Investing Ideas Newsletter

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

Below are updates on our twenty eight current high-conviction long and short ideas. We have removed The Home Depot (HD) short and TerrAscend (TRSSF) long from Investing Ideas. 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 

California could be in a drought this year due to lower rainfall and lower than normal snowpack. California supplies 88% of U.S. strawberries, so the concern from a drought would be another year of small supplies for frozen strawberries.

The California Strawberry Commission’s acreage survey is for an increase. The acreage planted in the fall, which produces fruit during the traditional winter, spring, and summer seasons, was reported at 28,407 acres, up 5.7% from the previous season. The organic acreage is 4,684 acres, representing 12.8% of the total state acreage remaining steady as a percentage of the total. California strawberry shipments are expected to peak in early May.

The Strawberry Commission said, “Combined with warm, dry weather patterns common to La Nina conditions, there is a possibility of higher-than-projected volume in early spring (March) to early summer (June).” Increased acreage, higher-yielding varieties, and optimum weather could produce a larger than expected harvest.

The summer acreage produces in the fall season is projected at 8,080 acres. A large strawberry crop would benefit SunOpta's (STKL) fruit-based division. 

EXPE

This week's STR print, was a solid one and showed improvement vs the prior week’s trend, even when accounting for the Covid comps.  However, as we have noted, the strength in hotel demand was significantly enhanced by the leisure cohort.  While leisure demand acceleration played a role, the timing of Spring Break also boosted the year to year comparisons. 

With that in mind, the relative softness during the weekdays persists, even during what normally is mostly leisure oriented week.  The bottom line is that the breadth of the current recovery continues to be challenged, with weekends materially leading the recovery and although that might work for some corners of lodging, the leisure customer alone cannot bail out the entire industry.  Business travel or the lack thereof, continues to be a major issue and even after “reopening” and mass vaccinations, we think there are likely to be permanent impairments to that demand segment. 

As of the most recent datapoint, the spread between weekend RevPAR growth and weekday RevPAR growth has blown past the highs last seen in September.  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 close proximity fly-to trips, but that’s not really a hotel industry catalyst per se.  Leisure acceleration, however, is most certainly is a catalyst for the OTAs like Expedia (EXPE).  We remain cautious on the overall RevPAR set up, outside of seasonality, but are particularly bullish on the leisure traveler’s outperformance that should continue well into 2021 and beyond.

BYD     

Following a better than expected January in the locals Las Vegas casino market, February was almost flat YoY, despite comping against Leap Year and an extra weekend day.  The Nevada Gaming Control Board (NGCB) released February numbers yesterday.  You may recall, January locals GGR fell only 6% but because of the accounting quirk when the month ends on weekend and slot revs are not counted, January was also closer to flat on an apples to apples comparison.  March will be the first comp against a Covid impacted month so there should be substantial growth. 

Obviously, RRR is the big player in the locals LV market, generating almost all of its EBITDA there but Boyd Gaming (BYD) is also significantly exposed to that market (~30% of property EBITDA).  Both companies are tracking ahead of our Q1 EBITDA estimates due, in part, to Nevada.  BYD remains on the Hedgeye Best Ideas Long List and is early in a positive earnings revision cycle, in our opinion.  We remain positively biased on RRR as well.

The Strip looked better than January but not by much, at least on the GGR side.  YoY RevPAR growth improved sequentially from -80% in January to -60%.  Meanwhile, February fell 42%, just slightly better than January’s 44% drop.  As is the case for locals as well, the January NGCB numbers were held back by the accounting quirk.  February recaptured January’s “lost” revenues but then ended on a weekend itself so the month to date numbers are lower than what would be reported for GAAP accounting.  March will actually recapture the “lost” revenues from the end of February so the full quarter of NGCB revenues will be roughly apples to apples with what the companies report.

Note that downtown also performed better than expected which is a slight boost to BYD as it generates roughly 6% of its EBITDA in that market.

AMN

Depending on your perspective, price volatility has resulted from either resurgent COVID-19 case volume, a slow vaccine roll out, or rising inflation, to call on some of the more prominent news cycles of the last few weeks.  Despite these disruptions, AMN Healthcare (AMN) has remained relatively unchanged since mid- February. We believe this is the result of AMN sitting in a unique position within health care.

As the largest staffing player in the sector, AMN has benefitted from and continues to be aided by a series of tailwinds which we have discussed in our previous work. 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.”

Last week, 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 that 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

Trulieve Cannabis (TCNNF) reported 4Q20 adjusted EBITDA of $78.2M ahead of the FactSet consensus estimate of $75.7M. 4Q20 revenue of $168.4M was ahead of FactSet’s $162.3M. 2021 guidance is inline, with EBITDA between $355M-375M vs FactSet $375.2M and revenue between $815M-850M vs FactSet $821.8M. Trulieve has also agreed to acquire Mountaineer Holdings for $6M.

The acquisition will position Trulieve for vertical operations in West Virginia. Mountaineer Holdings brings a cultivation permit and two dispensaries. Trulieve will operate six dispensaries in the state. Trulieve also announced that it has begun planting at its cultivation facility in Holyoke, Massachusetts. Massachusetts is a market that is short of supply. Trulieve's facility allows for 60,000 square feet of canopy. Trulieve has a combination of new state expansion and organic growth in 2021 and 2022 setting up for a bright future.

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.

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) reported earnings this week. The quarter had its puts and takes, sales for the quarter were for the most part known from prior data points, but margins were weak given the heavy mix shift to consoles, freight costs, and costs associated with much higher ecommerce penetration.  The rate of change is accelerating.  This Q comps accelerated to 6.5% from -24.6% last Q. 

Then in February the company noted that comps are up 23% and revenue is up 5% despite lockdown closures and YY door closures.  Console demand remains far above supply as management noted console events sell out in minutes. As console supply picks up, we think sales continue to ramp on top of easy 2020 compares for GME. Management outline some high level strategic initiatives which included:

•             Investing in technology capabilities, including by in-sourcing talent and revamping systems, and evaluating next-generation assets;

•             Building a superior customer experience;

•             Expanding product offerings;

•             Modernizing U.S. fulfillment operations to improve speed of delivery and service;

•             Establishing a U.S.-based customer care operation, and;

•             Leveraging the Company’s digital assets, including Game Informer and PowerUp Rewards, to increase market share within the growing online gaming

These were generally what we expected to hear, customer experience, speed, online capabilities are the bread and butter from Chewy.  We also expected to hear about leveraging Game Informer and PowerUp rewards to build the ecosystem, though the company probably has bigger plans than most think for those. Evaluating next-gen assets sounds like the company expects to consider targeted M&A, now it has the currency to do so with its stock price. 

On expanded product offerings PC gaming is a clear category of focus as the CEO noted “growing our product offerings across PC gaming, computers, monitors, game tables, mobile gaming and gaming TVs, to name only a few”.

Also coming on this event was the announcement of new execs, including a new COO Jenna Owens that joins from Amazon fulfillment operations having experience at Google and McKinsey as well.  A new VP of ecommerce from Chewy/Amazon and a VP of supply chain from Zulily also were also announced.  Those came after the announcement this morning that the Chief Customer Officer Frank Hamlin is leaving after a transition period. 

Ryan Cohen is putting his team in place and with the pedigrees of the talent being hired, it looks like they are coming on board to build something great. Gaming is large and growing industry with a highly engaged consumer, building the right platform and experience for the customer could have huge value potential.

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.  

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) with another old wall initiation this week.  This one is another buy with a price target of $105.  When we went long CTRN with the stock a bit under $60 there was no sell side coverage.  Now there’s 3, all getting more and more bullish and price targets all at $100+. 

CTRN is going to have a solid first half of the year, and we suspect there will be more bullish sell side coverage coming and more upside for the stock.

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

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. Ouster (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.

TCS

The Container Store (TCS) along with several other of the retail names we like got hit with a wide spread selloff in small cap consumer names, particularly those that have done very well recent.  An episodic and non-trending vol spike on small cap. 

We don’t think there was anything uniquely TCS driving the selloff. We like the setup for TCS riding strong comps with easy near term compares and the likely coming catalyst of a new growth plan under the new CEO.

PLCE

The sell side remains bearish on Children's Place (PLCE) as it has the fewest buy ratings since the great recession.  The consensus view is that it’s a mall retail, and malls are dying, right? Well PLCE is closing its worst positioned stores. 

And in the meantime we have accelerating business trends and still have the post pandemic reopening ahead of us when we expect apparel sales for every age to perform well, particularly those focused on events and activities that have been limited in the pandemic, like full time in person schooling.  The sell side will be getting incrementally bullish as earnings beat and the stock grinds higher.

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

Michigan is one of 4Front’s five focus markets. 4Front Ventures (FFNTF) sees the Michigan market growing from $800M in 2020 to $2.5B by 2024. We are unveiling a new dashboard to represent the monthly data posted by the state of Michigan.

The data is broken up by type of product sold and by medical and recreational cannabis. Towards the bottom, we see the annualized run rate for each category and the state's lifetime sales. The growth rate as seen in our dashboard explains why management is so bullish on Michigan.

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

It is important to note that Cinemark (CNK) chose not to distribute ‘Raya and the Last Dragon’ after failing to find common ground with Disney over the simultaneous release on Disney+ via Premier Access. Disney deciding to go day-and-date for ‘Black Widow’ and ‘Cruella’ increases the pressure on CNK to come to (hopefully mutually-beneficial) terms with DIS.

We suspect CNK is looking for a break on the rental % in exchange for a loss of exclusivity (as they should). While we don’t know the specifics, we do know AMC was able to strike a deal with Warner that gave exhibitors more favorable terms.  

DUFRY

Duty Free (DUFRY) is more than just a reopening play, it is a global consolidator of the travel retail business which is looking to become more luxury oriented whick Dufry is executing. The vast majority of Dufry’s business is airport retail.  Airport retail is one of the industries where your customer is confined to an area including your store for an hour or two or more with no competition.

Our model of Dufry’s growth trajectory leads us to believe the stock can more than double over a TAIL duration. This week the company had two pieces of news cross the wire, first they issued a new 500mm CHF convertible bond maturing in 2026, the announcement meant the stock felt some downward pressure this week.

Second they announced new concession contracts in Brazil. Continuing to win airport contracts is in line with our Long thesis will continue to be a growth driver for Dufry.

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) core beer business remains in a secular decline that is accelerating from hard seltzer share gains. Domestic premium light beers run the risk that a younger generation may stick with the alternative low-calorie alcoholic beverage for the rest of their lives. 

Molson Coors has focused on hard seltzer in 2021 to recapture share losses. The company is at risk for being the last major entrant to the increasingly crowded category. Molson Coors recently had a cybersecurity incident that caused the company to take its systems offline.

This has caused manufacturing to be shut down, and inevitably production volumes will be missing. The shares are trading at 13x 2021 EPS expectations and 8.7x EBITDA. However, in the past month, shares have increased 15% while the S&P 500 is only up 3%. The company’s 3.5x leverage may be preventing management from making the necessary investments to address the market share losses. The combination of share losses and high leverage limits its valuation multiple. 

KR

For the week ended March 14 total, CPG demand fell 37% as we lapped the stockpiling early in the pandemic last year. Frozen food sales fell 39%, produce sales fell 21%, and beverage alcohol sales fell 22%, as seen in the following chart. Meat sales fell 38%, with all subcategories seeing a significant drop in demand. The worst performing in the meat sub-category was frankfurters, down 48%.

Seafood was the only category to see an increase this week, up 2%. The entire edible category fell 34%, while non-edibles fell 52%. Within non-edibles, paper products saw a 71% YOY decline while household cleaning fell 49%. This week and the next week are the most difficult comparisons of the pandemic for consumer packaged goods.

Kroger (KR) remains short.

BBY

Best Buy (BBY) saw an insider sale this week.  SVP Chief Accounting Officer sold 4400 shares at $118 not a massive sale, but about 20% of his stake.  We think BBY is over earning, and that street expectations for margins to remain a peak are aggressive.

As we move past stimulus and start the reopening process, we expect BBY to see a big air pocket in demand from the pull forward of sales that happened in 2020 when everyone was investing in home entertainment, appliances, and home office solutions.

That will mean sales and margin pressure given cost pressures driving earnings well below the street expectations. 

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

After everything aligned for Yeti (YETI) in 2020, today people view this as a cult brand and value it at a mind-numbing 5x EV/Sales multiple – for a cooler company – a consumer durable business with extremely low barriers to entry.

This type of ‘lightning in a bottle’ business is one where it’s critical to model out the margin and capital intensity of the business over time. Again, barriers to entry are low in the cooler business, and the company will have to spend up each year to maintain its share.  Keep in mind that the company’s success is drawing steeper competition from branded competitors (Hydroflask), and even private branded product on platforms like AMZN (which accounts for 13% of total sales today). We're also seeing somewhat puzzling product diversification into backpacks, duffels and wheeled luggage.

Ultimately, for 2021 we’ve got sales slowing by 400bp, and margins down to 18.7% from 19.6% in 2020. That takes ROE down to 47% and ROIC closer to 30%. Still good, but with a decelerating top line, margin pressure and with greater capital intensity, we think it’s the start of when people begin to value this name on EPS with a much lower, ‘down to earth’ PE multiple.

DPZ

Despite being a pandemic winner, Domino's Pizza (DPZ)  should be able to have positive SSS growth by the end of the year and have a relatively modest decline. Half the company’s sales are walk-in. That’s the profitable half of sales which were also depressed during the pandemic. So Domino’s is that rare pandemic winner in restaurants that should quickly return to positive SSS growth and have upside EPS.