Investing Ideas Newsletter

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

Below are updates on our thirty current high-conviction long and short ideas. We have added Cinemark (CNK) and Duty Free (DUFRY) to the long side this week. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.

MP 

By substituting MP Materials' (MP) 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 

Construction is expected to begin on a $45M facility in New Jersey that will provide processing and packaging to an adjacent Oatly facility that produces an oat base. Innovation Foods will build and operate the facility. The co-packing facility received approval from the Millville planning board last week. Oatly opened its first facility in the US in the town in 2019. Oatly’s facility is 19,000 square feet, and the new facility will be 71,866 square feet. The second phase of construction will add two additional buildings with a total footprint of 125,286 square feet. The new construction will take the total investment at the location to $110M. The “low-acid aseptic” facility will be able to produce shelf-stable products that do not require refrigeration. Oatly and Innovation Foods will use outside co-packing facilities.

Last week Oatly announced the construction of its first facility in the U.K. Oatly is expected to IPO in the coming months. Oatly has tremendous growth potential ahead of it, but its manufacturing capacity challenges it. The company is setting up its growth and expansion plans ahead of the IPO. We are excited about the IPO, but the rumored valuation is ~$10B. SunOpta (STKL) is the best way to invest in the secular growth of plant-based milk.

EXPE

In yesterday’s STR data we got more evidence that the US leisure traveler is starting to pick up the pace, and hotels are filling back up on the weekends.  But the outlook for continued leisure travel also is looking pretty solid, and the below chart generated by Kayak’s flight search data suggests demand is accelerating.  Importantly, however, is that the share of demand acceleration is significantly skewed to the domestic leisure market – aka, US folks are staying closer to home, and international travelers have not turned the corner in the same way (at least not yet).  Key markets for demand acceleration continue to be focused around the sunbelt in the US (FL and AZ), while urban centers and core Top 25 markets are not seeing much love.  Hawaii, particularly Maui, is also seeing a spike in activity and is one of the strongest markets in terms of search interest. 

Hotels are going to benefit from this pickup in demand and we have been clear about that, but the real upside and leverage to this leisure led recovery will be geared towards the OTAs.  Leisure travel beneficiaries like Expedia (EXPE) and BKNG remain prominently positioned on our Best Ideas long list.

BYD     

February GGR numbers across the regional gaming markets have been pretty underwhelming, especially following the big reacceleration we saw in January.  Any cause for major concern?  We think not.  Admittedly, we were expecting stronger growth to kick in as more states reported, but the month appears to be somewhat of a throwaway.  Challenging weather across the middle of the country and pockets of the Northeast, one less Saturday (most important day), and another challenging comp probably accounted for at least a good chunk of the deceleration from Jan into Feb.  Looking into March, we’re expecting better things for the regional states that should bookend a solid Q1.  With vaccinations accelerating, stimulus checks getting out to folks, and more capacity being added back to casinos we expect to trends to reaccelerate meaningfully.  Those positives should also translate into better April and really 1H revenues as well – and remember these revenues are coming against a much leaner cost structure.     

Boyd Gaming (BYD) remains our top pick in the space but we also remain positively biased towards PENN.

AMN

AMN Healthcare (AMN) is sitting in a unique position as the largest staffing player in health care. Recall, that we expect the upward pressure on wages to continue, as demand for staffing is unlikely to waver; although it may shift from ICU/COVID- care to other areas like Med-Surg or "vaccinators.” This past Tuesday, AMN appeared at the Oppenheimer Healthcare Conference to update their investor presentation giving it more of a “tech- like” investment and ESG focused feel than before. Nonetheless, the information is not materially different.

During their appearance, Brian Scott provided an overview of the business and hit on a few key themes which we have been monitoring. In his remarks, he reminded us that AMN operates a low-cost business with strong cash flow, continues to see growth in technology and workforce solutions, and has recognized an uptick in the utilization of AMN Passport in the past year. Most notably, the company alluded to the potential for an uptick in labor disruptions given unionized workforces. We have often highlighted the increased bargaining power which nurses hold within the current environment since adding AMN to the long side. With this update in mind, we remain Long AMN on the Hedgeye Health Care Position Monitor.

TCNNF

President Biden has said that he wants to end criminal penalties and expand medical research regarding marijuana but doesn’t support full legalization. Vice President Kamala Harris was a sponsor of the Senate version of the bill the House passed the last session.  Biden has nominated California Attorney General Xavier Becerra, a supporter of marijuana legalization, to be his Health and Human Services secretary. Under Becerra’s leadership, HHS could amend its 2015 stance that said marijuana has no medicinal benefits.  Attorney General Merrick Garland could play an even more central role in determining federal marijuana policy. During a confirmation hearing last month, Garland argued that cracking down on state-legal marijuana markets wouldn’t be a wise use of limited federal resources.  Biden has not commented on whether Mexican legalization would change Biden’s stance. It has been our contention that federal legalization is unlikely to pass this year. For Trulieve Cannabis (TCNNF) the status quo with the states legalizing cannabis sales on their own is a very bullish setup given its organic growth prospects.

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

We’ve noted that we expect VW and Porsche Auto (POAHY) to be the best performing large cap names in our coverage this year.  That seems to be playing out well in shares of VW today, but to a lesser extent in shares of Porsche SE.  In this volatile upward move in a name with a (pointlessly) complicated capital structure, we’re seeing the preferred v common relationship for VW in the local market blow out – likely driven by enthusiastic buyers of the VWAGY ADR which holds ordinary shares.  In the local, one might swap to the preferred.

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) reports earnings on Tuesday.  The quarter could be squirrely, but we’re not sure that is what investors are focused on.  We know a lot about revenue trends, November was strong on console launches, December was weak with minimal console supply and rising covid cases, January improved with the help of stimulus. But we know little about margin trends.

More important than 4Q EPS will be any color provided on recent trends and 2021 outlook. Stimulus is probably helping here in March, but we do still have limited console inventory flow.  4Q20 will be better than 3Q, 1Q growth will be better than 4Q, and 2Q could be even better if consoles start coming on more normalized shipping/supply chains.  That makes for a positive rate of change trend. 

Even more important than the 2021 outlook for investors is what the leaders will say around the recent GME stock ramp, and what the new company is doing to change the strategic direction.  We don’t expect to hear a full plan, but any hints about the changes being made will be notable.

EXPC

Blade (EXPC) posted revenues up 53% and the company launched two entirely new infrastructure initiatives in Chicago and Westchester, NY – a good indication that Blade is a ‘growth’ name with enough market opportunity to increase the top line despite stunning external challenges.  EBITDA improved $2.4 million despite the pandemic, a decent sign that Blade is on the right track as the pandemic recedes.  Management provided favorable commentary about the upcoming summer season and pent-up demand in its fiscal 1Q21 earnings release last week (fiscal 1Q ends 12/31/20). While management touted progress on EVTOL (EVA), the growth in live organ transport MediMobility – up a surprising 176% YoY – offset the decline in airport-related, short-distance services.  

The SPAC will likely continue to trade with momentum indices and flows into ARKK and similar products, likely getting a boost from the dynamics discussed above.  The merger is still expected to close in the first half of calendar 2021. 

CTRN

Citi Trends (CTRN) reported earnings this week and results looked good.  EPS came in a nickel ahead of the prior prelim range top end, that puts EPS up about 110% YY.  Full year guide is $2.95 at the midpoint, about 15% ahead of the street, though given the business trends and stimulus help we think this is low.  Management is dancing around the quarterly trends in the PR, just noting sales are above internal expectations. 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.  Compares are now easy from door closures last year, stimulus dollars are coming imminently, and consumers are getting ready to head out to buy spring/summer apparel.  The comp cadence for the rest of 1Q should be stellar. 

We’ve said EPS of $3.00 to $4.00 for 2021, given recent margin trends it’s probably more likely towards the mid to high end of that range. Management reiterated its long term growth plan 100 new stores (MSD growth), 3% comps, 20%+ EBIT growth and 25%+ EPS growth. With that kind of growth algorithm there’s no reason this shouldn’t trade at 25x-30x or higher. If we say $3.50 in EPS you have fair value around $90 to $105, with the business accelerations we see very reasonable upside to $120 on fundamentals.  Then you have the potential for this to be a takeout candidate for some of the bigger off price players as it provides unit growth within an urban customer base that is outside the normal off price core.  If that happens you’re looking at a price probably closer to $150 or more.

TRSSF

TerrAscend Corp. (TRSSF) announced late last week that TerrAscend NJ, LLC has been issued a permit to process cannabis by the New Jersey Department of Health (“NJ DOH”), which allows the Company to engage in the extraction, processing, and manufacturing of a wide range of branded form factors including, vaporizables, concentrates, topicals, tinctures and edibles under the Ilera Healthcare, Kind Tree, and Prism brands. 

"We are pleased to receive our processing permit from the NJ DOH, and we look forward to introducing TerrAscend’s house of brands and form factors to medical-use patients through our ATCs and the wholesale channel.” - Jason Ackerman, CEO and Executive Chairman of TerrAscend.  The medical cannabis business in New Jersey is booming; constructing a 140,000 sq. ft. production facility will position the company well for adult use in 2022. 

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.

OUST

Ouster (CLA) renamed to OUST following the SPAC deal close with Colonnade Acquisition Corp. for Industrials

While SPACs may not perform well as the economy decelerates in 2H21 amid expectations of higher taxes and less stimulus, the outperformance of ‘risk on’ assets remains a key factor in 1H21. CLA fits key style factor criteria, while offering an asymmetric return.

LiDAR is set to grow rapidly in coming years as platforms and software packages are built around the technology. While segmentation remains, a simplified, fully digital architecture should allow for lower price points and widespread adoption analogous to cameras. Ouster is well positioned to capture market share amid this broader LiDAR growth.

We expect shares of CLA to trade into the mid-20s as management gets out to pitch the company’s advantages and pipeline. Valuations of comparable companies and competitors are far higher, with many strategies too focuses on the AV market.

TCS

The Container Store (TCS) with a volatile week, but started it off nicely making new highs.  Mid-week there was reports about the Texas storm shutdowns causing a big shortage in the global plastics supply chain.  Combine that with the port issues, perhaps it means some near term pressure on inventory flows. Though TCS exited the quarter with reasonably healthy inventory levels, with dollars flat YY and in-stocks better than the prior quarter.  We’re heading into easy compares from door closures last year, stimulus should boost near term spending, and online interest remains elevated YY.  That should mean business momentum leading into hearing about the new plan for the new CEO who’s still new and assessing the state of the company.

PLCE

We’re going to use the WSM example again – but for Children's Place (PLCE). Children’s Place is one of the retailers that has been most aggressive in getting rent abatements --- else threatening to close down the stores. WSM is closing down 25% of its fleet – similar to PLCE. We think people are mis-modeling the gross margin uplift and SG&A saves as the company closes down low-productivity stores, and gets rent abatement from the mall landlords, which is why we’re getting to $7-$8 in EPS power vs the Street at $4.20.

XM

So far, Qualtrics (XM) numbers point to fair value in the low $60’s based on 2022. There are two bullish puzzle pieces for us: 1) the NTM y/y comparisons after a sluggish YTD through 9/30 due to a COVID impact in 1H20, and 2) increasing acceptance of this tool as central, not peripheral, in customer engagement which we think leads to greater adoption and enduring NRR%.

FFNTF

This week 4Front Ventures (FFNTF) announced that it has entered into definitive agreements with both the landowner and an affiliate of IIPR to build an up to 558,000 square foot cultivation and production facility in Illinois. This would mark the largest such facility in the state to date. In summary, the agreements provide for IIPR to acquire the land for $6.5m and fund the approximately $45m buildout of phase one of the facility, which will be leased back to 4Front in the form of a 20-year lease with two five-year extensions at the Company's option. Closing of the transaction is subject to securing appropriate county and state incentives, completion of standard due diligence, and other customary closing conditions.  

While the Company has already experienced significant success in Illinois through its Mission-branded dispensaries and existing cultivation-only facility, it is excited with the scope and scale of this new facility which will enable it to now introduce its full array of products into the market and catapult it to a top player in the State.

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.

CNK

Hedgeye CEO Keith McCullough added Cinemark (CNK) to the long side of Investing Ideas this week. Below is a brief note.

Looking to buy things that are on sale on #decelerating volume? I am...

Cinemark (CNK) is one of Communications analyst Andrew Freedman's new Long Ideas (see his Comms Pro product for more details but here's a good summary clip of his content):

LONG CINEMARK HOLDINGS (CNK); +40% UPSIDE We are adding Cinemark Holdings (CNK) as an active long in the Hedgeye Communications Position Monitor. As the third-largest film exhibitor in the U.S., CNK is poised to benefit from movie theaters reopening and pent-up-demand for out-of-home entertainment. The most compelling case of pent-up-demand being the record box-office set during the 2021 Chinese Holiday New Year, with revenue increasing 32.5% over the 2019 holiday record. Based on the slate of tent poles awaiting release (and re-release), we believe domestic box-office has the potential to get back to 2019 levels faster than what is reflected in current consensus estimates.

DUFRY

Hedgeye CEO Keith McCullough is adding Duty Free (DUFRY) to the long side of Investing Ideas. Below is a brief note.

Now that SMALL CAP has corrected, as a Factor Exposure, towards the low-end of my Risk Range, The Signal says buy-more Best Ideas by Brian McGough... including Duty Free (DUFRY) which he calls a multi-bagger...

Here's an excerpt on the idea from his popular Retail Pro independent research product:

Takeaway: Mother of all reopening plays. Multi-year multi-bagger. More upside here than we originally thought. Black Book Deep Dive on 3/30. We've amped up our research efforts around Dufry (DUFN-CH, ADR=DFRYF) since first going long last month on 2/6 (at CHf 52) , and are convinced that this name is the Mother of all Reopening plays…and then some. Today we're adding the name to our Best Idea Long list, and despite the 23% gain since we first made the call, we think this name is a 3-bagger over 3-years, with many ways to win. We think that (Advent and Alibaba-backed) Dufry will prove itself to be the consolidator of the global luxury travel retail industry, and will put up earnings nearly 2x pre-pandemic levels over a TAIL duration. That's definitely not in the stock today.

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

Molson Coors (TAP) has shifted its innovation and growth initiatives to its hard seltzer portfolio of brands consisting of Topo Chico, Coors Seltzer, Vizzy Hard Seltzer, and Proof Point. Molson Coors is trying to catch up to the competition, but the field is becoming increasingly crowded. The company has also added distribution of Yuengling in the West, Zoa (non-alcoholic seltzer), Hexo (cannabis drinks), and La Colombe (coffee drinks). The core beer business remains in a secular decline that is accelerating from hard seltzer share gains. It seems management understands the challenges for its brands and has partnered with several smaller brands for help, offering distribution to outside innovation. The on-premise business will get a lift when vaccines allow governments to lift restrictions. Management guided 2021 revenue to grow MSD%, but EBITDA growth is expected to be flat.

Year to date through February 21, off-premise sales of the Vizzy Hard Seltzer variety pack were $11M, making it the top-selling hard seltzer SKU for the company. The Coors variety pack had sales of $4M.  In comparison the hard seltzer category surpassed $3.4B in sales in 2020. 

KR

Kroger (KR) is on the short side of Investing Ideas. Below is a brief note.

In the week ended March 7, total CPG demand decreased 2% YOY, decelerating from +4% in the week prior, as seen in the chart below. The first week of March lapped a +12% increase in the prior year as the pandemic was beginning to dominate the news cycle, but widespread restrictions had not yet begun. The decline was driven by a significant drop in demand for the non-edible department to -22% from -10% in the week prior. Home care fell 20% YOY, decelerating from -4% in the week prior.

Tobacco was the only non-edible category that saw a YOY increase in the week. The edible department decelerated to +1% from +6% in the week prior. The beverage alcohol category saw the least deceleration to +9% from +12% in the week prior. The meat category slowed to +2% from +8% in the week prior. The produce category had a modest deceleration to +4% from +7% in the week prior. Next week will lap the largest week of stockpiling.

BBY

Best Buy (BBY) has been benefitting from the general wallet shift to the electronics category in 2020, as many services/experiences have been unavailable and out of favor in 2020 during the pandemic.  Some of Best Buy’s core categories like home computing, home theater/entertainment, appliances and fitness equipment, all getting abnormally high demand as consumers invested in the home and home schooling.  The replacement cycle for appliances, laptops, TVs, monitors, tablets, and other quarantine video consumption and learn from home items will be several years.  Demand has been pulled forward leaving a 2021/22 air pocket which will be at the same time consumers will shift wallet back to service/experience consumption.

There is also a high level of exposure to credit card income with little disclosure on the subject, which is a hidden risk should the unemployment trends ever lead to a real consumer credit problem, though we don’t expect this anytime soon given government action. We estimate that 20-30% of EBIT is from BBY’s credit card. In addition sales of extended warranties are around 40% of EBIT. BBY has seen increased online penetration.  That presents a margin risk, not just from the shipping costs, but also from the fact that online conversion of warranty sales is much lower than when there is a salesperson in the store pushing the coverage.  

BBY also faces pressure from wage inflation as it bumped up its minimum and average wage keeping up with some other big box retailers.  Fundamental in 2H should look particularly rough, with an estimated 7% comp decline, GM pressure due to online shift, warranty pressure and increased marketing expenses. If we're right, then we're looking at EPS of $6.63 vs the Street at $7.45. If we're right in our model, we think that BBY will trade towards a 10x multiple in a downward earnings revision cycle -- or a $65 stock -- that's 35-40% downside from current levels.  It's stunning that the short interest on this name remains near an all-time low of 2.8%.

AKAM

Akamai Technologies' (AKAM) core business is called CDN which is a service to accelerate the transport of internet traffic around some of the occasional bottlenecks of the Internet and ensure performant packet delivery.

The company does this by installing almost 300K physical servers in telecommunications service providers around the world, which then route and process bits with the help of the company’s purpose-built algorithm. Despite something to the tune of 1/3rd of said servers no longer functioning (per our field work), and a host of other challenges, AKAM is still arguably the best in the business for performant delivery of traffic.

YETI

Yeti (YETI) was the perfect pandemic play. It upscaled the cooler category and created a real premium brand – at the exact time consumers spent more time a) outdoors (camping, etc..) and b) drinking at home. The latter bolstered the company’s drinkware business, which is now 58% of the total and is among the highest margin product the company sells. Now the end of the pandemic is in sight, bars are likely to reopen in 2H and the company will be facing some extremely difficult top line comps. That’s the same time where we’re seeing new product innovations take the form of luggage. Yes…like the kind you cram into the overhead bins on airplanes. We’re not too sure about that one. But due to the culmination of positive factors striking at the same time, YETI put up 20%+ top line growth and a 19% EBIT margin. Yes, it innovated and branded a great product, but its over-earning at a 19% margin. Over a TAIL duration we have sales slowing into the single digits while operating margins revert to a more appropriate low-mid teen (about 14%) level. That means that virtually all top line growth gets eaten away by lower margin. In the end, we’re left with a $1.75-$2.25 earnings annuity. That’s when people stop blindly paying 5x sales for a cooler company, and focus on real metrics like earnings, returns, and cash flow. That gets us to about a $20-$30 stock vs its current $75. BIG downside over a TAIL duration.  

DPZ

Like many COVID winners, 2021 is going to be a challenging year for several reasons.  Delivery concepts like Domino's Pizza (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. The company will experience a MSD decline in SSS for the balance of 2021. Consistent with past commentary, DPZ has emphasized its strong belief in its "fortressing" strategy as a way not just to grow its business but also to deal with the higher labor cost that helps with both its carryout and its delivery business. 

CEO Ritch Allison says that with minimum wages rising to $15/hour, and "shrinking the radius" of delivery zones to improve a delivered order's economics is "honestly something we have to do."  Also, "taking $20 worth of food 9 minutes away from a store becomes economically very challenging." To emphasize the point, the CEO said that Domino's is "quite happy to put its own capital" down and build company stores to fortress.  The company is also using the strategy in the international markets, but this is more of a concern given the 3Q20 sales performance. 

Head of international, Joe Jordan notes that India's sales are running at 96% of year-ago sales as of the end of October. 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.