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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, PLCE Short: HD, PPC, EDU, ROP |
Below are updates on our twenty five current high-conviction long and short ideas. We have added The Children's Place (PLCE) to 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.
BARK SPAC With Unimpressive 3Q. Northern Star Acquisition Corp. and BARK announced BarkBox's preliminary 3Q results. Revenue was up 78% to $105mm vs last year. Subscription shipments grew 47%, and new subscriptions increased 66% to 381,000.
Churn was flat at 6.2% yy -- but let's be clear, that's 6.2% for the MONTH, which suggests annual churn closer to 75%. That's just horrible and one of the biggest problems we have with this model. Customer Acquisition Cost (CAC) was higher year over year as well by about 7% due to a shift away from discounts and towards media spend, which is a healthy trade-off.
That said $60 in CAC is high to me when you take into account that each box retails starting at $23. To be clear, we're not a fan of this SPAC. The deal is likely getting done due to the heat around the Pet category, but this name shares virtually none of the bullish long-term characteristics we see for Chewy (CHWY).
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
A study from Mintec found that dairy milk is priced too low relative to its component costs. Plant-based milk’s retail prices can be twice as much as dairy milk. Plant-based milk profits are several times greater than dairy milk, even though the latter has no R&D or marketing costs. Two of the largest dairy milk companies, Dean Foods and Borden, filing for bankruptcy in recent years, speaks to the low profits.
The thin margins in dairy milk make it challenging for the industry to invest in turning around the fortunes. The excess supply and shrinking demand are difficult challenges as well. Plant-based milk companies continue to invest in marketing which is helping to drive adoption.
The higher margins in plant-based milk will be a positive tailwind for SunOpta (STKL) as plant-based milk sales grow at a faster rate than the rest of the company.
IIPR
Most adult-use states saw a sequential increase in cannabis sales in January, as seen in the following chart. Sales in California grew 43.5% YOY in January but declined 0.1% from December. In most states, January is seasonally smaller than December.
However, in January 2021, sales increased sequentially in Colorado, Washington, Michigan, Oregon, Nevada, and Massachusetts. Demand in cannabis continues to grow even in states that have legalized use for more than a year.
Innovative Industrial Properties (IIPR) is one of the best ways to bet on the broader growth in cannabis as the largest landlord to the industry. More states are legalizing medical or adult-use which drives real estate expansion in the sector.
EXPE
Post mortem of an ugly Q4 for everything travel and especially Expedia (EXPE), but it’s now recovery time. Recovery means it’s execution time for management to start putting points on the board. We think they will, owing to powerful exogenous forces, brand outperformance, and cost cuts.
Our data and management commentary suggests Vrbo is crushing it and at a key inflection point for leisure travel. And even in the core hotel business the combined forces of pent up leisure demand and de minimis business travel provides a fertile landscape for the OTAs as hotels lean in for help, and particularly for EXPE with its US focus.
The company needs to deliver as the valuation still suggests caution on the out years and a lack of trust from investors. In other words, even after its recent move, EXPE remains a show me stock – $950 million in cost cuts, Vrbo, etc. has to show up in the numbers. Q1 should provide the start of such an inflection.
BYD
We’re just about ready to close the books on January data collection for the regional states and so far, the data has nicely accelerated vs November and December. Some states are even showing YoY growth and we suspect that most states will mostly be in acceleration mode for the foreseeable.
Capacity restrictions were moderately adjusted in January and stimulus checks likely boosted GGR. OH, MA, and NV just raised capacity limits last week and we expect further loosening of restrictions in February / March and likely more stimulus dollars. So far, 11 major states have reported revenues and every single state has shown YoY acceleration – IA, IN, LA, MO, MS, PA, MD, WV, CT, KS, OH make up the January ’21 bar in the below chart.
On average, the states have shown revenue acceleration of ~1,500bps their respective YoY growth rates and that’s despite very stiff comparisons. As we suspected, PA’s more lackluster casino GGR performance did drag down the bar but LA posted strong results which proved to be an offset.
Note, in the below we only highlight core casino revenues and exclude the often positive impact of iGaming or Sports Betting where applicable. Following our update of the states, we’re growing even more confident that consensus is not bullish enough on the revenue backdrop heading into the rest of Q1 and into Q2 – we see higher estimates coming. Boyd Gaming (BYD) remains our top pick and we’d be buying the dip.
GH
This past week, we updated our monthly Genetic Testing Lab Chart Book, which delves into many of the genetic testing labs we cover, including Guardant (GH). GH has certainly started the year strong with a string of positive news and appearances. The key themes to recap include 1) Evolution in the portfolio as Guardant seeks to be the leader in liquid biopsy AND overall cancer testing (adding tissue this year), 2) G360 which will be used for the blood test equivalent of a CT scan to predict overall and progression- free survival, and 3) the GuardantREVEAL which will act as a blood-only test for MRD, starting in CRC.
While the evolution of GH’s test menu makes for an exciting future set- up within our MicroQuad framework, we always defer to our proprietary claims data for the first interpretation of inputs for our model. Based on our final forecast from our most recent update, we expect the company’s clinical test volume to come in slightly below/in- line with consensus. Where we sit today, we believe the effects from COVID are likely to continue to impact the oncology space in the near- term.
As Helmy mentioned, there has been a resurgence of COVID cases in some regions across the U.S., and we are seeing signs indicating that this resurgence will adversely affect clinical volumes. 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
Match Group (MTCH) management highlighted the uneven pace of recovery globally during Q4 in their investor letter, citing headwinds from the U.K. lockdown and stronger first-time subscriber growth in Japan, where COVID cases have subsided.
We would note that Los Angeles and New York City placed restrictions on indoor dining in Q4, which likely exacerbated what is already a seasonally weak quarter for net additions in North America. That said, it stands to reason that MTCH will experience a rebound in subscriber additions in 2021 as we emerge from the COVID winter.
AMN
AMN Healthcare (AMN) covered each of the demand points we were looking for this past week on their earnings call. The beat was tremendous, but the guide was even better (and will likely return consensus to MicroQuad 2). AMN guided 1Q21 revenue well above consensus to $800MM-$820MM vs. consensus of $620MM. COVID-19 has been a positive driver, but later in the call management indicated that they expect 2Q21 to trend well above the $605MM estimate.
Other positive drivers like burnout, vaccinations, and the return to in- person care, corroborate our view that there are multiple waves of demand emerging for AMN as COVID-19 recedes.
As we have been hearing in our checks with physicians, staffing remains tight. Wage rates for AMN are rising 20% which we expect to persist through 2021 and into 2022. The dynamics of deferred care will bring a wave of a) patients who have merely waited for a vaccine to return to a physician, and a rise of acuity that typically comes from waiting to see a doctor, and b) the long- term disability for COVID-19 patients, even for patients with milder cases.
The key estimate to watch is FY 2022 revenue as AMN remains one of our top Long ideas.
TCNNF
There was little change in this week’s sales data in the state of Florida. Little change is a good thing for Trulieve Cannabis (TCNNF), which dominates the state of Florida. When Florida legalizes adult-use sometime in the next couple of years Trulieve will be well positioned for the significant increase in sales.
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
iHeartRadio (IHRT) is acquiring Triton Digital from E.W. Scripps for $230m. Triton Digital is an audio ad-tech company specializing in advertising infrastructure and ad measurement, including a content delivery system that distributes digital audio streams and podcasts to listeners while dynamically inserting ads.
Triton also runs a programmatic marketplace for digital audio programmatic ad-buying. This acquisition targets podcast monetization, an area that has been a hotbed for acquisitions as podcast platforms try to capitalize on their content.
GME
GameStop (GME) was back in the headlines this week as the congressional hearings took place diving into the crazy trading events and suspended selling by Robin Hood in January. Back on the fundamentals though, Playstation 5s and New Xboxes are in short supply, still unavailable at nearly all retailers with just limited supply drops happening periodically with all selling out just about instantly.
Demand for the products is immense and every console made this year will probably sell. GME will bundle games and accessories to drive margin on the incremental transactions/traffic flow. If we look at the last new console cycle start at the end of 2013, hardware sales per store were up nearly 110% for GME.
Software has some unique headwinds last time around, like the first real push into digital download, but this new cycle has a lot of changes that should support software sales including innovations driving affordability like installment pay, stimulus dollars, and backwards compatibility for games.
There is still a lot to see at GME in terms of business improvement and what direction the new board might take the company in.
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
Bullish Citi Trends (CTRN) Preannouncement. Citi Trends, which is on our Long Bias list, reported preliminary EPS of $1.71-$1.76 – more than doubling the $0.88 it earned this quarter last year. The consensus (which is only one analyst) was at $1.30.
But the company came in even ahead of our bullish $1.62. Comps were an impressive 16.7% -- a 1,000bp sequential acceleration from 3Q. The company bought back nearly 400k shares during the quarter.
Keep in mind that management at ICR laid out a 3-year target to include at least 100 new stores (MSD growth), 3% comps, 20%+ EBIT growth and 25%+ EPS growth. We think 2021 could look more like 20% Rev growth and 50%+ earnings growth. We see $3-$4 in NTM earnings power here (with very little stock buyback), given the longer term algorithm the company has laid out, no reason this shouldn’t trade at 25x-30x, and in this market why not higher?
OLLI is at 35x the street, BURL at 40x, while CTRN arguably has much more long term margin upside. There is minimal sell side coverage, so we can’t even say how we compare to the street for next year, but as the stock rises we will likely see more coverage coming driving interest and incremental bids for the stock. We suspect sales are ramping in January given stimulus checks hitting accounts, so we expect a 4Q beat.
The company has easy compares in 1Q lapping down 43% sales during the pandemic. If we see enhanced stimulus in the coming months 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. We’d put fair value on this around $80-$90, upside to $120.
TRSSF
Lawmakers appear close to a deal on handling possession offenses by minors that could finally lead Gov. Phil Murphy to sign marijuana legalization and decriminalization bills that have been on his desk for almost two months. But given the tumultuous legislative process, since voters overwhelmingly passed a recreational legalization referendum in November, it’s uncertain whether a final deal can be reached, report POLITICO’s Sam Sutton and Carly Sitrin.
Those under the age of 18 would receive a written warning for their first offense. A second offense would come with another warning and a referral to a social agency that can provide counseling. A third violation comes with a $50 fine or community service in place of payment.
The Senate might amend the bill to eliminate penalties or court-ordered drug treatment. New Jersey is the 11th largest state by population. TerrAscend (TRSSF) is one of four medical cannabis permit holders in New Jersey. It operates a cultivation and manufacturing facility in the state. It recently received a permit to dispense medical cannabis from its dispensary in New Jersey and expects to open two additional dispensaries this year.
SAVE
Spirit Airlines (SAVE) shares declined on the print this month, although we aren’t sure anyone should be about 4Q20…or even 1H21…results. It will remain a difficult operating environment until 2H21 and 2022. Aircraft utilization has more room to improve from disappointing 4Q20 levels.
SAVE shares are up since we added them to Best Ideas, and we expect that outperformance to resume as investors look forward to a pent-up demand, stimulus-fueled leisure travel recovery. We suspect changes in the expected recovery pace are more ‘noise’ than ‘signal’ and see no reason to change our view at present.
CLA
Ford sold its shares in LiDAR maker VLDR…a decision we agree with. GRAF was a SPAC we passed on, with financials that didn’t match the valuation. We doubt that the F exit reflects poorly on LiDAR in general, as Ford is co-invested in Argo AI with VW – the Argo AI system relies on LiDAR.
VLDR has a higher cost, ‘legacy’ LiDAR architecture. The company hasn’t grown revenue in years, a financial history that is difficult to reconcile with shareholder enthusiasm for VLDR shares. Instead, CLA expects to take share from VLDR with its cheaper, more scalable custom system-on-a-chip design. While it may initially be viewed as a slight negative for Ouster (CLA) and LiDAR in general, it instead fits with our understanding of the LiDAR state-of-play.
TCS
A handful of Form 4s of insider sales hit on The Container Store (TCS) last Friday after the close seemingly dragging on the stock on Monday. However nearly all of them are associated with the 5mm share offering that was announced on Feb 8th.
The selling directors are Leonard Green partners, so filing as indirect owners for the sale. The same thing happened in November when Leonard Green sold 575k shares. The only 'new' sale is the CMO selling $127k worth, less than 10% of her stake, which we wouldn’t really read as overly bearish.
The stock shrugged off the confusion for the remainder of the week and put up a 9% gain for the week…something we expect to continue as the new CEO (entering his third week on the job) turbo-charges the comp trajectory around its affiliation with TV shows including The Home Edit, and accelerates store growth.
PLCE
Hedgeye CEO Keith McCullough is adding The Children's Place (PLCE) to the long side of Investing Ideas. Below is a brief note.
Looking for more HIGH SHORT INTEREST names that Hedgeye likes on the long side? Here's one with 23% short interest that is for sale on #decelerating volume today. I like that similar set.
And summary statement from Retail analyst Brian McGough's Retail Pro product on why:
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Takeaway: After 3-yrs of taking it on the chin, PLCE should see outsized margin gains and EPS nearly double consensus. 60% upside on base case model. |
HD
January existing home sales – an obvious telling statistic for demand at Home Depot (HD) – came in this week.
There was some statistical shifting in the reported numbers, but the defining features of home demand remain unchanged. Sales Growth remains solid (+23.7% Y/Y) with total volume holding at cycle peak levels while supply conditions continue to tighten. Unit inventory fell -1.9% M/M while accelerating to -25.7% Y/Y, marking a 20th consecutive month of negative Y/Y growth and the fastest pace of Y/Y decline ever.
On a months-supply basis, we hit another lower ATL at 1.87 months. Per our Housing team “we remain on the cartoonish trajectory towards 1-month supply. Take a moment to internalize that. Months-supply at parity – a level formerly relegated to analytical rubbernecking of anomalous overheating zip code level locales – is occurring at the national level. We’re effectively approaching an equilibrium whereby every home for sale in the entire country would be sold every month.”
Keep in mind that we’re seeing this backward-looking date at the same time rates are backing up – especially the 10-year treasury. If that move continues, it could paint a much different picture for home demand and HD comps – at the same time it prepares to go up against 24% coms for 2Q and 3Q of last year.
To be clear, housing demand coming off peaky levels, with rates rising at the same time you’re facing generationally-dificult same store sales compares is NOT when you want to be owning Home Depot.
PPC
USDA data shows that the average price paid to livestock producers at the farm level dropped by nearly 20% in April. At the same time, consumer prices for meat, poultry, fish, and eggs began increasing.
By June, consumer prices were 10% higher than the level before the pandemic. Once the packing plant disruptions eased, the price trends reversed, as seen in the following chart. The data shows that consumer prices for meat and other animal products declined by more than 5% between June and November, while farm-level prices increased by 20% between April and November.
Price trends have not returned to pre-pandemic levels yet, with consumers still paying slightly higher prices, but the situation has improved. Livestock producers have weathered the worst of the pandemic impact, but looking forward, rising feed costs will add a different challenge for Pilgrim's Pride (PPC) and other protein producers.
EDU
While New Oriental (EDU) has recovered as China equities have soared recently, it is still only up 3% YTD. Competition from the online education peers remains fierce which will impact EDU’s quest to gain new students. Meanwhile, EDU has to invest i.e. spend to retain their teachers. This combination does not bode well for the company.
ROP
The shifting conference call topics from water meters to billing software to the timing of NYC road projects to college campuses harkens back to 30 Rock’s Jack Donaghy character becoming “Vice President of East Coast Television and Microwave Oven Programming”.
That was NBC making fun of GE’s hodgepodge of a business portfolio; Roper (ROP) is just the latest iteration of the failed acquisitive conglomerate model, in our view. Organic growth has been unimpressive since well before the COVID-19 pandemic.
