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Long: CHWY, MP, STKL, IIPR, EXPE, BYD, GH, MTCH, AMN, TCNNF, BCO, POAHY, IHRT, GME, EXPC, CTRN, TRSSF, SAVE Short: HD, PPC, EDU |
Below are updates on our twenty one current high-conviction long and short ideas. We have removed Beyond Meat (BYND), Sirius XM (SIRI), & Under Armour (UAA) from Investing Ideas this week. We have also added Spirit Airlines (SAVE) to the long side and New Orient (EDU) 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.
As well as Chewy (CHWY) is doing in the commercial marketplace, and as good as the stock has performed, let’s not lose sight of the fact that the average Sell-Side price target is 5% below where the stock is trading right now.
That either means that we need to brace ourselves for a downgrade cycle, or we’re going to see Old Wall upwardly revise price targets. One of the catalysts should be that this year CHWY should show the marketplace that in can not only anniversary Covid, but also generate a profit while doing so (something it has yet to do).
Let’s also not forget that 17% of the float is short the stock – there are plenty of haters out there. The real question for investors shouldn’t be whether this company can ‘comp the Covid comp’ but rather how it can dominate the pet ecosystem on a global scale and send this stock over the $200 mark.
MP
Increasing US tensions with China, flows into ESG funds, growth in alternative transport powertrains, lower carbon energy investment, combine with macro forces like accelerating inflation should drive investor interest in MP Materials (MP). Rarely does a single equity check so many ‘thematic’ boxes, particularly when many of those categories are seeing rich equity market valuations.
Investors have been flooded with SPACs, which are often ‘hard pass’ after significant research time and effort. Some good eggs are getting overlooked, and some have such elevated vol that it is worth being involved just for the writing premiums. With so much ESG/alternative energy capital chasing a few high-profile names, we see some potential in less recognized names with better solutions. We also like avoiding or getting ahead of algorithms/quants/retail flow where we can.
Rare earth elements have unusual magnetic properties – unpaired electrons in f-orbitals align favorably in certain crystals – that are well characterized and reasonably stable.
STKL
Several media outlets reported yesterday that Chobani is planning on an IPO later this year. The company is targeting a valuation of $7-10B. Revenues are said to be in the $2B range.
The company that changed the yogurt category has been expanding into refrigerated coffees, creamers, and oat milk. After shaking up the yogurt industry for years, competitors have offered their own higher protein yogurts. (There are similarities in the Greek yogurt shift to what we see ahead for hard seltzer.) Chobani said its yogurt sales grew 12% last year, outpacing the broader category by 2x, as consumers ate breakfasts at home.
Chobani hired Jody Macedonio as CFO in December. She was the CFO of Dean Foods most recently. Chobani should try to go public before Oatly, but either way, more attention will be drawn to the growth in oat milk. The only way to invest now in the growth in oat milk is SunOpta (STKL).
IIPR
Since Democrats won the two Georgia senate seats cannabis companies have announced a flurry of capital raises. In January the industry raised $1.6B. In comparison the industry raised $4.2B in 2020, down from $11.6B in 2019.
There are several new states legalizing cannabis in 2021 and growth requires capital. However, not every company wants to issue additional equity with the outlook for share price appreciation looking promising.
Debt is still expensive for the industry, generally in the 12 to 15% range for most companies. A sale leaseback is an alternative method of raising funds that does not dilute shareholders. Innovative Industrial Properties (IIPR) is the largest REIT in the cannabis sector by far with sector specific expertise.
EXPE
US hotel RevPAR is now firmly back to its pre-holiday trend of around down 50%YoY. RevPAR across the US fell 51% this past week with the usual scales, markets, and likely customer segments contributing to the weakness.
The YoY comps were clean this week and there was no Inauguration boost, so this past week’s RevPAR growth is more representative of true industry demand. Weekday RevPAR (Mon-Thurs) dropped ~57% YoY while weekend RevPAR (Fri-Sat) fell ~40% YoY. Weekends are best characterized by core leisure demand and, although growth isn’t substantial, it is improving and is certainly stronger than what we’re seeing from the weekdays (business travel is dead).
We contend that the real leverage to economic reopening and travel is with the OTAs (EXPE) who will in all likelihood be gaining share in hotels via leisure demand + driving growth in the AA businesses + leveraging a lower cost base. Expedia (EXPE) = Best Idea Long.
BYD
Vaccinations have already started in many regional casino markets. As they should, state governments have prioritized healthcare and first responders for the vaccine and also the elderly. The elderly represent a key demographic for regional casinos.
Many of these customers have smartly avoided crowded venues like casinos since the onset of Covid. Demand likely won’t step function higher immediately but there should be significant demand that returns over time as people are vaccinated and feel comfortable out in society again.
The following is a list of states with regional casinos and the status of the vaccination programs when it comes to the elderly. Note that while many of the initial vaccinations here in January may be for people that are too old to even frequent casinos, February could be the month when a noticeable uptick in demand occurs.
We continue to remain long on our Boyd Gaming (BYD) thesis.
GH
Guardant (GH) started the year strong with a string of positive news and appearances. Last week, we discussed the CMS’s recently released decision memo for screening for colorectal cancer - blood-based biomarker tests.
The posted final NCD and decision memo is in-line with expectations (74% sensitivity and 90% or better specificity). While the currently available Epi proColon® test does not meet the criteria for an appropriate blood-based biomarker CRC screening test, Guardant's LUNAR-2 data does.
Following that announcement, a head-to-head study released this past week showed Guardant 360 liquid biopsy was proven to outperform tissue biopsy for comprehensive genomic profiling in advanced non-small cell lung cancer with similar outcomes.
While the release was positive on the margin, it is unlikely to fundamentally change practice patterns in the near- term. Nonetheless, we are excited to see GH move back into the MQ 2 bin and remain long on the Hedgeye Health Care Position Monitor.
MTCH
Below are some Communications analyst Andrew Freedman's thesis points underlying his long Match Group (MTCH) thesis.
1. 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
2. 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
During their appearance at the 39th Annual JP Morgan Healthcare Conference, AMN Healthcare (AMN) shared further details on elevated demand for the Nurse and Allied segment centered on a combination of themes including recovery and meeting incremental needs. 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 remaining tailwinds will focus on the additional demand necessary to roll out the vaccine, subsequent re-opening following the point of herd immunity (100MM doses), and lastly post-COVID reckoning of burnt-out health care workers.
Our outlook of AMN’s potentially long tail was bolstered by a couple of articles last month detailing the struggles of New York nursing homes to meet the necessary staffing requirements, as well as an override of nurse workload limits in California. Both articles referenced the use of temporary staffing agencies to meet the additional demand, a practice which has become common over a year after the first COVID-19 cases were reported in the US. AMN remains one of our top Long ideas.
TCNNF
Trulieve Cannabis (TCNNF) has the largest dispensary network in Florida. The company currently has 74 dispensaries, up from 43 a year ago. The next largest competitor has 39. Besides its brick and mortar operations, Trulieve has its own delivery service and call center support.
The company’s tight control over its supply chain and consumers’ experiences is a significant differentiator. Trulieve has more dispensaries than its competition in Florida, but also sells considerably more in each location than its competition as seen in the following chart.
BCO
We expect shares of Brinks Company (BCO) to continue to perform well as the pandemic recedes, and consumers return to cash venues. BCO should be valued like a high quality, route-based logistics company like Uniform Services or Pest Control.
Brinks transformed its operational focus, increasing margins. On a relative basis, the shares are trading as though it didn’t make so much progress. With scale advantages, a suite of cash management products, and organic + acquisition driven-growth, we think it is easy to see BCO remaining a winning franchise.
The retail cash management market penetration is surprisingly low, with outsourcing opportunities more than offsetting concerns about a cashless society. Cash acceptance is often mandated by law to protect those without access to broader banking and electronic payment options. While electronic payments may take share in the USA, much of Brinks’ business is in South America and other cash-heavy regions.
If BCO was able to perform well in an exceptionally difficult 4Q20, a pandemic-free 4Q 2021 should generate investor friendly results. Shares of BCO have performed well, but we see more upside as Brinks operations emerge as a post-pandemic winner.
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.
A pandemic recovery → Quad 2 economic backdrop that should be favorable for shares of VW/Porsche SE. While over-indexed to a European recovery, demographics, reduced public transit utilization/service, and ex-urban trends support auto sales into an aged fleet.
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
GameStop (GME) starting to grow the stable of talent. A New CTO coming from Engineering at Amazon Web Services. If SFIX is any proxy, a big hire from AMZN is good for at least $1.5bn in mkt cap.
Other execs hires include VP of customer service from Chewy and a VP of fulfillment with experience at Amazon and Walmart. Regardless of what you think about the valuation of the company real changes are happening.
With talent and resources there are a lot of things that can be done to capture share in a large growing gaming market with a highly engaged consumer. The default perspective we’d take for now is new ideas and execution surprising to the upside.
EXPC
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.
Blade has compelling partners, an exceptional board, and a talented & focused management team. It is generating revenue and growing rapidly and is gross margin positive at a 50% load factor on mature routes. Blade will have the ability to integrate different modes of transport – helicopters, sea planes, business jets, and eVTOL – potentially generating a winner-take-most network effect as they can deliver passengers to transportation assets.
CTRN
Citi Trends (CTRN) at a high level could be characterized as “urban off price”. It provides value offerings in apparel and home for the urban consumer. The majority of its customers are African American and Hispanic. This customer is low income with nearly 90% having household income of $50k or less and an average of $38k.
The company recently announced holiday sales up 10%, and guided to low double digit comps for 4Q (ending end of Jan). We suspect sales ramped in January like much of retail given stimulus checks hitting accounts/mailboxes, so we expect a 4Q beat. For 2021 we see EPS around $3-$4, and given the long term growth profile (100 total new stores or mid-single digit unit growth, 3% comps, 20%+ EBIT growth and 25%+ EPS growth) that the company laid out at a conference in January, this should get a premium multiple in the 25x to 30x range. The company has easy compares in 1Q lapping down 43% sales during the pandemic.
If we see enhanced stimulus in the coming months, which is looking highly likely, we could be looking at huge sales growth in 2021 as bigger checks mean big discretionary income changes for this consumer and our $3-$4 EPS may be too low.
TRSSF
Canopy Growth (CGC) announced last month that it had acquired the option to acquire an additional 1,072,450 common shares of TerrAscend (TRSSF), conditional upon some form of federal legalization in the United States.
The company also announced that since it had last upped its ownership in TerrAscend from 13% to 21%, it had acquired beneficial ownership over 22.5 million common share purchase warrants – thereby raising its interest in the MSO by 10.9% on a partially diluted basis.
Following this transaction, Canopy Growth currently has effective ownership of 26.8% in TerrAscend on a partially diluted basis. As a result of this transaction, Canopy has a better path to capitalizing upon legalization in the US, by its investments.
Federal legalization will likely kick off a round of consolidation in the industry and TerrAscend’s operations make it a likely target.
SAVE
Hedgeye CEO Keith McCullough added Spirit Airlines (SAVE) to the long side of Investing Ideas this week. Below is a brief note.
As Industrials Pro subscribers know, Industrials analyst Jay Van Sciver is not only on a stock picking (and process) roll right now, but flying the friendly #Quad2 HIGH SHORT INTEREST skies in Airline Spirit Airlines (SAVE)...
Here's a good excerpt from his Independent Research (which would be great content for Reddit peeps looking for some Short Squeeze alpha!):
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As the vaccine rolls out in coming quarters, airline capacity should fill as travel – particularly non-business travel – recovers. Family reunions, delayed vacations, and other pandemic-related travel cancellations should provide ample pent-up demand to drive a revenue rebound. Capacity in the industry has contracted. SAVE is a low-cost producer, targets a market segment that should recover quickly, and provides mostly domestic service – a recipe for post-pandemic outperformance. |
HD
One of the big elephants in the room for Home Depot's (HD) remains interest rates, especially now with the Senate moving forward on the $1.9tn stimulus bill.
Growth higher + Inflation higher = rates higher. HD (and LOW) have slightly lower beta to rates than the homebuilders, but they’re still strongly inversely correlated. HD not a friend of Quad 2.
PPC
Corn prices hit a new high for the year this week, as seen in the following chart. China purchased a significant amount of U.S. corn last week (3.7M tons), which will likely cause the USDA to raise its corn exports forecast.
Corn prices in China are currently at $12 per bushel, $3 higher than U.S. corn, including the shipping cost. Farmers refer to chicken as “corn with wings” for a good reason. Corn feed represents the majority of the variable cost of raising a chicken. Poultry prices in the grocery store do not see the price increases necessary to offset the higher feed costs. Poultry prices were 5.6% higher in 2020.
Poultry production will have to decrease at a faster rate than it is currently to get prices higher. In November, poultry production was up 1.2%. Preliminary data for December suggests that slaughter will be down compared to the prior year.
The poultry industry is hoping for a surge in demand from restaurants and exports this year to offset the higher costs and create more demand. The bird flu in South Korea has added some expectations of increased exports. Food inflation is coming in 2021 as corn is an input for more than just chicken.
We remain short on Pilgrim's Pride (PPC).
EDU
Hedgeye CEO Keith McCullough added New Oriental (EDU) to the short side of Investing Ideas this week. Below is a brief note.
It's a lot easier on the eyes to short stocks on a VIX move towards 21 than on the move slicing downward dog through 31 to 21! Timing matters.
Going through my Factor Funnel for names my analysts do not like that have LOW Short Interest that are also at the top-end of my Risk Range on #decelerating volume.
Felix Wang's SELL On New Oriental Education (EDU) fits that funnel. Here's a brief excerpt from his recent Insititutional Research note on the name: Short EDU | Shocking Negative Margins + Lower Growth Is the New Normal
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EDU printed its first negative operating margin in two years which led to a sizable bottom line miss on a comparable basis. A part of my bear thesis on EDU has been my skepticism towards their long-term operating margin target of 17.5%. |
