Investing Ideas Newsletter

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

Below are updates on our twenty five current high-conviction long and short ideas. We have removed Domino's Pizza (DPZ) and Molson Coors (TAP) from Investing Ideas. We have added Ulta Beauty (ULTA) to the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.

MP 

Demand for light rare earth elements is likely to grow significantly in coming years, as the properties of these elements are essential for many promising markets. China, the dominant global supplier of rare earth elements, has already used its market position for geopolitical gain; as tensions have increased, obstacles to success for Mountain Pass (MP) are likely to be cleared.

With a more competent management team, backing from some exceptional investors, favorable geology, permits, a net cash balance, and recently installed facilities, we expect Mountain Pass to take a very different path from Molycorp.

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 

Sales of plant-based foods that directly replace animal products grew 27% in 2020 to $7B in measured channels, according to SPINS. The figure excludes retailers who do not share their data and sell plant-based foods, including Whole Foods, Trader Joe’s, ALDI, convenience stores, and Costco.

The largest category of plant-based foods by far is plant-based milk at $2.5B. Plant-based milk sales grew 20% in 2020, accelerating from 11.4% in 2019. The U.S. household penetration rate for plant-based milk is 39%. Plant-based milk represents 15% of fluid milk sales and 45% of fluid milk sales in natural food stores. Almond milk represents about 2/3 of the plant-based category.

Almond milk sales grew 16.9% to $1.59B in the 52 weeks ended Jan. 24. Oat milk sales grew 219% to $264M in the same period. Soy milk, now in third, fell 0.9% to $201.4M. Coconut milk grew 25.9% to $134.6M. Plant-based milk sales accelerated during the pandemic like most CPG categories, but the category will continue to grow in 2021, unlike most CPG categories. SunOpta's (STKL) sells all of the leading varieties of plant-based milk.

EXPE

The US leisure traveler as back out on the road and based on an update of recent Kayak flight search data, the intentions to visit leisure and resort markets is only accelerating.  In the table below is an up to date “heatmap” of traveler search interest for flights across the US and then at the bottom we segment the averages by “business” vs “leisure” markets.  As one would expect, both categories are seeing improvement in search trends, but the data on the leisure side continues to breakout relative to business / urban markets.  As of the first week in April, the growth spread in search interest for leisure vs business markets made a new recovery high. 

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 will 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) remain prominently positioned on our Best Ideas long list.

BYD     

For a few weeks we’ve been discussing the potential for March to exceed trend and expectations, but these regional gaming numbers are off the charts.  For many states, GGR is coming in better than even March 2019, and in some cases, significantly better.  Sure, some of it may be a little fleeting – the impact of pent up demand and stimulus checks could moderate by the summer so at the very least, regional gaming company estimates need to go higher for Q1 and Q2. 

However, we think more is at play here which is why Hedgeye’s brick and mortar casino estimates are significantly higher than the Street, particularly for BYD, even in the out years. 

In addition to the somewhat transitory drivers mentioned above, we believe the older customer set is feeling more comfortable in a casino environment following vaccination while at the same time there are new, younger customers that are proving to be stickier.  Easing of capacity restrictions are likely helping as well.  At the same time, the Street still seems too pessimistic regarding margin sustainability. 

One negative – we think online sports betting (OSB) expectations are too high now that things are normalizing, i.e., no concentrated sports schedule, the NFL season is over, and people are leaving their homes.  However, Boyd Gaming (BYD) is one of the companies most tied to brick and mortar casino operations and as we’ve shown, the stock is less correlated with OSB than most regional gaming companies. 

Even on the OSB side there may be a catalyst specific to BYD as Flutter and Fox Corporation duke it out in court over the valuation of Fan Duel (FD), which could spark a valuation re-rating for BYD as a 5% owner in FD.  But the real driver remains the structural change in the B&M business model with higher gaming revs and margins post Covid.  BYD remains on the Hedgeye Best Idea Long List.

AMN

Throughout the week, a number of publicly- available data releases and articles were reported which supported our long thesis for AMN Healthcare (AMN). To start the week, the JOLTS number of 1.4 million represented an all- time high and reinforced the idea that wage inflation will be a very likely result of COVID-19 (a positive for AMN).

Additionally, a set of headlines from Kaiser Family Foundation and Modern Healthcare stressed the themes emphasized in AMN’s annual Healthcare Trends Survey Report from last month.

Both articles underlined the heightened burden placed on health care workers both mentally and physically as a result of meeting the monumental demand needed throughout the pandemic. As a result, providers are choosing to leave the industry through either early retirement or switching careers.

This phenomenon is not unique, but rather one we have been highlighting alongside provider burnout, disengagement, and resulting shortages among healthcare professionals. The concerns mentioned in these articles 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

Trulieve Cannabis (TCNNF) announced that it has entered into a definitive agreement under which Trulieve has agreed to acquire from Anna Holdings LLC a dispensary license operating under Keystone Shops with locations in Philadelphia, Devon, and King of Prussia.

Trulieve has agreed to acquire Keystone Shops for an upfront payment of $60 million, comprised of $40 million in Trulieve subordinate voting shares ("Trulieve Shares") and $20 million in cash. The deal does not carry a deferred payment or an earn-out period.

The transaction is subject to customary closing conditions and regulatory approvals and is expected to close during the second quarter of 2021.  Trulieve now has dispensaries in Florida (76), Pennsylvania (3), California (1), and Connecticut (1).  

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

Click HERE to watch out Communications analyst Andrew Freedman discuss iHeartMedia (IHRT) on The Call @ Hedgeye this week.

GME 

GameStop (GME) doing its equity offering.  3.5mm shares at the market offering.  Should be raising in the area of $600mm to add to the war chest as the company launches its transformation under Ryan Cohen (who was announced this week to be running for Chairman in June).  The potential for further tapping of equity remains, but we suspect if it does happen again, it would most likely be in the form of currency for M&A. 

The company did cite ‘Investing in technology capabilities, including by in-sourcing talent and revamping systems, and evaluating next-generation assets’ as part of its strategy.  Concurrent with the offering GME noted that sales for March were up 18% vs last year accelerating vs 5% in Feb.  March of 2020 saw decent sales trend (comps up LSD) until store shutdown on March 22 and the company went to online/curbside only.

So though the compare was somewhat easy, the March growth comes with much of Europe still in lockdown, and store count down about 13% from store base rationalization.  April will no doubt accelerate again given the easy compare.  Rate of change remains bullish as the company continues its strategic rebuild and turnaround.

EXPC

Blade (EXPC) has shown a less clear trend, if past the bottom.  This has disconnected from revenue growth expectations because of live organ transport, new vertiports, and mix changes. 

The SPAC deal is expected to close around May 5th and there should be more coverage of Urban Air Mobility & EVTOL aircraft with Wisk and EmbraerX’s Eve Urban Air Mobility Solutions.  Hybrid work models in the NY/Chicago area should support increased use of Blade services.

CTRN

One of the areas where we’re most different from consensus on Citi Trends (CTRN) is that we think that it would make an outstanding acquisition target by the likes of TJX, Ross Stores, or Burlington Stores.

Those three all serve a similar customer, and buying CTRN would open up the customer base to a brand new consumer for anyone buying the concept (lower income, urban, spends disproportionally high percent of disposable income on fashion). Aside from bringing a new consumer to the table, it would also bring a unit growth story back to the table for the likes of a company like TJX.

This isn’t critical to our investment thesis for CTRN, but would be a nice kicker to an otherwise stand-alone story. We continue to see upside to $120.

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

It’s a quiet tape for The Container Store (TCS) – as the CEO (from Sephora) is still in his honeymoon phase and is learning the business and deciding what to change to build on the industry momentum of home furnishings/home organization.

The company’s next print is scheduled to be reported on May 19^th, and we’d be surprised to see any catalysts before then. One area we’re different from consensus in our model is in the unit growth – which is something we expect to accelerate over a TAIL duration.

Mind you…this is a company that has been sitting on a store base of ~90 stores for roughly 4 years. We’ve got it going up to 130 stores in our model over TAIL duration, on the heels of a strategic repositioning of the business to take full advantage of the positive industry tailwinds.  

PLCE

Our channel checks suggest that PLCE is having a very strong first quarter – as is the case with much of retail given the easy compares vs a pandemic-impacted 1Q20. Still, Street expectations appear very conservative to us for the upcoming quarter.

We’re at 60% comps for the first quarter for Children's Place (PLCE), which compares to the Street at 41%. Granted, given the massive run the stock has had (and the fact that it is expensive on consensus numbers), this is a name where our model needs to be right. Fortunately, we think it is.

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

It may be fashionable to hate SPACs over the last 7 weeks, but it’s also been a buy in to the post-pandemic travel recovery. ASPL is hosting an Investor Day on April 16th; we’re assuming that they’ll have some good updates.  Below are the Wheels Up (ASPL) App downloads, which have accelerated into vaccinations.

Vaccinations may have unlocked pent-up demand among those with the means and equity market gains to afford premium travel.  We’re most interested in hearing about the Avianis Flight Management Software fleet penetration in the Investor Day – a source of competitive advantage for Wheels Up more critical than brand loyalty, we think. 

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

An underappreciated aspect of this name is just how big of a growth driver the Chinese duty-free market is.

Previously the Chinese duty-free market was dominated by two state-run enterprises controlling most of the airport concessions, however in the past few years the Chinese Government has been creating a new and more commercially accessible duty-free channel: Hainan Island.

Hainan Island is a beach vacation spot where duty-free sales are projected to increase from only $842mm in 2015 to $46.5bn in 2025. The state-run enterprises will still get the lion’s share of this pot (we estimate 70% share), but with the government loosening restrictions for international duty-free retailers we are modeling Duty Free (DUFRY) getting 3% of that 2025 projection, with the possibility of it walking away with 10% share of Hainan – which would take consensus numbers much higher.

KR

CPG demand in grocery stores decreased 9% YOY in the week ended March 28, comparing against +28% last year, as seen in the chart below. CPG demand is down an average of 26% in the first three weeks of comparing to the beginning of the pandemic.

CPG demand is down much less than expectations against the +65% average for the first three weeks of the pandemic last year. Produce demand decreased 3% YOY, indicating only a slight decrease in at-home meal consumption. Produce demand was up 12% in the same week a year ago. Beverage alcohol demand was down 8% YOY for the week, improving from -22% in the week prior. Kroger's (KR) SSS are expected to be down HSD% in Q1.

It is important to remember many aspects of where meals are consumed are not back to pre-pandemic levels. Only 20% of the country is fully vaccinated at this point, and even those who are vaccinated have not shown a quick resumption of pre-pandemic behavior. That will take time. The slower return to previous meal consumption could drag out the negative SSS beyond five quarters.

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 

Barron’s wrote a fluff piece this week on lasting strength on any brands that are levered to the outdoors – including Yeti's (YETI) – sending the stock to new highs of $79. We’d definitely fade this strength.

We don’t dispute a renewed interest in everything outdoors-related, and there’s like even pent up demand for this Spring. But the reality is that the mix is shifting at Yeti away from its highest margin products (drinkware) which should particularly be the case as on-premise drinking makes its return this summer.

This company has a great innovation cycle that synched perfectly with the pandemic. But we see cost and margin pressures building at a time when the company’s brand extensions (ie luggae) are becoming questionable to say the least. It’s tough to be short brands that have momentum to the upside, but we think a challenged margin profile in conjunction with a slowing top line will force people to focus more specifically on things like earnings and cash flow, instead of blindly putting a 5x tech-like EV/Sales multiple on a consumer durable company with low barriers to entry.

PLUG 

We’re adding Plug Power (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

Wingstop (WING) recently released highlights for the fiscal first quarter 2021 as compared to the fiscal first quarter 2020:

• 41 net new openings resulting in 1,579 Wingstop restaurants system-wide, an increase of 11.7% (Consensus 1,568)
• Domestic same-store sales increased 20.7% (Consensus 11%)
• Company-owned restaurant same-store sales increased 13.4% (Consensus 9%)
• System-wide sales increased 30.0% to approximately $558.9 million
• Digital sales increased to 63.6%, compared to 43.3% in the fiscal first quarter of 2020

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. The consensus estimate for 2021 is SSS of 3.7% and that might be aggressive. Wingstop and Domino’s have very similar comparison setups in 2021, but Wingstop is significantly more expensive.

Wingstop is trading at 56.6x EV/EBITDA while Domino’s is trading at 22.8x. Cost of sales is inflating driven by a 27% YOY increase in the cost of bone-in chicken and pricing should stay elevated for the balance of the year.

ULTA 

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

There are plenty of selling opportunities into today's stock market close (both longs and shorts)...

One that worked recently for Brian McGough is Ulta Beauty (ULTA). Here's a good excerpt on why from his Retail Pro product:

ULTA Staying Short Despite Last Week’s Blow Up. We’ve been short ULTA in part because we thought that 2021 numbers needed to come down by 10-15% -- and that’s precisely what the company guided on the earnings print last week. But the company also announced a shocking CEO transition with Mary Dillon moving to an Executive Chair role for a year before leaving the organization. She’s been at the helm of ULTA during its meteoric rise over the past 8-years, and we view her stepping down at the age of 59 to be extremely bearish.