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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, XM Short: HD, ROP, TAP |
Below are updates on our twenty five current high-conviction long and short ideas. We have removed Pilgrim's Pride (PPC) and New Oriental (EDU) from the short side. We have added Qualtrics (XM) to the long side and Molson Coors (TAP) 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.
Is the Chewy (CHWY) Online Model more powerful than Amazon? Well, making that case would probably be a pretty big stretch. But we ranked three e-commerce models based on key factors that we think are critical to a successful online model.
Chewy actually outranks Amazon on some key metrics, most notably Predictability/Volatility of demand as well as TAM to penetrate. Wayfair (which is a Best Idea Short) #fails at most metrics.
MP
Demand for light rare earth elements is likely to grow significantly in coming years, as the properties of these elements are essential for many promising markets. China, the dominant global supplier of rare earth elements, has already used its market position for geopolitical gain; as tensions have increased, obstacles to success for MP Materials (MP) are likely to be cleared.
In a market where many ‘growthy’ names are often untethered from economic reality, MP looks to offer the sort of return asymmetry, macro & factor exposures, and investment cycle dynamics that we look for on the long side.
STKL
Several media articles cited people close to the matter, saying Oatly is seeking a valuation up to $10B in an IPO. That represents a 5-fold increase from the July 2020 funding round. Oatly has not disclosed 2020 revenues, but it targeted sales growth of 100% above 2019's $200M.
Assuming sales benefited from the pandemic like other grocery items (although Oatly's capacity is constrained, see the following slide from our Black Book), an estimated $450M in revenue would put the price to sales multiple at ~22x.
A multiple that large would be strong encouragement for Oatly to secure more production capacity. SunOpta is the largest plant-based milk supplier and supplies all of the largest oat milk producers, except Oatly.
Another way to think about the valuation gap is just the $100M in oat milk revenue that SunOpta is adding this year would be more than 1.5x SunOpta's entire market cap at Oatly's rumored valuation. Oatly will be a very exciting IPO, but the best way to invest in it now is SunOpta (STKL).
IIPR
Innovative Industrial Properties (IIPR) reported Q4 results this past week. Revenues grew 110% from the prior year. The company raised net proceeds of $263M during the quarter bringing total net capital raised to $1.7B since the IPO of which $1.4B is committed.
The company has less than 8% of total gross assets from senior notes and no secured debt. Management continues to see the pipeline for new deals coming with cap rates of 11 to 15%. “We think that we’ll be able to be very close to that as we move forward throughout the year…. We have a lot of acquisitions to do. And we think we’re going to be right there on average between 11 and 15%.
Management sees progress for the industry in Washington DC: “We are closely monitoring the status of the bills in Congress and the evolving dynamics of both Congress and the administration, including the Senate voting dynamics. In our view, and of course this is just our view, we see certain bills like the SAFE Act, where bills had addressed the 280 tax issue as perhaps near-term and bills such as the STATES Act further on the horizon.”
EXPE
We continue to have little doubt that ABNB is the dominant AA player and there’s not much that’s going to change that, but what about the stock? At this point, we understand and respect the reasons for owning the stock up here given the tailwinds of the market and the positive catalysts within its travel category; however, we can’t ignore the fact that Expedia (EXPE) offers significantly better values at these levels. We’re not just talking about valuation for valuations sake either. EXPE, despite having performed very well over the last few months, appear to have more leverage to the broader travel recovery and thus could have more upside in the stock prices. ABNB’s revenue downturn was less severe in ’20 and the stock certainly reflects that. Investors tracking ABNB, particularly those with more of cash flow and GLL orientation, could soon realize that a position in EXPE could provide unique exposure to both the alternative accommodation (AA) growth story (secular and cyclical), while simultaneously being able to ride the recovery in leisure hotel demand.
Having a broader, more diversified, base of inventory and product could really move the needle in the coming months as travelers feel comfortable about returning to resorts and traditional lodging. We don’t view ABNB as particularly disadvantaged, we simply view the set up for EXPE as more favorable and their positioning affords them a better chance at capture more pent up demand. We like the leisure travel set up, both domestically and internationally and view EXPE as one of the best way to play the recovery. Based on our current numbers, the stock has another ~30% upside from current levels.
BYD
Margin sustainability? Check. Demographics? Check. Near term catalysts? Check. Higher estimates? Check. Compelling valuation and Hedgeye Best Idea Long? Affirmative. And we didn’t even get into sports betting (SB) and internet gaming (iG) yet. BYD’s core business is no doubt a beneficiary of the Covid experience. It’s back to the future for the business model with the focus on higher margin gambling revenues.
The lesser known but maybe more important long term byproduct of Covid is that younger generations of potential customers were introduced to the product and many are proving sticky. Current top line trends are surprisingly strong YTD and that’s before the older demographic returns in full force. Already, Q1 Street forecasts (and 2021) look low and while Q4 was ravaged by Covid (but still surprisingly resilient), forward estimates need to be raised given the strength in the January revenue releases and commentary on February.
Even after recent upgrades and more Street optimism, consensus is still behind on this name, but it might not take long for the chase to really kick into gear. With 20%+ upside left in the stock, Boyd Gaming (BYD) = Best Idea Long at Hedgeye.
GH
On their earnings release this week, Guardant (GH) reported 4Q20 revenue $78.3MM and guided below consensus for 2021 at $360M-$370M versus consensus of $376M. The downside is sourced from Medicare audit and Biopharma partners. They are forecasting 90K clinical tests in 2021 which looks low to us based on the current run rate and level of deferred care, particularly in cancer diagnosis. As CEO Helmy Eltoukhy stated, "Clinical growth was strong despite a virtual selling environment and widespread office closures, which recent data has shown resulted in a 65% decline in new patient diagnosis this year."
New patient diagnosis declines of 65% are in- line with comments from clinicians that late-stage cancer is making up a larger percentage of practice volume. It also sounds likely that working down the backlog may extend well into 2H21 and very likely 2022.
Management commented on the approval of Guardant Reveal for colon cancer post-surgical monitoring and the long road map significant commercial traction, as well as the fast pace of the ECLIPSE study enrollment and the timing of data for colon cancer screening.
These two items hold a tremendous amount of TAM and promise but need the backdrop of accelerating estimates to support excessive valuations. It will take time for GH to develop these tests, but the story remains intact.
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
Last week, AMN Healthcare (AMN) reported an impressive beat versus consensus, 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. Based on management’s commentary on the call and our own data, we believe that the beat was likely more tied to pricing, rather than the volume coming through. We can see that demand has recovered from 0, but we do not believe that the pent- up demand within the healthcare system has started to be released.
Regardless, AMN covered each of the demand points we were looking for this past week on their earnings call. While COVID-19 has been a positive driver, 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.
Already through the best of the MicroQuad 2 set- up, we believe there is more to go here due to the massive demand being forced through a small knot hole in the system.
The lack of supply should continue to keep pressure on wages through 2021 and into 2022. By mid 2Q20, we’ll have a better picture of what the rest of the year will look like, but for now, AMN remains one of our top Long ideas.
TCNNF
For the week ending February 19th, the number of qualified patients in Florida’s medical marijuana program grew 1.2% WoW to 491,370 qualified patients with active ID cards.
Sales had a notable acceleration in the past week, in large part driven by Trulieve. Trulieve's medical marijuana volumes increased 20% over the prior week. THC in mgs sold increased 8.6% WoW to 178.1 million mgs, CBD in mgs sold increased 33.8% WoW to 4.6 million mgs, and flower in oz. sold increased 10.4% WoW to 56,643 oz. sold.
Florida’s flower sales trends are depicted in the chart below. Florida’s medical marijuana marketplace has shown strong results which would see a step change when adult-use is approved in the coming years.
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.
Most likely because investors needlessly worry about the future of cash payments, Brinks is poorly covered by the Street and often ignored by investors. Armored trucks? Sounds like a business from the days of the gold standard.
But so were railroads. The ongoing transformation of Brinks is likely to prove durable, as a larger footprint and broader solutions package drives route density, branding, compelling strategic acquisitions, and other scale advantages. Management has demonstrated competence, executing continuous improvement programs while furthering long-term strategic initiatives. Exceptional execution in otherwise boring industries often delivers fantastic investor returns.
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
Watch here as our Communications analyst Andrew Freedman updates on iHeartMedia (IHRT).
GME
A big week for GameStop (GME). The stock had another wild upward move which, if you follow the investing idea range process, was still within a reasonable range of probability given its volatility profile and upside/downside. This week it was announced that the CFO was resigning in late March.
The market initially took this as bearish, but its simply not. The change has little to do with business trends and is really related Ryan Cohen putting his team in place. The change is bullish for the long term. Ryan Cohen tweeted at one point the same day which seemingly had little to do with GME but maybe got investors thinking about the GME Tail investment case again.
There’s still a lot to happen on GME fundamentals in 2021 and beyond, and likely still a lot of volatility in the stock over the near term.
EXPC
The more we look at Blade (EXPC), the more we like it. By building out a helicopter/sea plane/terminal infrastructure, they are positioning themselves not only for existing market growth, but also for the coming eVTOL platforms as they receive regulatory approval. Internally, it sounds like they are planning to make the transition from existing vehicles to eVTOL much like Netflix did from mailed DVDs to streaming. They’ll have customers, routes, locations, data, and regulatory approvals in place, an edge that would take prospective competitors years to replicate. Given the exceptional management, Board, and partners, maybe they just don’t feel like they need to push all that hard at selling the shares.
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
This week Citi Trends (CTRN) got another buy initiation by the old wall. This time it came with a $93 price target. That’s actually in the reasonable range of valuation for CTRN. We think $90 would be giving it a fair multiple relative to comparable retail concepts.
But with how good the numbers are about to look as the company starts lapping Covid shutdowns last year and sees help from a new round of stimulus, fundamentals will accelerate meaningfully and the multiple could go much higher.
At the same time we’re thinking CTRN could actually make a solid acquisition target for some of the bigger off price players. It has unit growth, ramping comps, is working on improved merchandising, and would offer diversification into a customer base likely out of one’s usual core. Then perhaps some margin synergy opportunity via sourcing/buying scale. Our initial take is this makes a lot of sense.
TRSSF
TerrAscend (TRSSF) reported preliminary Q4 results last week. Net sales were C$65M vs. FactSet C$63.6M; Adj EBITDA was C$26M vs. FactSet C$22.1M; Adj. EBITDA margin was 40% vs. 35% sequentially and 24% in Q2.
The company also reaffirmed 2021 guidance of net sales of C$360-380M vs. FactSet of C$369.9M and Adjusted EBITDA of C$140-160M vs. FS C$149.4M. The company reported 2020 net sales of $198 million and adjusted EBITDA of $60 million; 4Q20 net sales of $65 million representing growth of 28% quarter-over-quarter and 152% year-over-year; 4Q20 adjusted EBITDA of $26 million representing growth of 46% quarter-over-quarter. TerrAscend has a lot of momentum and the company looks to build on that growth in 2021 with a recent private placement and debt financing to pursue its new markets.
The Company will host a scheduled conference call to discuss its 2020 results and provide updated 2021 guidance on March 23rd, 2021.
SAVE
Aircraft utilization has more room to improve from disappointing 4Q20 levels.
Spirit Airlines (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
In addition to being on key autonomous vehicle platforms and focusing on many (likely higher margin) non-automotive applications, Ouster is positioned to emerge with among the lowest cost/highest quality product sets. Ouster (CLA) uses a cost effective, simplified architecture based on a custom system-on-a-chip design instead of analog sensors with digital components.
The single photon avalanche diode (SPAD) detector array pairs with an energy efficient vertical-cavity surfaceemitting laser (VCSEL) for a digital solution that gets cheaper with scale. Legacy architectures from Velodyne look much the same but may not offer scale and cost benefits available to Ouster as the LiDAR market grows. Segmentation should emerge, with range, resolution and other performance axes allowing for a broader suite of solutions.
TCS
The Container Store (TCS) is a forgotten public retailer. There is minimal sell side coverage, just 2 hold ratings and seemingly ignored estimates. It was acquired by Leonard Green in 2007, and came public in late 2013. The stock was quickly crushed as comps went negative in several quarters in 2014-2016, shares fell over 90% over a 2 year time period. Quickly the finger was pointed at losing share to Amazon, which is only partially correct, but regardless the name was quickly relegated to the basket of 'small cap dying brick and mortar retail that should never have come public.'
We think that narrative is likely to start rapidly changing. If you review the model, the business has been incredibly consistent on a margin level, and comps were positive 3 years running before covid, resembling a much better business than most investors likely think. There simply hasn’t been much happening, declining store growth, managing costs, LSD comps… a boring story.
Now a new CEO is coming in, Satish Malhotra, former COO and Chief of Retail for Sephora – just started his new role. We think there is a new growth opportunity emerging for this company – as evidenced by product tie-ins with Home Edit and Tidying Up – TV shows that have gone viral around home organizing. We can see square footage growth re-emerging and with that comes multiple expansion, as we can count on one hand the number of retailers that are actually accelerating square footage.
When we look at margins, the company is currently sitting at 5-6% EBIT margins – we see upside to 8-9% as the category tailwind accelerates, new product categories come to fruition, and management streamlines the organization to operate from a better position of strength.
PLCE
CRI Disaster Print NOT a Read into The Children's Place (PLCE). We took CRI off Long side last week, but in hindsight should've gone outright short. The earnings print on Friday was an unmitigated disaster. EPS $2.46 vs Street at $2.73. Rev miss. Margins weak. Q1 Guidance: ~$0.25 vs FactSet $0.76. FY Guidance: $4.58 vs FactSet $6.36 This goes WAY beyond the typical 'CRI sandbag' game.
This company has major issues. The stock traded down ~15%, and we were glad to see that PLCE was only down about 1%. Even though people view these two names as peers, for the most part they serve a different customer – with CRI’s revenue directly tied to birth rate. PLCE serves largely a much older child (look at the web site for each retailer and the difference in customer jumps right out at you).
PLCE remains a powerful story as it closes money-losing mall-based stores, which should result in reopening earnings power roughly 2x the consensus.
XM
Hedgeye CEO Keith McCullough is adding Qualtrics (XM) to the long side of Investing Ideas. Below is a brief note.
Patience & discipline - not everyone has those qualities in life, never mind their risk management #process...
Ever since Tech analysts Ami Joseph & Yosef Vaitsblit mentioned this new Tech idea I have been waiting, patiently, for an immediate-term #oversold signal.
We're getting that in Qualtrics (XM) today. That's good because we have a catalyst tomorrow with their Black Book presentation to Institutional Investors at 1230PM ET:
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Takeaway: We see 75%+ upside on this multi-year new Long idea; Deep-Dive Presentation Wednesday Last week we added Qualtrics International Inc. (XM) to the Hedgeye Technology Best Ideas List as a Long. |
HD
Still no flow-through at Home Depot (HD). HD Put up a blistering 24.5% comp on Tuesday – on par with the peak Covid quarters from mid last year. Sequential acceleration in underlying comp, with 2-year +100bps sequentially.
But EBIT up only 20% on a 24.5% comp, showing once again that the company is unable to leverage outsized comp trajectory due to higher comp costs and product cost inflation (GM was down 31bps).
No guidance from the company – which is interesting because even Macy’s gave a stab at full year numbers – though the CFO noted that comps likely to be flattish and margins to remain near peak 14%. Ultimately, what you’re buying here is a year’s worth of accretion from the recent HD Supply deal.
But when the core business is slowing so dramatically and earnings are driven by a deal isn’t exactly a recipe for multiple expansion…especially when rates are backing up and we’re in Quad 2.
ROP
We think Roper (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.
TAP
Hedgeye CEO Keith McCullough added Molson Coors (TAP) to the short side of Investing Ideas this week. Below is a brief note.
Consumables analysts Howard Penney and Daniel Biolsi love Cannabis (MSOS), but they have no love for Canadian Beers (TAP) here...
This is also a Sector Style (Staples, XLP) that you should be short alongside Treasuries (TLT) and Gold (GLD) in #Quad2. Here's an update from their Consumables Pro product (#subscribe) on the name:
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European restrictions lead to Q4 miss (TAP) Molson Coors reported Q4 EPS of $.40, missing consensus expectations of $.77 by a wide margin. Constant currency sales decreased 8.3%, worsening from -3.6% in Q3. Management said, “Europe alone accounts for 92% of our fourth quarter topline [miss] to plan.” Government restrictions in Europe and the U.K., in particular, caused the shortfall. Europe accounts for 15% of revenue but contributed 61% of the revenue decline for the year and 92% for the quarter. North American sales decreased 0.8%, even with Q3, while volumes declined 6.9%. The U.S. grew 1.9%, with volumes down 6.2% compared to shipment declines of 2.3%. In Europe, revenue decreased 39.4% in constant currencies worsening from -15.3% in Q3. EBITDA of $375M missed consensus expectations of $481M. |
