Investing Ideas Newsletter

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

Below are updates on our twenty six current high-conviction long and short ideas. We have removed Ouster (OUST), 4Front Ventures (FFNFT), Roper Technologies (ROP) & Best Buy (BBY) from Investing Ideas. We have added Plug Power (PLUG) and Wingstop (WING) to the short side. 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. 

STKL 

Yeo Hiap Seng, a Singapore-based company, has entered into a JV with Oatly. Commonly known as Yeo’s, it is a leader in the region’s soy milk sector. As part of the JV, both companies will produce 60M liters of Oatly’s enzyme-treated oat milk at Yeo’s manufacturing site (in comparison, the new U.K. plant is expected to produce 300M liters initially). Production will begin in the second half of the year to supply China and the rest of Asia.

The oats will be supplied from Sweden. Yeo boasts that it was the first in the world to package Asian drinks in Tetra Brik aseptic cartons. That gives Oatly a skilled manufacturing partner in a new market while encountering challenges amidst a significant expansion in the U.S. and U.K.

Oatly has been looking to enter the Asian market because of the size of the market and because part of its mission is to improve the environment by reducing dairy milk production. The Asian market brings different challenges to Oatly because dairy milk is a relatively new product category. According to Yeo’s, 40x more people are lactose intolerant in Asia compared to Europe. Consumers in Asia are more accustomed to dairy milk alternatives, so the marketing of “Wow no cow” does not have the same messaging in Western countries.

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 adeptly setting up its growth and expansion plans on three continents ahead of the IPO. We are excited about the IPO, but the rumored valuation is ~$10B. SunOpta's (STKL) is the best way to invest in the secular growth of plant-based milk.

EXPE

Macro reacceleration and a Quad 2 environment has helped push many stocks and EVs in the gaming, lodging, and leisure (GLL) sector past pre-Covid highs. Even cruise and hotel stocks, with arguably permanently impaired businesses, have recovered despite fundamentals that should continue to lag most of consumer.

On a relative basis, we’ve favored leisure centric stocks and shied away from the lodging companies that will certainly benefit from the coming surge in leisure demand.  However, business travel, or a lack thereof, will continue to hold back revenues and to a larger extent, profits.  We continue to have Expedia (EXPE) on the long side.

BYD     

The regional gaming states should start reporting March GGR next week and over the course of the next 2 weeks we should have a good handle on the Q1 top line for many companies.  With the stimulus, vaccinations, fewer capacity restrictions, and the overall sentiment around Covid improving, we’re expecting a strong month vs February and current expectations.  Historically, analysts seem to start adjusting Q1 forecasts after the March GGR releases and we believe regional gaming estimates will generally move higher into earnings season. 

Brick and mortar gaming revenues and margins will be the main driver of higher revenue and EBITDA but seasonality should also result in better on line sports betting handle.  Due to March Madness, March is typically a better sports betting month than February (per historical Nevada results) but then betting should tail off in April through August until football starts back up. 

As we showed earlier this week, February same store on line betting handle dropped versus January.  With high marketing expenses, however, we don’t believe sports betting will move the EBITDA needle much, yet.

We continue to favor Boyd Gaming (BYD) and its regional gaming exposure including the locals Las Vegas market.  

AMN

This past month, AMN Healthcare (AMN) released their annual Healthcare Trends Survey Report which includes a survey of over 550 health care executives. From their analysis, the company reached many of the same conclusions which our team has been working on and providing to our subscribers. Most notably, the report found that the most potentially disruptive forces facing hospitals and health systems in the next three years are provider burnout, disengagement, and resulting shortages among healthcare professionals.

Furthermore, the report concluded that the remote healthcare workforce is here to stay with 78% of hospitals and healthcare systems reporting that they will retain remote staff versus only 12% which said they would restore their full on- site staff. Even with deferred elective procedures, 83% of hospitals and health systems are experiencing nursing shortages, 30% physician shortages, and 14% executive shortages.

Additional takeaways from the report include the identification of restoring deferred elective procedures, expanding service lines, and expanding telehealth as the top three strategies hospitals and health systems will use to grow in 2021. Many of the concerns mentioned in this report can (and likely will) be solved in some capacity by temporary staffing and, therefore, are bullish indicators for the largest staffing player in the sector. With this update in mind, we remain Long AMN on the Hedgeye Health Care Position Monitor.

TCNNF

Florida Gov. Ron DeSantis said on Monday that he opposes a House plan to cap the THC amount in medical cannabis, likely dooming the measure for the third consecutive legislative session.  The House bill, FL HB1455 (21R), would limit raw, “flower” medical marijuana to a THC concentration of 10%. Products such as concentrates and oils would be limited to 60% THC.

According to Politico, speaking to reporters at the state Capitol, DeSantis said he had already told House Speaker Chris Sprowls (R-Palm Harbor) that he will not sign the bill. A THC cap would effectively create a significant tax on medical cannabis sales in Florida, a very important state for Trulieve Cannabis (TCNNF). The Governor’s statements effectively remove that risk.

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

If you have VWAGY, we’d suggest swapping into Porsche Auto (POAHY) – the divergence has rarely been wider and is a relative risk for VWAGY.  There is no obvious arbitrage forcing the gap to close, but Porsche SE is (basically) an entity that holds shares of VW

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 

Yet another big hiring for GameStop (GME) this week. This time a new Chief Growth Officer comes over from Amazon. Plus two new VPs of from Chewy.  Ryan Cohen is building his team from his board seat.  It seems increasingly likely with all the management changes that Cohen will at some point be the CEO of the company. 

Gamespot is upgrading the talent pool and planning to build something big.  What that will be is still not really known, but it has the capital (with the current equity price) and is building the team to do it.

EXPC

Blade (EXPC) 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

The bear case on Citi Trends (CTRN) right now is after stimulus is done and 1Q crushes expectations, that the call has played out.  We don’t think that is accurate. 

We still have material earnings upside to current street numbers in 2021 and beyond, and there is potential for this to be a big long term stock given unit growth and consumption tailwinds for the core consumer. 

In 2021 in particular, the stimulus bill is not a one-time bump this spring. Sure the official stimulus ‘check’ is, but then there is continued enhanced unemployment, and perhaps even bigger for CTRN is the child tax credit being paid out in multiple distributions later in 2021. 

Other government spending bills are meant to support state and local governments which will likely benefit the core CTRN consumer. 

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.

TCS

The Container Store (TCS) saw some benefits in 2020 from people being focused on home investment during stay at home orders, though there is the potential for incremental demand on ‘reopening’ as well.  Much of the housing demand seen in 2020 was the de-urbanization effect of people leaving cities to get housing out where they would be away from densely populated areas and more able to do activities in their own bubbles. 

Post pandemic we’ll likely see at least some re-urbanization, particularly at the higher end of the consumer spectrum where TCS’s customer is.  People will get a new lease or purchase in urban areas, and that will be another catalyst for home/closet reorganization and storage solutions that TCS provides. 

If TCS can continue to gain share, and return to store growth the stock is headed much higher.

PLCE

Children's Place (PLCE) filed its 10K earlier this week – the company is very transparent on a quarterly basis so it very rarely drops bombshells in its annual filing. It alluded to its store closure program in this filing, noting that it “has closed 449 stores, including the 178 stores closed during Fiscal 2020, since the announcement of this initiative in 2013.

As accelerated demand for online purchasing has increased our digital business, partly as a result of the COVID-19 pandemic, we have accelerated our planned store closures and are targeting 300 retail store closures in Fiscal 2020 and Fiscal 2021, bringing our total store closures since the fleet optimization initiative began in 2013 to approximately 570 stores.” We think there is finally a light at the end of the tunnel with store closures, as the company will be fully complete with its plan by the end of this fiscal year.

That, in turn, will have fully mitigate exposure to the toxic lower-half of regional malls. It should have only 25% of total sales coming from the mall – otherwise the remainder should be split between strip mall and ecommerce.  

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. 

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). 

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

In terms of reopening plays, we can’t think of a better one than Duty Free (DUFRY). Currently the consensus is modeling this name to return to its 2019 revenue numbers by as far out as 2025, while we are coming in at a revenue recovery by 2023.

When travel snaps back, it will snap back hard, and this name is in pole position to capitalize on that rebound. We are already seeing passenger numbers increase in North America, as demonstrated by the slide below. On top of that, COVID saw Dufry cut costs at an unprecedented level in company history by cutting Chf 1.3bn in 2020 with CHf 400mm of those cost cuts being permanent.

The cuts translate to 450 bps in margin opportunity which gets us to the company getting above 2019 operating margins by 2022. The street and the market are not giving the company any credit for these catalysts in its earnings.

TAP

Molson Coors (TAP) reaffirmed guidance for an MSD% revenue increase in 2021 and flat EBITDA YOY. Management expects the combined impact from the cybersecurity attack.

The February winter storms in Texas will shift 1.8 to 2.0 million hectoliters of production and shipments from Q1 to the balance of the year. The later shipments will also shift between $120 to $140M in EBITDA from Q1 to the year's balance. This does not include the incremental one-time costs from the hacking. Last week we moved Molson Coors to the best idea short.

The company is counting on refilling distributor inventory levels, but sales lost to current out of stocks are lost forever. Our conversation with a Molson Coors distributor confirmed the company’s missing inventory levels. The company is counting on restocking to capture sales, but a lost sale at the consumption end is a lost sale.

KR

Kroger (KR) hosted an analyst day this week outlining its growth plans over the next few years, driven by online growth. The market was likely disappointed that there was nothing discussed that in the near term to offset the difficult comparisons it is facing this year.  

Kroger is likely the best operator in the conventional grocery sector. Still, the business's headwinds outnumber the tailwinds as the onset of the pandemic is anniversaries and vaccine rollout. The grocery sector is the most competitive of retail sectors, and the shift to at-home meal consumption was an atypical reprieve of competitive intensity.

As sales to the sector decrease, the competitive intensity will increase with the return of promotions and accelerating capital investments. The outlook for both SSS and gross margins is negative for at least five quarters. The current valuation is at the high end of the historical range despite the coming shift in where meals are consumed.  

AKAM

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 Akamai Technologies' (AKAM) 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

Yeti's (YETI) latest product innovation – luggage – is finally available as a web-exclusive on the company’s site. We give this company all the credit in the world for creating the premium cooler category, and innovating a very profitable and successful drinkware business. It did that at the exact time the consumer shifted toward spending more time outdoors, and drinking beverages at home.

To be fair, the wheels were in motion before covid existed, but the timing lined up perfectly anyway, which was huge for the growth and margin trajectory, as well as the stock. But we gotta say that the luggage initiative gives us pause. Maybe the company is being super smart in launching luggage at the time people begin to travel again – that’s the bull case. The bear case is that this is a company that makes coolers, sells for 5x sales (higher than AMZN), and is getting a little too far outside its core competency with new product innovations.

Yes, the brand is still hot, but we think that sales will slow, margins just peaked (and are headed lower) and this will result in a $2.00-$2.25 earnings annuity over a TAIL duration as the financial model evolved. That’s worth far below the $74 the stock is trading at today.   

DPZ

Despite being a pandemic “winner” shares of Domino's Pizza (DPZ) has been underperforming for much of the pandemic as seen in the chart below. Investors have been pricing in the difficult comparisons for some time now.

We expect SSS to be above consensus expectations in the second half of the year and to be positive by Q4. With the most profitable half of sales coming from the carryout counter, Domino’s could be set up for a bottom line beat in the second half of the year. 

PLUG 

Hedgeye CEO Keith McCullough added Plug Power to the short side of Investing Ideas this week. Below is a brief note.

Talking about Industrials analyst Jay Van Sciver being hilarious, you have to listen to him talk through the SELL call on Plug Power (PLUG) on The Call @Hedgeye!

This is a relatively new idea from JVS and here's a good summary paragraph introducing it:

Plug Power (PLUG): Added to Best Ideas Short We’re adding PLUG as a Best Ideas Short as it seems to be in the business of issuing shares of stock, even giving warrants to facilitate product sales at valuations that ended up being absurdly low. The behavior around the most recent equity offering looks dubious. Forklift fuel cells are a difficult business, likely entering a post COVID downswing. Reputational damage could become a broader issue, and we see ~80% relative downside.

WING

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

You didn't think I forgot how to make timely short sales on green with US Equity Beta (SPY) at the top-end of my Risk Range, did you?

I am not supposed to "feel" anything about this gig, but I admit... I love short selling!

I've been waiting on Howard Penney's green light to re-short this COVID winner. Why? He thinks they're going to comp negative same store sales next.

Howard on today's preannouncement: "The tailwinds in 1Q21 are stimulus checks, March Madness's return, and increased advertising; most will dissipate for the balance of the year.  We are looking for -5% SSS in 2Q21."

No, WING's management won't be pumping out preannouncements when the business is down -5%,