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Long: CHWY, MP, STKL, IIPR, EXPE, BYD, GH, AMN, TCNNF, BCO, POAHY, IHRT, GME, EXPC, CTRN, TRSSF, SAVE, CLA, TCS, PLCE, XM, FFNTF, ASPL Short: HD, ROP, TAP, DKNG, KR |
Below are updates on our twenty eight current high-conviction long and short ideas. We have removed Match Group (MTCH) from the long side. We have added 4Front Ventures (FFNTF) and Wheels Up (ASPL) the long side and DraftKings (DKNG) and Kroger (KR) 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.
Chewy (CHWY) saw a sizeable drop this week from the wider tech selloff and an insider sale (10b5-1 sale by the principal accounting officer). TAM stories with big multiple were hit hard. CHWY definitely has carried a big multiple, but we’d argue its much better than a pie in the sky TAM story. The industry growth has accelerated via Covid and that momentum will continue from higher pet ownership rates.
At the same time spending has shifted online with permanently higher penetration rates CHWY has added customers that stick around and actually grow their spending. Then you add on the catalyst of expanding into international. Based on Euromonitor data, North America is less than half the global pet care market. There is still a large growth runway for CHWY and we think it grow into its multiple.
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
This week SunOpta (STKL) reported adjusted continuing operations loss per share of $.03 in Q4 compared to -$.08 in the prior year. Adjusted EBITDA from continuing operations was $20.6M compared to $11.2M in the prior year. Consensus estimates were not comparable as they included the Global Ingredients business that was sold. Our estimates were a little higher for the Plant-based segment and lowered for the Fruit-based segment, but overall in line.
Sales grew 10.4% in the quarter, accelerating 400bps sequentially. The Fruit-based segment sales grew 3.9%, while Plant-based grew 6.6%. That is an acceleration for Fruit-based from +1% in Q3 and flat sequentially for Plant-based. Gross margins expanded 70bps in Q4, driven by higher volumes and productivity gains.
The Plant-based segment gross margins expanded 70bs while the Fruit-based segment gross margins expanded 720bps. Management’s focus on margins over the top-line for the Fruit-based segment provides visibility in 2021. For the Plant-based business, margins remain steady with the underlying commodity costs largely passed on to the customers, providing fantastic visibility.
Management expects the Plant-based revenue growth to be close to 10% in Q1 despite the difficult +30% comparison in the prior year. For the remainder of the year, management expects Plant-based revenue to be low to mid-teens%. The new capacity entirely drives the growth in Plant-based. For the Fruit-based segment, management expects an HSD% decline in Q1 followed by a low to mid-single digits decline for the remainder of the year. Management is passing on low-margin Fruit-based revenues to raise profitability in 2021.
Investors now have increased visibility into the company’s top-line growth and margins. SunOpta now has the combination of a HSD% organic growth rate and steady margins. We see 100% upside in the shares from current levels as management executes on their plan and the market recognizes the transformation.
IIPR
Merrick Garland, President Biden’s Attorney General pick, has reiterated in written testimony to several senators that he does not feel the DOJ should be using its resources to prosecute people who are acting within the cannabis laws of their state.
The Senate Judiciary Committee approved his confirmation on Monday. “I do not think it the best use of the Department’s limited resources to pursue prosecutions of those who are complying with the laws in states that have legalized and are effectively regulating marijuana.”
That view is consistent with policies during the Obama administration known as the Cole memorandum, which was rescinded by AG Jeff Sessions. Cannabis advocates want more than just a Cole memo, but it would have numerous benefits for cannabis companies to be treated more like other businesses. The rescinded Cole memo is the main reason Innovative Industrial Properties is the only publicly listed REIT in the cannabis sector. The company has more competitive advantages than its access to the public markets like its experience, expertise and relationships in the sector that a Cole memo will not change.
We remain long on Innovative Industrial Properties (IIPR).
EXPE
We continue to recommend Expedia (EXPE) on the long side, particularly on these market led dips, and we still see material upside into the $200+ range. 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 upcoming positive catalysts.
Thinking more about the near term, we have been amazed at the growth and relative share gains that the Vrbo platform is generating. The chart below details VRBO’s weekly active app user growth which has been trending north of 70% YoY since late Q3 of last year. No other travel platform that we track (not even ABNB) is coming close to this kind of activity.
Looking ahead, it could mean that comps will stiffen in 2H’21, but at that point the core hotel business should be kicking back into gear and EXPE’s overall bookings should be accelerating. Even still, we’re not expecting much of a drop off in activity for Vrbo and believe the momentum is real and sustainable.
We’d contend that EXPE gets nowhere near the credit they deserve for this asset, but that’s slowly changing. EXPE remains a Best Idea long.
BYD
In the aggregate, casino GGR might still be lower YoY but level of spend per admission has been like nothing seen before. Back in 2008, a similar phenomenon occurred in a few markets but not even close to this same magnitude, and eventually those trends in 2008 proved to be fleeting.
This time around is way different though. Certainly, multiple rounds of government stimulus (extra unemployment benefits + one off checks), which is driving unrated play, is certainly a plus, but casinos have indicated that higher worth and younger segments are what’s really driving their recovery. Casinos have been a prime beneficiary of a dearth of leisure entertainment options for consumers during Covid but an additional catalyst should drive additional growth post-reopening - the core older customer will be coming back as casinos retain some of these younger, higher worth customers.
On a related note, BALY reported their Q4 this week and called out that “market indications and preliminary results show markedly stronger consumer demand in January and February.” January is no surprise, and that’s reflected below but as we expected, the strength continued through February as well. GGR will begin to be reported next week from regional gaming states and we expect analysts to start raising estimates on some regional operators, particularly our favorite, Boyd Gaming (BYD).
Our $213 million Q1 EBITDA estimates well exceeds consensus of $191 million. New stimulus and vaccinations probably means forward estimates need to go higher as well. Unlike most of the rest of GLL, we still see value in BYD with positive catalysts as well.
Note, Nov-Jan does not include IL in the sample set given casino closures.
GH
On their earnings release last 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.
AMN
Last month, 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 26th, the number of qualified patients in Florida’s medical marijuana program grew 1.2% WoW to 497,068 qualified patients with active ID cards. Sales continued their surge in the past week, in part driven by Trulieve (TCNNF).
Trulieve's medical marijuana volumes increased 12% over the prior week, which was up 20% from the week before. The acceleration in sales for Trulieve can be seen in the chart below. Trulieve added two dispensaries in the previous week.
Florida THC in mgs sold increased 16.1% WoW to 206.8 million mgs, CBD in mgs sold increased 21.4% WoW to 5.6 million mgs, and flower in oz. sold increased 5.2% WoW to 59,604 oz. sold. Florida’s medical marijuana marketplace has strong potential and sales in the state would accelerate further when adult-use is approved.
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
GameStop (GME) has been holding up very well in an otherwise volatile tape this week and the recent rally appears to have much more substance than a Reddit trader frenzy. There is a lot that Ryan Cohen, management, and the other board members could do with GME to make it a strong long term competitor in the gaming ecosystem. In the interim, the company should benefit from demand in the new console cycle.
Consoles are currently in short supply, and we should keep in mind that unit sales for consoles actually peak about 3-5 years after launch, so the tailwind for GME sales and traffic would be more than just 12 months after the Nov 2020 launch. The fundamental rate of change acceleration for GME hasn’t started yet.
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
Last weekend the house passed the next Covid stimulus bill. Details are still being debated in the Senate, but the likely outcome is a big check and other financial support coming to mid to low income use households.
The CTRN consumer will see a huge boost in discretionary income. The timing of which is going to be right as Citi Trends (CTRN) is lapping closures last year. CTRN has seen solid comps since reopening, so its likely to see 1Q come in well ahead of 2019.
Given is comparing against down 43% sales (+77% needed to get back to even) add on stimulus and rising apparel demand, YY growth for 1Q could be anywhere from 100-200%, and it will have strong earnings flow through. EPS numbers and the multiple are likely heading higher.
TRSSF
TerrAscend (TRSSF) has made a number of changes to its business over the past year. Recent highlights for TerrAscend include a 25% cultivation expansion in Pennsylvania, opening their third Pennsylvania Apothecarium dispensary, opening their fifth California Apothecarium dispensary, receiving approval for and commencing cultivation in their 37,000 sq. ft. New Jersey greenhouse, and expanding their U.S. footprint via an acquisition of Maryland Based Grower Processor from Curaleaf.
TerrAscend is well-positioned in the growth market of Pennsylvania and the newly unlocked recreational market of New Jersey. TerrAscend’s sales and profits in Pennsylvania are expected to continue to scale following its recently completed 25% cultivation expansion.
In New Jersey, sales from their greenhouse and indoor cultivation facilities are expected to commence this month and ramp throughout 2021. The company recently opened its first NJ dispensary and has plans to open two more in the first half of the year.
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 bear case on The Container Store (TCS) is around the recent demand boost being from a fad fueled by organizational streaming shows. Perhaps there is some risk there, but we think the organizational trend has much more staying power than the most think. There’s a habitual and therapeutic nature to the action that means its not something going away after people are no longer locked in the house.
At the same time, there’s a quality business here that has demonstrated stable sales and profits before the pandemic boost. We think there is incremental growth runway by opening stores in the many markets TCS is not currently present.
Core shoppers of TCS very much enjoy the experience and service both in store and online, scaling the store base should provide some strong incremental returns.
PLCE
This week it was announced that Disney will close 60 stores in the US – or 20% of its store fleet as it focuses on e-commerce. It’s a slight positive on the margin for PLCE as some children’s clothing competition is exiting the mall.
A lot of PLCE competitors have been closing stores leaving share opportunity for PLCE on the reopening phase. We think the street expectations are still far too low for The Children's Place (PLCE).
XM
What we see in Qualtrics (XM) is 1) best solution in the market, 2) best Go-To-Market in its category, and 3) a large opportunity set that is within reach.
Some examples: 1) unique cohort dynamics – for each of the last 3-4 years, Qualtrics has brought on “land” cohorts at a greater size in their first year than the multi-year presence of each cohort that came before – this is despite being well landed among top enterprises. 2) Qualtrics is accelerating its quota-carrying headcount growth with additions through 3Q20 already ahead of full FY19. And 3) as we look forward: Qualtrics is the largest standalone experience management provider with only 13K customers, yet when we look across the ecosystem of adjacent companies we see Twilio (experience creation) @ >200K customers, Zendesk (experience response) @ >170K customers, and Salesforce (customer data storage) @ >250K customers, just to name a few examples.
The point is, why can't Qualtrics be on a path to a 50-100k customer base at the very least? We see a natural and recursive arc of adoption (customer acquisition, customer experience, expansion of spend, retention of customer, and so on) which is constantly being created and which was accelerated during FY20. We believe this arc should lead to greater adoption of Qualtrics on a lag.
FFNTF
Hedgeye CEO Keith McCullough added 4Front Ventures (FFNTF) to the long side of Investing Ideas this week. Below is a brief note.
Still looking to buy things on sale on #decelerating volume, eh? That's how you do this.
Paying attention matters, big time, too.
As many of you who pay attention will recall, The Cannabis Bull, Consumables analyst Howard Penney, walked through 4Front Ventures (FFNTF) on The Pitch @Hedgeye last month...
Seems like forever ago. But it's not. And the stock is at a much cheaper price here today than where you should not have been chasing it at the top of my Risk Range!
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"Well Keith, we have more multi-year multibaggers. Today we're talking Best Idea Longs in TerrAscend (TRSSF), 4Front Ventures (FFNTF) and Trulieve Cannabis (TCNNF). I want to talk about the Cannabis space this morning; it's a great time to focus here given the catalysts for the industry: |
ASPL
Hedgeye CEO Keith McCullough added Wheels Up to the long side of Investing Ideas this week. Below is a brief note.
There are plenty of longs we like that are on sale this morning - the art in this is having the patience to wait for either beta (SPY) to signal low-end of its Risk Range or a specific stock with a catalyst to do the same (before SPY does!)...
Wheels Up (ASPL) is a great example of that with the SPAC trading back towards the all-important $10 level.
We also had a catalyst with Industrials analyst Jay Van Sciver breaking the idea down for Institutional Research subscribers at 1230 PM (today).
Here's was his invite:
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Please join us for a look at the long side of the ASPL SPAC targeting Wheels Up today at 12:30PM EST. We continue to see SPACs offering an asymmetric return near their redemption price, and ASPL qualifies. We suspect many investors have looked past this one because it isn’t related to the ‘hot’ areas like EVs or ESG. The SPAC itself has an unpalatable name. Unlike some painfully immature SPAC targets, Wheels Up is building on an existing robust brand, generating significant revenue, and executing on an effective strategic blueprint. It has well known investors and a qualified management team. We also see it is targeting a large TAM with few effective competitors. |
HD
Lumber Liquidators (LL) reported earnings this week. It was another home improvement company that delivered strong results, yet finished the week down. The company highlighted its commitment to continued store experience/service, meaning elevated employee comp. Home Depot (HD) will have a tough time reversing compensation trends that have caused the reduced profit flowthrough of huge comp sales numbers in 2020.
As comps slow in 2021, that means earnings pressure and likely incremental multiple pressure. HD was a very crowded long, so there are plenty of incremental sellers, and very few incremental buyers as the comp and earnings trends weaken.
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
BeerBoard, which tracks $1 billion in draft sales nationwide, reported 92% of on-premise establishments were open and pouring beer for the Feb. 25-28th period. That is even with the prior pandemic peak period in September and October. 64% of the establishments’ taps are pouring, up from 60% during the last report from Feb. 11-14.
The volume of beer being poured per location is -40% YOY, but up 13% from two weeks prior. Florida, which currently does not have restrictions on restaurants and bars, has volumes 32% lower YOY while Minnesota is 66% lower, Illinois is 58% lower, and New York is 39% lower.
Domestic beers represent 54% of the volume poured, while craft represents 30.6% and import represents 15.4%. Trends in Florida indicate bars and restaurants need more than just being open for sales to return to pre-pandemic levels. We remain short Molson Coors (TAP)
DKNG
Hedgeye CEO Keith McCullough added DraftKings (DKNG) to the short side of Investing Ideas this week. Below is a brief note.
I've been patient, because my process is...
Waiting in the weeds for some of our new Best Idea Shorts to get to the top-end of my Risk Range, like Gaming, Lodging, and Leisure analyst Todd Jordan's new SELL idea: Draftkings (DKNG)…
Here's an excerpt from his Institutional Research on the name:
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We're adding DraftKings (DKNG) as a Best Idea Short. We think the current valuation may be unsustainable in the face of a number of negative catalysts we foresee. Following our detailed review of the company, the industry landscape, and a refresh of our industry growth and TAM analysis, we believe the setup is skewing negative for $DKNG. After a very strong year, we see potentially negative catalysts that could reverse what has been very positive momentum for $DKNG and the broader Sports Betting and iGaming industries. |
KR
Hedgeye CEO Keith McCullough added Kroger (KR) to the short side of Investing Ideas this week. Below is a brief note.
Another "Tough COVID Comp" (they have to lap the best of times during 2020 COVID) with margin pressure and in the wrong Sector Style and Factor Exposures is Kroger (KR).
Here's Consumables analysts Howard Penney and Daniel Biolsi on the quarter that was just reported:
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For F22, Management guided EPS to $2.75-2.92 vs. consensus of $2.69. Management expects ID sales to decline 3% to 5%. Management expects the two-year stack ID sales to increase 9-11%. Management is planning on inflation to be 1-2% for the year. Gross margins are expected to contract due to mix and sales deleverage. QTD sales growth is just slightly below Q4 as it begins to lap the outbreak. The company will hold its analyst day on March 31st. Kroger is a best idea short as it faces difficult sales comparisons and gross margins are contracting during the best sales environment. |
