Investing Ideas Newsletter

Long: MP, STKL, EXPE, BYD, AMN, TCNNF, BCO, POAHY, IHRT, GME, EXPC, CTRN, TRSSF, SAVE, CLA, TCS, PLCE, XM, FFNTF, ASPL Short: HD, ROP, TAP, KR, BBY, AKAM, YETI, DPZ

Below are updates on our twenty eight current high-conviction long and short ideas. We have removed Chewy (CHWY), Innovative Industrial (IIPR), Guardant Health (GH), DraftKings (DKNG) from the long and short sides. We have added Best Buy (BBY), Akamai Technologies (AKAM), Yeti Holdings (YETI), and Domino's Pizza (DPZ) to the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.

MP

It’s tempting to dismiss all SPACs as low-quality issues avoiding IPO scrutiny, but we don’t want to fight the SPAC tide if our investment process can remain intact.  We’ve found some genuinely good companies amid the SPACophony.  

Take MP Materials (MP). Chinese rare earths elements (REE) are extracted in a much more ecologically destructive manner than those at the Mountain Pass facility. 

By substituting MP’s surprisingly small environmental footprint for the Chinese REE Bigfoot, MP is producing lasting environmental gains relative to existing practices.  Unlike NKLA, MP Materials is a profitable, growing company with top shelf management.  We added MP (FVAC at the time) as a Best Ideas long in August, with a favorable macro backdrop and quantitative signals increasing the odds of success. 

MP has been better than a double during de-SPAC.  We also added EOSE (BMRG at the time), with a similar approach and favorable returns, along with other ESG friendly names. 

STKL 

According to LikeFolio, consumer mentions of buying and consuming oat milk are up 46% YOY over a 90 day moving average. That compares to a 4% increase for soy milk, 2% increase for coconut milk, and 1% decrease for almond milk.

Oat milk mentions have surpassed almond milk in the past month, as seen in the following chart. Oatly is driving the increase in oat milk mentions. The combination of its Super Bowl commercial and the launch of Oatly in Starbucks cafes on March 2^nd has driven an 84% YOY growth in Oatly mentions. The media coverage of the IPO will further add to consumer demand for Oatly and oat milk. As strong as consumer demand for Oatly is, its POS sales in the most recent 13 week period are close to Planet Oat’s sales.

Oatly’s growth will likely help the broader oat category due to its premium price and inventory tightness. SunOpta (STKL) supplies Planet Oat.

EXPE

Headline RevPAR growth will start looking impressive as the industry compares against near zero hotel activity in the prior year, but we’ll continue to focus on the trends under the hood if the easy comps.  We like to measure the breadth of the recovery and compare demand drivers to gauge sustainability within the data and from our vantage, breadth isn’t an industry strong suit at the moment.  The leisure customer is coming back and demand is accelerating (even compared to ’19 levels), but corporate demand is running in place.  As of the most recent datapoints, the spread between weekend RevPAR growth and weekday RevPAR growth is approaching its post Covid highs that were reached last year during peak leisure season.  All good signs for leisure, but the leisure customer alone cannot bail out the entire industry, especially not the higher end of the industry where weekday demand is a critical ingredient for RevPAR.   

Soft weekday trends will inevitably matter more for the hotel stocks (REITs especially), and for now, all eyes are on the headline figures and initial acceleration of leisure, but that catalyst won’t last forever. 

We think the blue line in the RHS chart has a lot more room to run as leisure travelers continue to get back on the road for drive-to vacations and even fly-to trips, which remains a catalyst for the OTA stocks like Expedia (EXPE). We remain cautious on the RevPAR set up, but are particularly bullish on the leisure traveler’s outperformance that should continue well into 2021 and beyond.

BYD     

Regional gaming figures have started to filter in for the month of February and the early signs suggests there might have been a bit of slow down relative to January.  Time to worry?  We think not at all.  The headline figures have looked worse, we think for a variety of reasons and most of which are not sustainable moving into March and April.  For starters, February 2021 contained only 28 vs 29 days (we solve for this below), but there was also 1 less Saturday YoY and weekend days make a huge difference. 

Also, there’s not much relief when it comes to YoY comps – recall, last Jan/Feb was very robust across the mature regional markets, aided by better weather.  With heavy snowfall and outages across the middle of the country, there could have been some impact, too.  In addition to those impacts, we also believe that our current sample (IA, MD, WV, OH) saw big time acceleration in January due in part to a lot of excess pent up demand in the system from stricter capacity restrictions in November and parts of December.  The remaining states left to report have a heavier weighting in our calculation and given that some of those states (PA in particular) were slow to reopen, February could be strong.  LA could have felt some lingering impact from the Texas power outages, but that too, will prove temporary.      

As we wrote earlier this week, the set up for regional gaming is a good one and the story has legs through reopening.  Greater confidence among the populace in their wellbeing (vaccine rollouts, lower cases and deaths) + extra money in their pockets + still a fairly limited amount of entertainment options = March and April GGR could see a nice boost. Boyd Gaming (BYD) remains our top pick in the space.

AMN

On our weekly Hedgeye House Call earlier this week, we highlighted last week’s updated Bureau of Labor Statistics (BLS) report which showed continuing wage inflation for the US Medical Economy. Diagnostic Imaging employment continues to underwhelm, having not seen a near-full recovery, yet.

As COVID-19 vaccines are rolled out at an accelerating pace, we see aggregate hours getting back to even with pre-COVID, which means volumes are returning. With these updates in mind, we believe it further supports the backdrop for AMN Healthcare (AMN), as well as reinforces the company’s positive earnings release and guidance from last month.

Remember that even as COVID-19 recedes, we believe the fundamental momentum will continue into 2H21 carried forward by a set of demand tailwinds such as nurse burnout, continued vaccinations, and the return to in- person care. Within the current environment, a) nurses have leverage, and b) temporary staffing is extremely important.

We believe there is more to go here due to the massive demand being forced through a small knot hole in the system. Therefore, AMN remains one of our top Long ideas.

TCNNF

For the week ending March 5th, the number of qualified patients in Florida’s medical marijuana program grew 0.8% WoW to 500,950 qualified patients with active ID cards. After a two-week surge, sales decreased this past week compared to the week prior. Trulieve (TCNNF) added one dispensary in the past week.

THC in mgs sold decreased 20.2% WoW to 165 million mgs, CBD in mgs sold decreased 25.2% WoW to 4.2 million mgs, and flower in oz. sold decreased 2.8% WoW to 57,964 oz. sold. Trulieve is the market leader in Florida, which has only approved medical use so far.

Approving adult-use would cause a step function increase in demand in the third largest state by population.

BCO

We expect shares of Brink's 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. 

If BCO was able to perform well in an exceptionally difficult 4Q20, a pandemic-free 4Q 2021 should generate investor friendly results.  Shares of BCO have performed well, but we see more upside as Brinks operations emerge as a post-pandemic winner.

POAHY

A pandemic recovery → Quad 2 economic backdrop that should be favorable for shares of Porsche Auto (POAHY). 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

iHeartMedia (IHRT) reported a strong finish to 2020 when they reported earnings in late February, with revenue growth outperforming broadcast radio peers. Management moved to a new segment reporting structure that breaks out IHRT’s digital assets in greater detail.

The digital segment grew 26% YoY in 2020 and 54% YoY in 4Q20, and represented ~16% of consolidated revenue in FY20. Within the digital segment is podcasting, which grew in excess of 100% YoY. What was perhaps the most surprising part of the new disclosure, was the digital businesses EBITDA margins of 30-35%. Meanwhile, management expects to get back to 2019 levels of performance by year-end 2021.

We would note that IHRT has a small events business that should do well in a reopening scenario. We continue to see upside to $18-22/share, with potential for higher prices depending on the magnitude and pace of economic recovery.

GME 

GameStop (GME) bulls like everything Cohen. At the start of the week GME released an odd announcement noting it formed a Strategic Planning and Capital Allocation Committee comprised of Ryan Cohen and his board additions Wolf and Attal (former CHWY co-workers). The committee was responsible for recent new hires and management changes. 

Perhaps the rationale for the release is to reassure investors that the CFO departure was an intentional change.  Or maybe this is an announcement to keep the market excited as it gets ready to raise some capital (as it says they are responsible for capital allocation).  Whatever the intentions behind it, the market certainly liked it with GME crossing back above $300 this week. 

It was also announced this week that GME earnings will be March 23^rd after the market close.  We’re not sure 4Q EPS really has any bearing on what people think of the value of this stock, consoles are still nowhere to be found.  But it will be interesting to hear directly from management for the first time since all the excitement has started for the company.

EXPC

The Blade (EXPC) management team looks exceptionally qualified and is pursuing a vastly more sophisticated long-term growth strategy than a ‘helicopter app’. We think eVTOL is a transformative technology, with solid state batteries and regulatory approvals making this clear over the next few years.

As a platform for zero-emission eVTOL service that can ease the dangers of long commutes, speed urban transport for organs/healthcare, and democratize urban air mobility while comping pandemic depressed results, we think EXPC/BLDE could be an excellent performer into de-SPAC and during the de-SPAC process.

CTRN

Citi Trends (CTRN) reports 4Q earnings on Tuesday.  We already know 4Q was great, as it was pre-announced.  Management might temper 1Q expectations some, as it’s reasonable to assume comps QTD have not been great.

February compares were not easy, Jan stimulus probably pull forward some demand, and Feb weather across the country wasn’t great for retail.  If there’s any weakness around QTD trends, we’d be buying. 

Compares are now easy from door closures last year, stimulus dollars are coming, and its starting to feel like spring is upon us sending consumer to buy spring/summer apparel.  The comp cadence for the rest of 1Q should be stellar.

TRSSF

In a deal announced 12/21/20 with Canopy Rivers, Canopy Growth (CGC) is increasing its stake in TerrAscend (TRSSF). This makes TRSSF the company preferred vehicle to participate in the U.S. legalization. How the company deals with the Acreage assets will be dealt with at a later date.

This makes TRSSF the best ideas as long as the market sees impressive growth in 2021 and realizes that CGC will likely own the company one day! In an investor conference this week Canopy Growth clarified that entering the US market does not necessarily require full legalization, but could be with federal permissibility – a notable distinction.

Permissibility could come from the Department of Justice clarifying what they will prosecute. On March 23 TerrAscend will report Q4 results, but the company has already reported the preliminary results with sales growing 28% sequentially and 152% YOY.

SAVE

Spirit Airlines (SAVE) app data has continued to diverge from other industry data.  App data should lead bookings as a signal of customer interest.  As the pandemic eases on wider vaccinations and seasonal declines in infection rates, travel should bounce back.  Pent-up demand is likely significant and investor sentiment increasingly less skeptical.

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, Ouster (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 CLA and LiDAR in general, it instead fits with our understanding of the LiDAR state-of-play. 

TCS

The Container Store (TCS) has some near team catalysts as it should see imminent revenue acceleration lapping closures last year via shutdowns and it still has good looking online interest YY.  We’re not currently modeling big upside to ’21 consensus. 

The opportunity here is much more around taking a new industry tailwinds of consumer home organization trend and increased housing turnover into a longer term growth story for a forgotten retailer.  We want to see new CEO come out with a plan to invest and re-accelerate store growth that could put $2 in Tail EPS in play.  Perhaps that is on 4Q fiscal EPS print (Late May) or maybe on a summer investor day?  A new plan would draw in more buyside and sell side interest, and likely mean upside to the multiple. 

Set-up remains bullish for TCS here in Quad2.

PLCE

The Children's Place (PLCE) Long Thesis Intact. PLCE set the stage for big earnings upside in 2021. Though it’s up 44% since our call, we still think it's got 33% left to go.

We still like PLCE Long at current levels, and think it has big earnings upside in its back pocket for 2021. The stock isn't as cheap as when we first made the call at $57 on 1/18 -- as it's up 44% in a +3% tape. But for 2021 we're coming out at $6.04 in EPS vs the Street at $3.27. Then in 2022 we've got recovery to a 7.6% EBIT margin (keeping in mind pre-pandemic peak was 8.9%), which suggests operating EPS of $8.45, or $9.32 after stock buyback -- which we think resumes in 2H of this year.

We think that a 12x is hardly aggressive for a company like PLCE (it's historically traded higher), which suggests a stock a year-out of ~$110, or about 33% upside from current levels.  Still respectable upside from here.

XM

Now that Ryan Smith owns an NBA team, you have to permit us some basketball analogies now and again…such as the title of our recent Black Book on XM More Jazz Than Meets The Eye. So even though we know that every earnings report will have its share of Bears and Bulls, for us we think Qualtrics (XM) just put up a nice solid dunk.

Why?

• RPO up 41% Q/Q and 78% y/y compared to 4Q19 RPO up 73% y/y on smaller numbers; an acceleration on both relative and absolute metrics
• Customer capture up 1,500 customers in 2H to 13,500 total, even more bullish than what we thought the parent co had disclosed
• Company added 312 customers >$100K Y-Y which appears to be a record capture based on the disclosures we have
• NTM RPO up 48% y/y

FFNTF

Part of our LONG thesis for 4Front Ventures (FFNTF) is the company's dominant position in Washington State.  The legal cannabis industry has grown at a “staggering rate” in Washington. According to a new report from Washington State University, it now contributes roughly $2 billion a year to the Pacific Northwest state’s economy.  The report, titled “2020 Contributions of the Washington Cannabis Sector,” found that in 2020 the industry was responsible for $1.85 billion of gross state product and supported about 18,700 jobs.  

The report also concluded that even more growth is likely on the horizon, which is great for FFNTF.  The expected 2021 contributions to Washington’s resulting from the Cannabis sector is $2.13 billion, up from the $1.8 billion in 2020.  “There is still substantial growth to come as the industry matures,” Caitlein Ryan, a spokesperson for the WSU Impact Center and the Washington State Cannabis Alliance.  Retail marijuana sales alone have grown 605% between 2015 and 2020; the report further suggested the economy would benefit even more if Washington state lawmakers legalized home cultivation for recreational use.  

That practice is prohibited, though limited home grows are allowed for medical marijuana patients. A bill to make such a change is working its way through the state legislature.  

The report found that allowing recreational marijuana home grows would not detract from existing businesses. Instead, it would more likely have a complementary effect by expanding the industry in general and allow for more experimentation and innovation. We recently met with a dispensary operator in Washington State, confirming that business is good and FFNTF products are some of the best selling products in his store! 

ASPL

Wheels Up (ASPL) is no pre-revenue SPAC target, with nearly $700 million in 2020 revenue, 11,000 active users, and 150,000 passengers flown in the last year. The private aviation market suffers from inefficient asset utilization and legacy operating practices that are ripe for disruption.

By combining owned, managed, and third-party assets with flight management system software providing data for optimization, Wheels Up is looking to build a competitive edge like CHRW, AirBnB (covered by GLL). With celebrity ambassadors, high quality investors, decent customer retention, and an experienced management team, continued success seems likely.

We expect Wheels Up to be a winner in the private aviation.

HD

Home price appreciation unsupported by market fundamentals. Our Financials/Housing Sector Head Josh Steiner hosted a call with Ed Pinto, of the American Enterprise Institute – one of the foremost authorities on the housing market in the US.

We found the following slide to be particularly telling. The punchline is that price appreciation has dramatically outpaced the underlying fundamentals for home sales – suggesting that when there is an inevitable correction, it will be particularly painful.

Obviously bearish for Home Depot (HD) when that event comes to fruition.  

ROP

We see Roper's (ROP) valuation as the product of reporting and accounting ‘choices’; heavy allocations to intangibles and add backs, along with the characteristics of purchase accounting at serial acquirers, tend to fluff up results…as long as a steady stream of ever larger deals come in.

TAP

Beer volumes in Canada have been relatively flat in 2020. Canadian domestic beer sales decreased 3.1% YOY in December after increasing 1.0% measured in volume in November.

Imported beer sales fell 28.3% in December after falling 17% in November and October, as seen in the following chart.  Total beer sales measured in volume decreased by 7.4% in December and 1.7% in November. Exports increased 6.6% in December, accelerating from 2.8% in November. For 2020 domestic beer sales decreased 0.1% by volume while imports decreased 7.9% and exports decreased 3.0%. 

Molson Coors (TAP) is the largest beer producer in Canada, controlling about a third of the market.

KR

Grocery store sales decelerated at the end of February as we start to approach the one-year anniversary of the stockpiling that occurred in March. The peak of grocery store sales last year was the week ended March 15, 2020. Total CPG demand in grocery stores increased 4% YOY for the week ended February 28, decelerating from +11% in the prior week.

The edible category decelerated to 6% growth from 13% in the prior week. Frozen category demand increased 12%, decelerating 10% from the prior week. The meat category decelerated to 8% growth from 14% in the prior week. Beverage alcohol sales decelerated to 12% growth from 15% in the prior week. Produce sales decelerated to 7% growth from 10% in the prior week.

Last week Kroger (KR) guided ID sales to decline 3-5% this year and the two-year stack to be up 9-11%.

BBY

Hedgeye CEO Keith McCullough added Best Buy (BBY) to the short side of Investing Ideas this week. Below is a brief note.

With our Long Squeeze Retail (XRT) position signaling immediate-term TRADE #overbought today, I'm looking for Brian McGough Short Ideas ... because his Long Book is ripping!

One of Brian's great SELL ideas has been Best Buy (BBY). Here's an update from his recent Retail Pro publication on the name:

BBY | As Good As It Gets. Facing a severe rev slowdown, GM% pressure and higher SG&A. The TREND and TAIL consensus numbers are way too bullish. Press the short.

AKAM

Hedgeye CEO Keith McCullough added Akamai Technologies (AKAM) to the short side of Investing Ideas this week. Below is a brief note.

Consider the alternative to lighting ones Macro Tourist hair on fire with CNBC narratives about Tech vs. Rates...

and just professionally wait on some solid Tech Shorts to bounce, on #decelerating volume to lower-highs with QQQ +4% on the day!

I've been waiting on a day like this to short something Tech. Tech analyst Ami Joseph's bear case on Akamai (AKAM) is the first to get the nod.

Check out his new Tech Pro product for details like this: 

We model the business primarily on a traffic volume basis which offers growth rates in % and unit terms. We examine the rate of change of this traffic volume and model it (with some success). The takeaway: comps just got a lot harder, a fact that should continue through the Sep-Q of 2021. This means AKAM’s core organic revenue growth will decelerate, organic EBITDA growth will only happen via headcount reduction, and the multiple may contract alongside the ebbing growth.

YETI

Hedgeye CEO Keith McCullough added Yeti Holdings (YETI) to the short side of Investing Ideas this week. Below is a brief note.

Looking for shorts? Let's go to our cleanup hitter so far in #Quad2, Brian McGough, for another one in Yeti Holdings (YETI)...

Here's an excerpt from Brian's popular Retail Pro subscription on the name:

Takeaway: The fundamental set-up and negative rate of chg should catalyze people to look at EPS, EBITDA and FCF instead of blindly valuing on Sales. We’re adding YETI to our Best Idea Short list and think that there’s 60%+ downside over a TAIL duration. We’ve been patiently waiting to add this name to our Best Ideas but wanted to de-risk the 4Q print, as we knew the results were tracking well. We were vocal about that even when upping this on our Short Bias list earlier this week. But apparently so was the Street as the stock traded down 8% on a 20% EPS beat and bullish guide. We’re far from too late in elevating this short to our Best Ideas List (first made the call at $68 last month – stock closed at $72 today). The upside catalyst is gone, and it just signaled its 1st lower high with accelerating volume on declines (bearish trading inflection).

DPZ

Hedgeye CEO Keith McCullough added Domino's Pizza (DPZ) to the short side of Investing Ideas. Below is a brief note.

There's nothing quite like it when our guru of the restaurants space goes from bullish to bearish on a name... 

Consumables analysts Howard Penney's pivot to bearish on Domino's Pizza (DPZ) was professional:

DPZ Moving to the SHORT bias list. Like many COVID winners, 2021 is going to be a challenging year for several reasons.  Delivery concepts like DPZ were the only go-to place to eat in the early days of the pandemic.  The 2020 pull-forward of demand will reverse course in 2021.  Current estimates are for 4Q21 SSS of 12.3%, slowing to 9.3% in 1Q21, and the company will experience an MSD decline in SSS for the balance of 2021.  We can see the stock trading due to low 20's NTM P/E over the balance of 2021, a similar valuation to 2019 when the company was under pressure from the significant growth in 3PD companies.