This is the intro that drove a lot of readers to send in questions this week:
“The Greatest Day in Stock Market History
“Thanks to Supreme Court Order 16-476, over $4 billion could move into three very specific stocks—on one day, Feb. 4, 2019.
“If you invest now, you could ride share prices up 3x, 4x—even 10x—in a single day.”
The ad is from E.B. Tucker for Casey’s Strategic Investor (currently $49/year, renews at $129), and it’s all about sports gambling — which is now a state issue again, after the Supreme Court responded to New Jersey’s long-running lawsuit and finally overturned the old prohibition that grandfathered in only Nevada as a legal sports gambling state.
We’ve seen teaser pitches about gambling before, and the pending legalization in a bunch of states that immediately jumped to pass legislation allowing sports books was widely covered in the investment world as an obvious possible boon to various casino operators… but now we’re getting the promise that these favored stocks will surge higher on a single day, the Monday after the Super Bowl, and that E.B. Tucker has identified the best bets.
More from the ad:
“… in the space of 24 hours, the three obscure companies I’m talking about could collect the lion’s share of over $4.7 billion added to their bottom line….
“… the billions predicted to flow into those stocks on that day are thanks in part to a plan the NFL hatched to save pro football.”
Huh? The NFL is indeed the most popular sport both for viewing and for gambling… and it has been in a little bit of a decline in recent years, though it has come back this year after recovering from the negative press and backlash from the concussion epidemic and the anthem kneeling controversies. Part of this is probably just trying to appeal to the 60 year old grumpy white guy in most of us, since that’s who most investment newsletters are sold to…
“It’s hard to tell if the NFL is past the point of no return in America… The signs are starting to show a permanent decline.
“But the league has one set of hard-core fans who are only growing in number: gamblers.
“In fact, league research shows the massive impact illegal gambling has on viewership:
“It increased engagement by 300%.”
And Tucker’s trying to draw this in to create his artificial February 4 deadline — since the NFL is the big dog of gambling, and since the Super Bowl is the biggest event of the year, then Super Bowl wagering should fatten the bottom lines of the various legal bookmakers nicely. More from the ad:
“With the American Gaming Association saying Americans ‘bet $4.7 billion on Super Bowl 51… yet 97 percent of bets—approximately $4.5 billion—[were] bet illegally due to a failed federal ban signed into law in 1992.’
“But thanks to the new Supreme Court ruling, all that is about to change.
“Because Super Bowl 53 will mark an historic milestone in our nation…
“The unofficial end of America’s third prohibition… and the first time since 1992 that folks can legally bet on the big game in places other than Vegas….
“And if you’re a part of the small group of investors who buy into the shares of three specific companies now, you could double your money on that day. And that’s just the start.”
Tucker notes that this legalization should spread pretty quickly:
“New Jersey is just one state that could soon be raking in billions thanks to legalized sports gambling. With some industry experts predicting that sports gambling in Jersey will soon surpass the $4.8 billion bet annually in Nevada…Are you getting our free Daily Update
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“… there will be more upside for years to come as an estimated 32 states introduce sports betting.”
And he throws out some forecasts:
“It’s hard to know for sure how big the sports betting market will become. But research from the University of Nevada, Las Vegas, suggests that the illegal sports betting industry is turning over $150 billion a year. That’s more than the GDP of Nebraska.
“My own research shows that the market should turn out to be even larger than that. Markets the government has outlawed always get bigger when they become legal again….
“Now that it can be legally out in the open, I expect the industry to hit $250 billion in the next few years.”
And then we get to the “what stocks to buy” bit… here’s part of his argument:
“Investors may assume that the biggest beneficiaries of sports betting will be the Las Vegas casinos. That couldn’t be more wrong.
“Sports betting has been legal in Nevada for years. Last year, the state earned about $250 million from sports betting. So even with this new Supreme Court decision, it’s business as usual for Las Vegas. The ruling won’t hurt. But it won’t cause the casinos there to see a spike in betting….
“The place to start your investment research is with legal casinos in states that previously outlawed sports betting.
“There are about 1,000 casinos across the U.S. Some are tribal casinos. Others are legal commercial casinos
and card rooms.
“Depending on local laws, these can already have a variety of card games and slot machines. But if they’re in a state that had previously outlawed sports betting, they’re now looking at a new source of revenue….
“Right now, I’m looking at casinos in Pennsylvania, West Virginia, and Rhode Island. These are states that already have sports betting legislation on the books. Local casinos there will profit the most from legal sports betting.”
We should keep in mind that “amount wagered” is not really like “revenue” — the casino or bookmaker ends up keeping a fairly small percentage of each bet, since much of the money just flows from losers to winners. It varies by location, but the casino’s share is generally in the 5-10% range, so that’s really the “revenue” number that matters when it comes to supporting the costs of the operation and eventually generating a profit.
And then, finally, we get to the hints about the specific stocks:
“Stock recommendation #1: This legendary company already boasts an iconic asset that alone could double its value. They have a strong presence in eight states and host America’s longest continuously held sports event. But, I believe it’s their technology backbone that will give this company a unique edge when it comes to sports betting.
“You see, they already operate one of the largest online gambling platforms in the United States. And I believe this technological advantage will give them a distinct head start… allowing them to quickly expand into new states legalizing sports betting. For these reasons and more, I believe this company will see additional billions in its coffers over the next months.”
This one is Churchill Downs (CHDN), the venerable racetrack owner and a fairly quiet early leader in online gaming technology. Churchill Downs was also the first stock pitched by Tucker’s colleague Matt McCall in his “you must buy sports betting stocks before football season starts” ad late in the Summer… this is what I said at the time:
“That’s the TwinSpires business of racetrack owner Churchill Downs (CHDN), which has been talked up as a beneficiary of sports gambling expansion — which makes some sense, since horse wagering is obviously a core part of the history of US sports gambling. They’ve been expanding into other casino operations recently, including buying a couple smaller casinos in Pennsylvania. I’ve not studied it very closely, but compared to some flashier casino stocks Churchill Downs is downright cheap, trading at about 22X next year’s earnings — and while the continued success of the Kentucky Derby will obviously be important to the company, that online wagering company TwinSpires will probably be more imoprtant in the future… and they’ve already launched sports gambling at a couple of their casinos in Mississippi, and are likely to be officially launched in Pennsylvania and New Jersey as soon as the rules are in place.
“Perhaps not a bad idea as a way to play sports gambling, and the company is small enough (under $4 billion market cap, about $720 million in revenue) to feel the impact of any new business fairly quickly — the real question is whether sports gambling can reignite regional casinos that are suffering some from competition as the country gets arguably over-served by casinos, or do enough to absorb the costs of operating their racetracks that are generally in decline outside of a few marquee events. I like that they’re small and nimble and are trying to expand, though I don’t have a strong sense of how likely they are to succeed or to take meaningful share of the sports betting market in Mississippi, Pennsylvania, New Jersey or other early-adopter states where they have a presence.”
The stock is still about where it was in late August, though it was a bumpy ride for a while — the shares collapsed in October, but then they reported a strong quarter on Halloween and announced an agreement to buy a controlling stake in the owner of the Des Plaines casino in suburban Chicago, presumably in part to give them the “on the ground” presence that will give them a head start and regulatory advantage once Illinois legalizes sports gambling. That seems inevitable, given Illinois’ perpetual budget crisis, though it’s also possible that Illinois will vastly expand legal gambling and therefore bring some possibly dangerous competition for the Des Plaines “Riverboat” casino (Illinois was an early riverboat gambling legalizer, though they are less committed to the “temporary” nature of those riverboats and seem to have treated that notion as a technicality to bypass — from what I can tell, Des Plaines is a permanent structure, built on top of a manmade puddle).
So Churchill Downs is still like a lot of other gambling stocks — poised for big gains from further legalization of sports betting in the US… but also suffering from either flat or declining sales in their core businesses as gambling competition heats up around the country and/or tastes change (particularly, in their case, with the declining interest in horse racing… though they are also the chosen operator for a brand new horse track that is planned for Kentucky, so it’s apparently not declining everywhere).
“Stock recommendation #2: This company is already a heavyweight in the sports betting arena. Now, thanks to a recent merger, it’s in a unique position to scoop up much of the legal U.S. sports betting market. Simply put, this blockbuster deal creates the largest online sports destination in the entire United States… with a combined presence across 45 states. What’s more, they already have a large, highly-engaged, sports-focused customer base they can immediately tap into.
“That’s why I believe this company is one of the best-positioned to capitalize on the sports betting mania about to sweep the country. In fact, in New Jersey alone, they brought in $55 million in September. That’s an impressive 30% share of the staggering $184 million wagered that month. And thanks to a massive U.S. footprint, they are perfectly placed to quickly set up sports books as states legalize.”
That’s Paddy Power Betfair (PPB.L in London, PDYPY for the US ADR), the venerable UK betting firm which recently acquired the pioneering fantasy sports company FanDuel and is making headway in the US market after building and/or buying large retail betting operations in the UK, Ireland and Australia.
You can see their first half results presentation here, which will give you some taste of both the opportunity and the risk — it’s a heavily regulated and taxed business in most places, and it’s not currently growing very fast in their mature markets, particularly their storefront betting parlors in the UK and Ireland, but they do see a lot of opportunity with the FanDuel brand in the US and their building partnerships with on-the-ground casino operators in legal states… they also use essentially the same map as Tucker in giving some projections about which states will soon legalize sports gambling:
Paddy Power was one that stood out for me as interesting when I covered sports betting back in August, though I didn’t buy that stock (or any others in the business) at the time — and it is still at roughly the same price, with pretty steady business that will depend as much on Paddy Power restarting growth at home as it will on catching fire in the US… right now, the US business is only a tiny sliver of the company (7% of revenues, 3% of profits), so it’s going to take a lot of growth for that to be the real driver, and competition and startup spending will probably be pretty dramatic over the next few years as legalization spreads, so even the eventual winners might have numbers that don’t look so great at first.
On the plus side, having a big operation and infrastructure and a strong global platform for odds-making and risk management could give both Paddy Power and their competitor William Hill (WMH.L WIMHY), which is similarly expanding in the US (and was touted by McCall in August), a meaningful edge over smaller casinos and startups over the long run.
“Stock recommendation #3: Our third stock has seen share prices rise 4x over roughly the past two years. And I believe legal sports betting will only accelerate their growth. They currently operate 26 properties in 13 states. And a whopping 85% of their properties reside in the states making an early move to legalize sports betting.
“Recently, they issued a surprise announcement stating they reached a wide-ranging partnership with a bookmaking giant. This will allow them to quickly expand their digital and land-based sports betting operations. As well as give them an online gaming presence across the United States. What’s more, they currently have a customer base of 23 million people… giving them a massive built-in market for sports betting. I believe this company has lots of room to run.”
This one, sez the Thinkolator, must be Eldorado Resorts (ERI) — the numbers are slightly off, they actually operate 28 properties in 13 states, according to their website, but they are the midsize casino company with the broadest reach in the US, at least in terms of number of properties and number of different states. They started out with a single casino in Reno, and that was their foundation for almost 40 years, but they have been extremely acquisitive over the past five years, buying or merging with several different regional casino companies to add Circus Circus, Tropicana, Isle of Capri and a few other brands and properties to the collection.
Which does provide some advantage for sports gambling, one assumes, because the working guess is that most states are going to require that sports gambling operations, even if they’re primarily online, be controlled by companies who have a physical presence in the state and, perhaps, a history of licensed casino operations. Thats presumably why they made a deal with The Stars Group (TSG)… which, yes, was another stock pitched by McCall back in August (Eldorado already had a deal for sports book operations with William Hill, who will operate their physical casino sports books).
Eldorado has shown some pretty phenomenal growth over the past year or two, though that’s mostly “inorganic” growth — meaning they bought new casinos to up their revenue, they didn’t improve the performance of their existing properties that dramatically. Those acquisitions have increased the share count pretty dramatically over the past couple years, as well as the debt burden, but the overall result is still pretty impressive… at least so far. I don’t know anything about their properties or the real operating performance, but the financials look good: They’re expected to have about $1.70 in earnings per share this year, almost doubling to $3.39 next year, and that gives them a forward PE of about 12… pretty cheap, even less expensive than Boyd Gaming (BYD), which is arguably the closest comparison when it comes to regional casino operators (and is also growing like crazy, and hoping to capitalize on their multi-state operations to grow a big sports book).
On the other hand, casino investors sometimes think about tentpole casinos or high value properties, and most of Eldorado’s (and Boyd’s) casinos are fairly small and very local, so you’d probably have to know a lot about the specific properties to judge how they might do when competition heats up in their area, or if the local economy takes a downturn. These aren’t landmark casinos like the major properties in Las Vegas and Macau that draw in millions of visitors each year, so it might be hard to have as much faith in the perpetual value of the Tropicana in Evansville, Indiana or the Lady Luck in Black Hawk, Colorado.
So where does that leave us? Well, I don’t own any of the stocks, and that isn’t likely to change in the next few weeks… but these are all mainstream gambling companies with meaningful exposure to the expected explosion of US sports gambling. They are also facing the risk of continued stagnant sales or declining growth in some of their core gaming or related businesses, too, which keeps them from being “upside only” investments or providing a lot of certainty about the overall growth trajectory.
I wouldn’t bet against gambling in general, though I think the steady expansion of legal gaming across the US is definitely bringing competition and just “having legal gambling” isn’t necessarily going to be enough anymore, whether you’re talking about a sports gambling app or a casino where you can spend a couple hours at the slot machine or the blackjack table — we seem likely headed for a world in which you will probably have to have a better app, a better experience, or a nicer casino to draw growing crowds, which probably means margins will be pressured.
So I’m not rushing out to buy any of these, but they strike me as decent ideas and they do have some potential juice from the “story” of expanded legalized sports gambling… as to whether or not these stocks will double in a single day on February 4, or even in the two months between now and February 4, well, I’ll happily take the “under” on that bet. They should get some boost from sports gambling, even if their other businesses are fairly tepid, but there’s no reason for them to see that kind of stock price surge in short order unless we get a silly bubble in sports gambling stocks… which is possible, of course, but not the kind of thing you’d necessarily want to, well, bet on.
It’s your money at stake, though, so it’s your opinion that counts… think Eldorado, Paddy Power or Churchill Downs will be big winners from expanded legalized sports gambling in the US over the next couple years? Favor other competitors? Let us know with a comment below.