Investing Ideas Newsletter

Long: CHWY, MP, STKL, IIPR, EXPE, BYD, UAA, LVS, GH, MTCH, AMN, TCNNF, BCO, V, FISV, POAHY, IHRT, GME, EXPC Short: ZI, HBI, BYND, SCL, KR, HD, TAP

Below are updates on our twenty six 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.

Petco (WOOF) brought some positive energy to the Pet category this week with its ~$4bn IPO. The stock traded up 62% on the first day of trading, which was good for a 12% lift in Chewy (CHWY) stock for the week. Approximately 20% of WOOF’s business is digital, and it carries a legacy infrastructure of ~1500 stores – which makes it very difficult to compete with CHWY on the margin. It is, however, adding vet clinics to another 800 of its stores as well as telemedicine solutions, grooming, and pet insurance which could make it a one-stop solution for pet parents. The chain has about 600 too many stores, and a very hefty debt burden – something CHWY doesn’t have to worry about, but my sense is that given the heightened competitive landscape for pet services we see a big breakout in 2021 for CHWY in offering ancillary traffic driving services to round out its model in the US.

MP

Since MP Materials (MP) was added to Investing Ideas (as FVAC) in August 2020, shares have run-up significantly. It's worth reviewing Industrials analyst Jay Van Sciver's original long thesis for clarity.

STKL 

Oatly is looking to go public in 2021. Last year the company raised $200M in a private financing round. The Swedish oat milk pioneer counts numerous celebrities as well as large financial institutions like Blackstone as investors. The company filed a preliminary prospectus with the SEC in recent weeks and hired investment banks to assist in the offering. Oatly’s IPO could be over $1 billion. Oatly’s sales are expected to have doubled in 2020 from 2019. Oatly’s IPO and expected valuation will draw more attention to SunOpta (STKL).

IIPR

In the past few weeks a number of multi state operators (MSO) including Ayr Strategies, Curaleaf, Jushi Holdings, Columbia Care, TerrAscend, and Planet 13 have announced capital raises. With the Georgia elections giving Democrats control of all three branches of government expectations in the industry are high for legalization of cannabis. A number of companies are seeking to expand, but only the largest have access to the public markets.

With the upside in the share prices, equity capital is arguably more expensive than sale/leaseback financing. Companies will continue to pursue sale/leasebacks where they can to preserve their cash balances that are needed to finance expansion. Innovative Industrial Properties (IIPR) will continue to play a critical role in financing the growth in the cannabis sector. Legalization will lead to even more growth for the industry along with more capital providers.

EXPE

It might be a new year, but we’re holding firm with one of our highest conviction themes across our coverage: the prospect for pent up leisure travel demand to take off in Q2 or Q3.  For everyone’s sake, we’re hoping for a better 2021, but as we say at Hedgeye “hope is not a risk management process.” 

Indeed, while we may be hopeful for a better and more open 2021, the data is what will ultimately guide our conviction and so far, the data during the Covid led downturn and early recovery continues to favor leisure accommodation demand vs most other segments we track.  The OTAs, specifically Expedia (EXPE), are right at the epicenter of the leisure travel industry and were among the hardest hit during the downturn last year, but consequently have proven the most resilient across the travel landscape.  With Covid pulling forward alternative accommodation adoption, pent up leisure demand, and the need for hotels to fill lost room nights, the 2021 outlook for the OTAs looks favorable.  Positive signs and stabilization across some high frequency data are visible, which could become solid catalysts ahead of earnings in February.

We see a combination of higher earnings estimates for 2H’21 + multiple expansion in the cards for EXPE and continue to see significant upside (25%+) in both stocks over the NTM. 

BYD 

Following that address by Cuomo, Governor Lamont (Hedgeye’s home state), voiced his support for legalizing sports betting and iGaming in Connecticut at some point in the near future.  Stressing that CT needs to be competitive with its surrounding areas of NY and NJ, not to mention the state’s gaping budget deficit.  CT will have some hurdles as it will need to strike a balance with both Mohegan and Foxwoods which have argued for exclusivity in the past, but ultimately we see a decent shot of CT getting it done. 

All bodes very well for the Sports Betting industry and the stocks but we continue to see a lot of opportunity for a stock like Boyd Gaming (BYD) to get more of the credit it deserves in Sports Betting + iGaming.  BYD remains our top pick in domestic gaming.

UAA

Under Armour (UAA) is set to report earnings in another two weeks. Though the company is purposely holding back in delivering to off price channels and outlets, our sense is that revenue estimates look too low for the quarter.

The Street is looking for a loss of $0.07, and we wouldn’t be surprised to see the company in the black for the quarter. UAA will likely offer up conservative guidance for 2021, which we think is prudent – though we think it’s a year with a far better revenue, margin and balance sheet trajectory.

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 28^th, 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

Guardant (GH) has had a great week pairing their presentation at the 39th Annual JP Morgan Healthcare Conference with the announcement of a full suite of product updates for their colorectal cancer liquid biopsy platform for the upcoming ASCO meeting (scheduled to release later this year). As we see it, the three big takeaways from their appearance at JPM are as follows: 1) the company is diving into tissue and thinks it can improve upon the Gold Standard. 2) Management sees an opportunity in MRD and thinks large panel is the way to go. The venture would rival Natera’s targeted panel of 16, which GH seemed to dispel as “not true liquid biopsy,” because tissue is needed to get the ball rolling. 3) Lastly, CRC screening could gravitate quickly toward liquid biopsy. Another notable topic was the company’s comments on considering price and a willingness to grow via M&A.

Their end-to-end plan for their appearance at the ASCO meeting is to address screening, tumor profiling, therapy selection, and disease monitoring. Which while robust, also sounds like a few other PowerPoint presentations. NTRA already has their minimal residual disease product in the market, and according to our data and conversations with surgical oncologists, growing rapidly since the middle of 2020. We remain long on the Hedgeye Health Care Position Monitor.

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?

AMN

Although AMN Healthcare (AMN) does not typically pre-announce, management chose to this quarter given the circumstances. The company announced a “solid-looking” beat on the top line (50% above the guide) but flow through to operating margin could have been better. In their appearance at the 39th Annual JP Morgan Healthcare Conference, they shared further details on elevated demand for the Nurse and Allied segment centered on a combination of themes including recovery and meeting incremental needs (cited Stratus Video).

Based on their comments and our own field work, we foresee a set of four tailwinds that will occur in rapid succession to bolster AMN’s value proposition in the near- term. The first tailwind cycle has already occurred in which we have seen nurses that were experiencing “burnout” retiring early or leaving the industry temporarily/permanently. The subsequent tailwinds will be the additional demand necessary to roll out the vaccine, subsequent re-opening following the point of herd immunity (100MM doses), and then post-COVID reckoning of burnt-out health care workers. Said differently, there should be a long tail for AMN, which remains one of our top Long ideas.

TCNNF

For the week ending January 7^th, the number of qualified patients in Florida’s medical marijuana program grew 0.7% WoW to 462,562 qualified patients with active ID cards. THC in mgs sold fell -11.4% WoW to 127.1 million mgs, CBD in mgs sold fell -7.9% WoW to 3.2 million mgs, and flower in oz. sold fell -0.6% WoW to 47,643 oz. sold. Trulieve’s THC sold per location continues to significantly exceed the competition in Florida as seen in the following chart.

Trulieve Cannabis (TCNNF) is starting 2021 strong on the news of Democrats winning the Senate. Trulieve was approved for two dispensaries last week. 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 Brink's Company (BCO) have improved markedly. Weak anticipated fourth quarter volumes are likely a reason for the languishing 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. We expect shares to return to prepandemic levels, offering more than 50% relative upside.

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

Fiserv (FISV) is on track to deliver $600 million of cost synergies by 2020, two-thirds of an initially expected $900 million over five years through 2024. Accordingly, the company has increased its cost synergy expectations to $1.2B, while also pulling forward implementation by 18 months to 2022. With Fiserv’s legacy account processing client base, the distribution of FDC’s merchant-acquiring solutions through digital banking channels and the physical branch networks of Fiserv’s clients represents a significant revenue synergy opportunity.

With a diversified and durable revenue mix capable of reliably producing high single-digit, top-line growth, and together with significant operating margin expansion driven by cost synergies, Fiserv is poised to deliver mid-teens earnings growth over the next three years which, given the rich valuations in the payments space, represents a solid investment offering growth at a reasonable price.

POAHY

Porsche Auto (POAHY) 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%.

GME

What a week for GameStop (GME).  Most rapid rises in the stock we have seen.  The question now comes, is the bull run done? Well the risk/reward is certainly not what it was in the mid teens (risk manage accordingly) but the reality is that there are still multiple catalysts to come.

1) We’re going to see the mother of all comp accelerations throughout 2021, 2) We’re likely to see a severe upward revision cycle for earnings over the next two years (we’re at $2.70 in EPS this year vs the Street at -$0.17, and then we’re 3x the consensus in 2022), 3) The Board just got a complete facelift with Ryan Cohen & and some of his old CHWY team joining the Board, and they’re certain to reshape the strategy and the narrative around the company and we’d expect an analyst event in the coming months to outline the strategy and upside. So while we saw what was potentially big short covering this week, the reality is that the shorts should cover for a reason – the catalyst calendar is going to continue to drive this stock higher.

We’re sticking with this as a Long.

EXPC

We believe investors are underestimating the potential of e-VTOL growth over the next 3-5 years, with deployment lagging developments due to stringent regulatory oversight.  This shift to ‘air taxis’ should reduce the noise and emissions that limit the helicopter operations, opening many new shorter distance routes. Blade (EXPC) has grown well, with traction in wealthier urban areas – it isn’t a pre-revenue offering.  Blade is asset light, but has mindshare, market experience, and the travel data that should allow it to keep up with potential competitors. 

ZI

At this point, the post-acquisition churn drama, as well as the pricing and business model integration, are mostly behind the company, and ZoomInfo (ZI) has started to nibble back into the acquisition market so they can have more stuff to sell.

ZI is much more profitable than peers. But incremental margins don’t look so great and will look worse with acquisitions sliding in, all of which leads us to conclude that peak profitability is in the rearview. We see risk/reward heavily skewed to the downside. Bulls see best in class product, some positive tailwinds from canceled T&E spending in 2020, trailing growth rates, high margins, and Henry (CEO).

We continue see risk/reward heavily skewed to the downside. 

HBI

Alongside most commodities, cotton has been ripping up 15% in 2 months.  This is a risk for margins in late 2021 and beyond.  It takes about 12 months to flow through the P&L for Hanesbrands (HBI), so cotton will be a tailwind until about mid summer, then it will become a big headwind.  A 10% change in cotton price, is about 40-65bps of gross margin pressure. 

HBI will try to get retailers to take some of the margin pressure, but generally HBI has to consume the majority of the pressure as it does not have bargaining power over key retail partners like WMT and TGT.

BYND

This most prominent risk to the Beyond Meat (BYND) short has always been the company's relentless press release driven strategy around creating excitement around the potential for the product.  WEN and Taco Bell were the last hold outs of the top ten largest chains to find a plant-based meat provider. Taco Bell announced it was testing BYND this week, sending the stock up 13%.  We would note that KFC (Taco Bell's sister concept at YUM) has been testing a BYND product since 2019, and it has not materialized into anything more than a test.  Since the company has been public, BYND has not announced that it has signed a long-term contract to sell its core Beyond Burger at any significant concept. Does this Taco Bell news signal that BYND has turned the corner and will now see significant growth in the foodservice segment?  On the contrary, it signals the end of the road for the company's relentless press release-driven strategy.  The company's dream of having its brand on every restaurant's menus is getting dimmer by the day.  The good news is we now only have one more major chain to announce its intentions around plant-based meant, and that is WEN. 

The top 10 by system-wide sales are McDonald's, Starbucks, Subway, Taco Bell, Burger King, Wendy's, Chick-fil-A, Dunkin Donuts, Sonic Drive-In, and Arby's.

• MCD was a bust
• SBUX is going with BYND sausage patties in Asia, in the Impossible Breakfast sandwich in the USA
• SUBWAY has a BYND Meatball Marinara sub
• Taco Bell is now in a test with BYND
• Burger King has the Impossible Whopper
• Wendy's has not started a test yet
• Chick-Fil-A – is not in the market for a burger product
• Dunkin Donuts is the company's biggest win, and they are not even buying the companies core burger product.
• Arby's in on record as saying we will never have plant-based meat on its menu

After Wendy’s there are no other large food service companies that could announce a new plant-based offering.

SCL

Industrials & Materials Typically Good Quad 2 Longs…Except

Quad 2 means accelerating growth and accelerating inflation – right now, markets seem to be recognizing the inflation part.  The ISM Prices Paid was a good hint, but we can see a variety of input costs that are much higher.  Industrials and Materials typically perform well in a largely synchronized global Quad 2 environment, but it is worth being mindful of industries that lack pricing and suffer from higher input costs. 

Commodity chemicals (e.g. Stepan (SCL)) are a good example, we think, of a group that tends to underperform in that macro environment.  Staples like sector constituents, like can maker BLL, also tend to underperform. 

KR

Since the fall, Kroger (KR) has been testing KroGO, a smart grocery cart in a Cincinnati store. Kroger has partnered with Caper, a startup firm. The cart can weigh items, provide shopping suggestions, and scan and pay without using the traditional checkout lane.

Amazon Fresh grocery stores utilize a proprietary smart cart called Amazon Dash. Caper and Amazon are hardly the only companies developing smart carts or faster grocery checkouts. The growth in online grocery during the pandemic has accelerated the sector’s technology investments. It’s not clear what the first-mover advantage will be when training the consumer to change their shopping behavior.

Still, with Amazon aggressively pursuing grocery management investments, teams take big risks by not doing anything. (Amazon Fresh announced it is opening two stores in Seattle, which will bring its nationwide total to ten.)

HD

Home Depot (HD) seeing a week of moderate underperformance vs retail trading higher.  Near term sales trends have been strong for many retailers with a stimulus boost, and Home Depot is likely benefitting as well. 

But the company is a clear consensus long with many of the institutions we talk to owning the stock.  After such a strong year of growth, tough compares, and rising rates, we think there are very few incremental buyers of HD over the intermediate term. 

TAP