the intersection of the cannabis industry and the REIT space in a rapidly changing legislative landscape, earning outsized returns in the current environment with few competitors. Its exclusive U.S. listing on the NYSE has been a moat, but with the industry in a rapid growth stage the introduction of AFC Gamma as a better capitalized competitor will not have an outsized impact on IIPR’s growth.
EXPE
It’ll be a while before EXPE will be reporting earnings but we’ll continue to track, measure, and map the data trends across the industry. Q4, to no one’s surprise, will largely be a throwaway quarter, but commentary surrounding the bookings trajectory coming out of the quarter will be important. That bookings commentary could set the tone for where the industry might be headed in the coming quarters of 2021 as the recovery gets under way.
In the charts below we show up to date data from ADARA which highlights the difference in leisure hotel bookings among US consumers vs EU consumers. The EU continues to lag the US as the region has been hit with tougher restrictions on cross border travel and also restrictions on domestic travel. But the bigger point that we’d note is that both regions are showing some signs of a bottoming process, and importantly, these bottoming processes are occurring at higher levels of activity than the March / April bottom. The relative outperformance should continue to be a positive for EXPE, who sources the majority of their bookings from the US, but in the case of BKNG who is mostly EU focused, the rate of change recovery story could be more dramatic moving through 2021. Needless to say, we like the set up in 2021 for leisure travel on both sides of the Atlantic (and Asia), and see nice upside in EXPE.
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's (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
Under Armour’s (UAA) basketball poster child Steph Curry might have gotten off to a rough start on the court this season, but a video of him in practice surfaced this week showing him land 105 straight three-pointers in Warrior’s practice – which is simply mesmerizing, if not astonishing. If UAA’s sports marketing department has two brain cells to rub together, it will use the footage in some creative way to pump the Curry brand, which has otherwise exceeded our expectations from a branding standpoint since it launched last month. To be clear, Nike’s Jordan Brand shouldn’t be the barometer of success here. That’s simply a ridiculously high water mark for a company as small (relative to Nike) as Under Armour. All this brand needs is to sell $200-300mm worth of apparel in addition to its existing shoe line in order to make it a slam dunk for both the brand and the P&L.
LVS
Although it is a market that is not often discussed by US investors, Singapore still matters in a big way for the gaming industry and in particular for our top pick in big cap gaming, Las Vegas Sands (LVS). Starting on December 28th, Singapore will be entering Phase 3 of their Covid mitigation plans as cases and overall community spread has been extremely well contained. By later this month Singapore’s citizens will be allowed to congregate in groups of 8 vs groups of 5 previously, and then the new phase also allows for indoor and outdoor live entertainment to commence. Importantly for LVS and Genting Singapore (G13.SG), the easing of capacity restrictions and then encouraging words from the government should create more demand from locals on the casino floors. Meanwhile, Pfizer’s vaccine was recently approved in Singapore so that should create an additional catalyst for the market moving into 2021. We continue to like LVS as a best idea long.
GH
After our Natera (NTRA) Black Book earlier this month, we followed up 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.
Despite what the data suggests (that Guardant360, the first FDA-approved comprehensive liquid biopsy test, is expanding beyond its initial application in lung cancer), Guardant (GH) screens as a MicroQuad 4 name within our proprietary algorithmic screening tool. For this reason, we will be closely monitoring the claims data for a material slowdown in volume. For now, the data continues to show an overall improvement in claims volume week-over-week, and we remain long.
BUD
Kegs typically account for about 10% of all distributed beer. Between weeks 12 and 20, kegs fell to nearly 0% or even negative, counting the returns. On-premise businesses began to reopen in week 21 but will finish the year at roughly 3% of all packaged beer. The keg volume shifted to can packaging, which increased 5% points to 65%, while bottles remained the same at 32%. With two weeks remaining in 2020, the on-premise segment that has performed the best in 2020 is golf courses that have sold nearly 90% of 2019 volumes, according to Fintech. The fast-casual restaurant channel has seen an increase YOY.
Sports bars, private clubs, restaurants, bars, taverns, and casinos have sold 60-70% of their 2019 volumes. Hotels, fine dining, airports, other transit hubs, and stadiums are at less than half of last year’s volumes. The recovery in on-premise consumption will provide a boost for Anheuser Busch Inbev (BUD). The company’s on-premise mix in the U.S. is a couple of percent less than 20%, skewing higher than the industry’s mix.
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
Below are Communications analyst Andrew Freedman's four thesis points underlying his long Match Group (MTCH) thesis.
1. Tinder 6M Subs -> 10M 2026
- North America is mature; incremental growth coming from international markets
- MSD ARPU growth 2021 – 2023 driven by Platinum roll-out and premium features
2. Hinge Grows to 3M Subs by 2026
- Hits $1B revenue run-rate by 2026; Becomes as large, if not larger than Bumble today.
- Affluent Millennial Target + High Intent = Higher ARPU / Higher Retention / Conversion
3. Product Development Drives ARPU Higher
- Rollout of video chat and live stream capabilities (e.g. POF driving 2x increase in app revenue).
- Engagement from digital events in post-covid world (e.g., Tinder’s Swipe Night)… premium video content + gaming?
4. Niche and Emerging Apps Gain Traction
- Already seeing strong adoption of smaller/niche apps in the portfolio… (e.g., Ablo)
- 126M Global MAUs Growing +40% YoY… Free -> Paid Conversion Rates 7.5% – 15.0%
For balance, below we've included the "bull versus bear" debate over Match Group.
AMN
With >$500MM piling up to flow into the U.S. Medical Economy and multiple tailwinds driving Health Care investing into the mainstream, there are more reasons than ever to map and measure the ADP Employment release next week, and subsequent BLS Releases. These reports provide invaluable data on just where the industry stands (i.e., where labor is or isn't in demand). Next week, we will monitor these reports alongside our own proprietary trackers. Throughout the week, we will update our outlook based on the analysis should anything change. We remain long AMN Healthcare (AMN) on the Hedgeye Health Care Position Monitor.
TCNNF
For the week ending December 24th, the number of qualified patients in Florida’s medical marijuana program grew 0.6% WoW or 52.7% YTD to 456,594 qualified patients with active ID cards. Over the Christmas holidays, all product categories had record-breaking sales volumes: THC in mgs sold grew 34.6% WoW to 194.9 million mgs, CBD in mgs sold grew 52.4% WoW to 4.8 million mgs, and flower in oz. sold grew 26.4% WoW to 65,567 oz. sold. THC grew 33.5% from their previous peaks, CBD grew 7.9%, and flower grew 23.9%. On Tuesday, Trulieve Cannabis (TCNNF) announced it had opened its 70th dispensary in the state and 75th nationwide. As 2020 comes to a close, the company has added 28 dispensaries YTD and maintained approximately 50% market share in THC and flower sold.
Last week, Ayr Strategies announced its acquisition of Liberty Health Sciences in a transaction valued at $290 million. Liberty has been a chronic underperformer in Florida’s robust medical marijuana market. Despite holding a 9.3% share of approved retail units, the most recent data has Liberty with a 4.1% share of THC, a 1% share of CBD, and a 2.6% share of flower. While a medical marijuana dispensary in Florida can pull anywhere from $4 - $10 million in monthly revenues, Liberty has averaged $2 million. Ayr’s management has emphasized Liberty’s underperformance as a unique opportunity for exceptional upside – CEO John Sandelman framed the timing of the acquisition as a land grab as well. Liberty has 14 stores slated to open in 2021, and the company plans to add a least one store every month.
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
The market ‘factors’ for Brinks have improved markedly. Weak anticipated fourth quarter volumes are likely a reason for the languishing Brink's Company (BCO) share price, but the market should soon look past it.
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.
Porsche Automobil Holding SE (Porsche SE) is a family controlled holding company that has voting control of VW and holds ~157 million shares (~31%), and little in the way of relevant other assets or on balance sheet liabilities. Those shares are worth about Euro 25 billion vs. Porsche’s cap of about Euro 17 billion, a sizeable discount despite the same functional control position (or better, since Porsche SE holders are in the same position as the Piëch/Porsche). The Porsche car brand is owned and operated by VW. The Porsche SE holding company just holds controlling shares of VW, although it somehow feels more confusing. The gap need not close, but it is a discounted way to buy shares of VW, which already appear to trade for about half what they should.
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 one good thing the prior mangers at Hanesbrands (HBI) did was consolidating the Champion brand under its ownership globally just as the brand was gaining momentum. It bought Champion Europe and Champion Japan in 2016 (already owned Champion US). The brand had a create multi year run which started to fall apart in late 2019 after over distribution. The Champion brand saw some momentum this spring around the work from home trend which is usually a time with somewhat less demand, but it seems that was pulling forward some demand as the fall to winter online interest has been very weak YY. Champion was once the great growth opportunity for HBI, now it appears it will take some reinvestment to bring the brand back to growth. That means further downward pressure on margins vs recent years.
BYND
It's not been easy being short Beyond Meat (BYND) in 2020, but I like the setup in 2021. Several competitors and new technologies are coming after BYND, including private label. Sprouts Farmers Market recently launched its vegan burgers. A part of the chain's meat-dominant The Butcher Shop line, the new "Plant-Based Burger Patties" are made using portobello mushrooms and feature pea protein, onion puree, and beets. Available at all Sprouts locations, the mushroom-based burgers retail for $5.99 for a package of two and can be found in the frozen meat section. Last September, Sprouts launched Impossible Foods plant-based burgers at more than 350 Sprouts locations across 23 states. That same month, vegan brand Abe's Muffins began rolling out its allergen-friendly muffins at the grocery chain with the launch of two seasonal flavors: Apple Cider and Cranberry Orange Zest. More recently, Cedarlane Foods launched new frozen meals—including Vegan Lasagna, enchiladas, and Lentil Shepherd's Pie—at Sprouts under its Simply Plant-Powered Line.
SCL
Stepan (SCL): Smaller Pandemic Recovery ‘Source Of Funds’ Bear Layup
- SCL Makes Disinfectants & Surfactants (Detergent/Soap Here), Saw Demand Surge In Pandemic: Demand & Pricing for the surfactants demonstrate an abnormal surge in demand as consumers sought hand soap and cleaning products. Pantry and inventory stocking likely led to some over-purchasing. With the pandemic case count ongoing, demand has likely remained robust into fourth quarter. However, as the pandemic recedes into next summer, we would expect a normalization of demand trends that negatively impacts both pricing and volume for Stepan…just as it approaches the dreaded “COVID19 Comp”.
- Customers Have Own Capacity, Significant Capacity Added For Detergents/Disinfectants: Stepan is in an odd position with respect to customers, as these customers often make their own raw materials. While Stepan has found an important niche for itself supplying non-integrated producers and lower volume/innovative products, the post-pandemic is likely to disrupt that position. New surfactant/disinfectant capacity and consumer preferences, most visibly from ethanol-based sanitizers, should significantly depress profitability in the key surfactants segment. The Polymers segment is likely too small to provide an offset in an economic recovery.
- SCL Poorly Covered, Trading At Peak Multiple Of COVID-Driven Peak Results, ~25% Relative Downside: Stepan competes in a highly fragmented, poorly structured industry. It is an industry that lacks a positive recovery narrative. We doubt investors (or algos) following better 2020 results have looked closely at the structural costs higher returns may bring in coming years, with scant street coverage failing to highlight the risks. We’ll add SCL as a Best Ideas short, as SCL is trading at peak multiples on COVID-driven peak results.
We expect the shares to underperform by ~25% in a market awash in recovery plays.
KR
We reiterate our short call on Kroger (KR).
Year over year foot traffic into grocery stores has widened into the largest gap of the year around the Thanksgiving holiday. The combination of increased restrictions, online grocery growth, and the increased seasonal frequency of visits during the holidays are all behind the divergence. As seen in the chart below, traffic to grocery stores relative to the year's start was 37.5% greater on November 30, 2019. On November 30, 2020, traffic was down 26% to the start of the year. On November 18, 2019, traffic was 20% greater, while on November 18, 2020, traffic was 27% lower. The widening gap in traffic is being offset by larger basket sizes and growth in online grocery shopping, but lower traffic levels for a sustained period are a headwind for sales.
HD
October housing prices were reported this week, and though this is lagging data, it showed new highs in the HPI rate of change up 10.3% YY levels that haven’t been seen since the housing bubble around 2005. The housing market has clearly been hot, and more recent data still indicates strength. We are likely sitting near the peak as interest rates sit at trough. Perhaps Home Depot (HD) management realizes where we are in the cycle. Last week the company closed on its acquisition of HD Supply. Management teams like to show earnings growth whenever possible, and with the outlook on organic growth in its core retail business for 2021 looking grim given the comparison setup, maybe management felt acquiring some growth was the right way to go. We continue to think HD will struggle to deliver growth in 2021 as it has to lap some of the strongest demand tailwinds ever seen in its history.
EDU
New Oriental Education (EDU) rallied this week on broad strength in China equities. Earlier in the week, EDU was pressured on strict offline measures in Beijing following COVID clusters. With online players getting more financing, can EDU contend in the hyper competitive market? We still see underperformance vs its peers.
SAM
We reiterate our short call on Boston Beer (SAM).
U.S. brewers shipped 12.3M barrels in November, a 0.8% YOY decline, according to the Alcohol and Tobacco Tax and Trade Bureau. November represented the first YOY decline since May. October had a 0.6% YOY increase with 13.25M barrels shipped. YTD through November, brewers have shipped more than 151.9M barrels of beer, a 0.8% YOY decrease. According to the National Beer Wholesalers Association (NBWA), the monthly Beer Purchasers’ Index was 77 in November. Readings over 50 indicate expansion and below 50 indicate contraction. Flavored malt beverages had the highest reading of 87. Premium light beer had a purchase intent of 70. Imports had a purchase intent of 65, while craft beer was at 55. “We’re still seeing beer distributors around the country trying to rebuild their inventories that got seriously depleted after the COVID pantry rush,” said NBWA chief economist Lester Jones. The NBWA expects beer industry volume to be down 0.5% by volume in 2020. The high purchase intent by distributors can be taken out of context by investors for bullishness on future sales expectations instead of what it is – restoring inventory levels. We see the same optimism in hard seltzer.
