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Long: CHWY, MP, STKL, IIPR, EXPE, BYD, GH, MTCH, AMN, TCNNF, BCO, POAHY, IHRT, GME, EXPC, CTRN, TRSSF, SAVE, CLA, TCS Short: HD, PPC, EDU, ROP |
Below are updates on our twenty four current high-conviction long and short ideas. We have added CLA/Ouster (CLA) and The Container Store (TCS) to the long side, along with Roper Technologies (ROP) 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.
In yet another signs of the heat we’re seeing in the Pet space, Poshmark announced on Thursday it’s launching into the pets category, only weeks after its blistering IPO (the stock is trading at 17x sales).
Kind of an odd move for the company, as Poshmark is hardly the first place people think of when they want to buy pet supplies (Chewy (CHWY) is). But according to the company, this is for “owners who are seeking a simple, social and sustainable way to shop and sell," and includes new and secondhand pet accessories, supplies and toys for a variety of animals. Other retailers have also bolstered pet products and services.
Tractor Supply recently announced online pet prescriptions and the ability to obtain professional veterinary advice on demand. Walmart accelerated its in-store veterinary clinics in 2019, and in November expanded its pet care services including insurance, dog walking and pet sitting. No shortage of competitors nipping at Chewy’s heels, but we think CHWY will remain a net share gainer of the $100bn pet industry for years to come – regardless of half-baked efforts by so-called competitors.
MP
Check out the rewind of our long MP Materials (MP) research call from our Industrials analyst Jay Van Sciver and David Talbott along with the full Black Book presentation.
Click here to watch it in full.
STKL
For many Americans, Oatly’s “Wow no cow” commercial during the Super Bowl was the first time they have heard of the Swedish oat milk company. BuzzFeed said it was either the worst or the best thing they have seen. The company originally aired the ad in 2014 in Sweden. It was banned there, so the company had an idea of how it would be received. The earworm jingle is stuck in many people’s heads after the Super Bowl. Oatly was already sold out of its t-shirt pictured below within minutes of the commercial airing.
Last week, Bloomberg reported that Oatly is targeting a $10B valuation in its planned IPO. The listing could come as early as May. The company had also been considering a Hong Kong listing, but it is just planning on the U.S. listing.
A Hong Kong listing would indicate prioritizing the China market. Like the commercial or hate it, Oatly will garner significantly more consumer awareness this year. What Oatly needs more than it did before the commercial is more supply of oat milk. SunOpta (STKL) is a cheaper way to invest in oat milk growth as it adds capacity (that doesn’t come with the jingle).
IIPR
Innovative Industrial Properties (IIPR) is an important source of capital for state-licensed cannabis operators by acquiring and leasing back their real estate. This allows the companies to redeploy their capital into their core operations.
Management is flexible in the type of properties they will acquire, but they typically target a deal size between $5-30 million and a lease term between 10 and 20 years. The base rent is typically between 10 and 16% with rent escalators in the 3-4% range. Due to the company’s narrow focus on cannabis companies it can evaluate deals quickly and close on a transaction in one to two months. The following slide shows what management typically looks for in an investment.
EXPE
We didn’t think that Q4 results, in isolation, would ‘wow’ any investors. However, we did make the case that there could be enough ‘good’ in the release/conference call to be a net positive. We’ll see how the stock reacts today, but last night met our expectations and the quarters and numbers should only look better from this point forward. Accelerating bookings, leveraging cost controls, and more updates on Vrbo should bode very well for EXPE’s stock in the coming months.
With our model now updated for Q4 and considering the color from the call last night, we believe that despite the potential for another soft, but in line quarter in Q1’21, overall estimates for the out years will tick higher. Better leveraging of Vrbo, pent up leisure demand and the potential for strong a summer seasons Q2/Q3, the (big) cost reset, and the long run potential for substantial long term marketing efficiency are all positives for analysts to bake into their numbers and valuation framework more effectively.
So, we remain bullish on Expedia (EXPE) – there’s a lot of potential momentum in the story. Our model is very detailed but to summarize the numbers: consider EXPE’s EBITDA run rate pre Covid of ~$2Bn, add back $1Bn of cost savings (fat, not muscle), layer in more profitable growth from Vrbo, and then assume excess cash flow is directed to share repurchase (Kern does not seem high on M&A), and EXPE’s EPS power goes to $10-$14/share by ’22 & ’23, nearly 2x pre Covid levels.
Take an average pre Covid multiple (18x) * $14 in EPS and discount back yields a $200+ stock over the next 6-9 months, good for ~40% upside. We include a EPS sensitivity analysis below, but in recent weeks have featured a number of ways to show EXPE’s business is undervalued when considering the valuation of their AA rival, ABNB.
BYD
It’s still early in the data accumulation phase, but so far, the US regional gaming data has shown nice acceleration vs November and December. Capacity restrictions were moderately adjusted in January, and have been further adjusted in February for a number of states, so we expect growth to keep improving.
January did receive a slight boost from the calendar as there was 1 extra weekend day (Saturday), but given the tough comps and challenging restrictions, won’t read too much into the extra weekend day. So far, just four major states have reported revenues and all have shown YoY acceleration – IA, MD, WV, and OH make up the January ’21 bar in the below chart. In the case of IA, revenues actually grew significantly YoY (+13%), but the other states showed ~1,200bps of sequential acceleration in their YoY growth rates. Other states could drag the January bar down a bit, but the month and start to the year does seem like it’s off to a strong start, with pent up demand serving as the driving force.
Note, in the below we only highlight core casino revenues and exclude the often positive impact of iGaming or Sports Betting where applicable. We’ll see how the rest of the data shakes out but we think consensus will be moving numbers higher for Q1 and potentially Q2 for many of the regional gaming operators. Boyd Gaming (BYD) remains our top pick in the space.
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.
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
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 Healthcare's (AMN) 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
For the week ending February 5th, the number of qualified patients in Florida’s medical marijuana program grew 1.3% WoW to 475,943 qualified patients with active ID cards. THC in mgs sold decreased 1.3% WoW to 153.6 million mgs, CBD in mgs sold increased 1.5% WoW to 3.7 million mgs, and flower in oz. sold decreased 2.6% WoW to 51,295 oz. sold.
Trulieve Cannabis (TCNNF) opened one dispensary last week and now has 75 in the state. Trulieve continues to lead Florida with slightly more than half the market share of flower and slightly less than half the market share of THC in the state.
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
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.
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) is setting itself up for a big business transformation. One of the biggest assets for the company now is its board. There is the very obvious recent additions of Ryan Cohen and some of his old Chewy colleagues, but that’s not where the board power stops.
You also have the former president of Nintendo North America and the former president of Walmart US in Bill Simon that joined the board less than a year ago. They know retail and they know gaming. Ryan Cohen knows building great consumer experience ecosystems.
There are ways to create value and generate profits with the gaming consumer, and we think it will be very interesting to see what the new strategy includes.
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) presents a unique opportunity for many reasons. One of which is the fact that is has little to no sell side coverage. The stock is under followed, under the radar, and under owned, while under new management the company is changing up merchandising and making the shopping experience more relevant for its customer.
With the tailwinds from stimulus dollars this year and very easy 1H comparisons we expect to see big sales and EPS growth in 2021. As a retail unit grower, with comps sales growth, and material margin upside, we think CTRN deserves a premium multiple and see a reasonable value for the stock at $80-$90, with bull case upside to $120.
TRSSF
New York Governor Andrew Cuomo’s budget proposal to legalize adult-use marijuana in New York could bring in an estimated $566 million in legal market sales in the first full fiscal year of implementation and up to $2.6 billion by FY 2027, according to the Center for New York City Affairs at The New School. Estimates that under the governor’s proposal, recreational marijuana state excise and sales tax revenue would hit $159 million in FY 2023, rising to $765 million in FY 2027.
It further projects that it would generate nearly 51,000 jobs and $2.2 billion in employee compensation and add $6 billion in economic output by FY 2027. “A legalized adult-use cannabis industry can inject billions into our state economy and address longstanding inequities with smart policies in place.
As New York works to develop new revenue streams to address critical budget needs and repair the economy in the wake of the COVID-19 crisis, legalization provides a substantial opportunity to create new and diverse small businesses, quality jobs and strengthen rural and urban economies and communities.”
State Budget Director Robert Mujica has said that the governor’s proposal is estimated to generate around $300 million in tax revenue per year when fully operational. Still, it will likely “take several years to get up to those numbers.” TerrAscend (TRSSF) is poised to be a significant player in the New Jersey market when the final rules and regulations go into place.
It recently opened a dispensary in New Jersey and completed the second phase of its cultivation and manufacturing operations. TerrAscend will be able to open three stores (the current limit) before the adult-use begins. With New York and Connecticut expected to quickly follow New Jersey in legalizing adult use, TerrAscend could have a much bigger presence in the Tri-state area in the coming years.
SAVE
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. Spirit Airlines (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.
CLA
Hedgeye CEO Keith McCullough added CLA/Ouster to the long side of Investing Ideas this week. Below is a brief note.
Looking for a new SPAC idea by Industrials analyst Jay Van Sciver? Ouster (Colonnade Acquisition Corp) was just added to his Industrials Pro product with a full Institutional Subscriber presentation today...
Here's an excerpt from the intro to the Long Ouster (CLA) thesis:
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Growth in Advanced Driver-Assistance Systems (ADAS), robotics, automation, and other key markets is likely to result in rapid growth in cheaper 3D mapping sensors. The race is on for more efficient solutions that would push more sophisticated sensing technologies into the ‘standard equipment’ categories for automotive, defense, heavy equipment, and factory applications. Ouster is a well-regarded technological leader in the LIDAR space. A simplified architecture and increasing volume should allow Ouster to lower unit costs by up to 90% in the next half decade. The company is winning placement in heavy equipment, typically wins that come with years of follow-on orders. |
TCS
Hedgeye CEO Keith McCullough added The Container Store (TCS) to the long side of Investing Ideas this week. Below is a brief note.
I don't think consensus is yet Bullish Enough on the US stock market, particularly on the HIGH SHORT INTEREST names (where they are implicitly bearish!)...
So I'll go right back to the wood with Retail analyst Brian McGough on a buy-signal in The Container Store (TCS) which has 17% short interest and the following intro note from McGough in his Retail Pro product:
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Takeaway: Forgotten retailer, new management, new industry tailwinds, new unit growth and margin opportunity. Solid Quad2 name. 3 year, 3 bagger. TCS closed out an era with solid results all around. The company put up EPS of $0.45 vs the Street at $0.38, and $0.05 last year. This was the last conference call for outgoing CEO (now Chairwoman) Melissa Reiff, as it marked Day 2 on the job for new CEO Satish Malhotra, former CEO of Retail for Sephora. The call had its share of farewells to Ms. Reiff and gratitude for her contributions. But quite frankly, this organization is ready for the management team and operational strategy to be turbo charged, and with the new CEO, we think the growth trajectory is about to get a shot in the arm. And the good news is that the new team has assumed control from a position of strength, with the business putting up significant momentum. As we outlined in our note from this weekend (see below), this name has ‘3-year, 3-bagger’ written all over it. |
HD
Home Depot (HD) got an old wall upgrade this week, the stock didn’t budge on the news. 2020 was a huge year for home improvement, it was very clear to everyone which drove up the earnings and multiple for the home improvement retailers.
Now however there is almost no incremental buyer of these names, and as Quad 2 wages on and rates make new highs, the stock continues to trend down. We suspect stimulus will help HD’s sales here in early 2021, but that is very much in the buyside expectations. As 2021 progresses sales will be slowing, earnings growth will be pressured, and the multiple is unlikely to rise.
PPC
Pilgrim's Pride (PPC) reported Q4 results this week. EPS was $.25 missing consensus estimates of $.33. The shortfall was due to a 6% revenue miss and 13% EBITDA miss. Tyson Foods, which also reported this week, reported an EPS beat of $1.94 vs. $1.49 consensus estimates.
The difference between the two protein producers’ reports was due to better results in beef and pork compared to chicken. Pilgrim’s Pride is expecting a recovery in on-premise dining to drive revenue growth this year against the pandemic restrictions.
Corn prices continue to make new highs which will pressure margins this year. Pilgrim’s Pride will need poultry demand to accelerate in order to lift prices higher as the supply outlook (+0.7%) is not changing enough to lift poultry prices.
EDU
New Oriental (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%.
ROP
Hedgeye CEO Keith McCullough added Roper Technologies (ROP) to the short side of Investing Ideas this week. Below is a brief note.
Looking for shorts that worked on fundamental reality (i.e. down hard on #accelerating volume on EPS news day) that have since bounced to lower-highs on #decelerating volume?
Roper (ROP) fits that bill.
Here's a good summary excerpt from Industrials analyst Jay Van Sciver's Industrials Pro product on the name:
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ROP | That’s Not Much Compounding On $6 Billion We think ROP is an obviously overvalued acquisitive conglomerate with a collection of largely unrelated businesses for which it often overpaid. A business isn’t capital light just because the ‘capital’ is in non-amortizing intangibles. Despite investing about $6 billion in 2020, Roper’s Income from operations declined from $398.4 mil to $380.7. Compounding didn’t. |
