- Before you dismiss this idea as a bubble….
- … consider a sector far more lucrative than your fantasy sports league
- Why the stock market gaining ground last week was a bad thing
- Strike three for the Fed — the latest “Don’t do it!” warning
- We’re No. 16!… a reader’s innovative suggestion (seven years too late)… an interesting take on minimum wages and state budgets… and more!
Your editor couldn’t help noticing the fantasy-draft commercials yesterday. They were relentless.
Were they more numerous than usual with the start of the NFL season? Or did our investment director Chris Mayer put them in my head on Friday after he attended a conference all about the online gaming sector?
No matter — even if you don’t care about football, there’s an investable insight to be had.
“DraftKings and FanDuel control about 95% of the daily fantasy sports betting in North America,” Chris tells us. If you want to bet on the performance of players that day, you’re likely to use one of those two websites.
“Both are worth more than a $1 billion each, based on the prices investors paid for shares in July. (Both companies are private.)”
Now you’ll start noticing the ads too…
Wait a minute, you’re asking: Isn’t online gaming illegal? How does that work?
The Unlawful Internet Gambling Enforcement Act of 2006 carved out an exception for fantasy sports, on the theory that…
- Fantasy sports are a game of skill and not of chance
- Your winnings don’t hinge on the outcome of a single game or the performance of a single player.
Both sites attracted deep-pockets investors during 2013 — DraftKings is owned partly by Major League Baseball and FanDuel has backing from Comcast.
“What’s interesting here is that neither company is anywhere near making a profit,” Chris goes on.
“DraftKings and FanDuel carry valuations of $1.2 billion and $1.3 billion, respectively. That’s 40 times sales and 23 times sales. Sales, not profits. They are super-rich valuations.
“Are these simple exhibits of late bull market madness? Or is something deeper going on?” Chris asks.
“It is easy to go with the knee-jerk reaction and say it’s madness. But studying stocks that returned 100-to-1 gives me reason to linger over that second question.”
Chris comes back to the case of Amazon — which, as we mentioned last month, occupies an important place in his book, 100 Baggers. CEO Jeff Bezos has kept a laser focus on return of invested capital — pouring money into research and development to generate growth.
Thus did Amazon become a 100-bagger in 13 years, even while generating razor-thin profits — when it turned a profit at all.
“Amazon has been a 300-plus-bagger since 1997 — when it went public,” says Chris. “Shareholders enjoyed a return of over 34,000%.
“And it did that despite two stock market crashes, Fed moves, manipulated markets, a number of crises along the way… didn’t matter.
“If you get the business right, the macro stuff fades in the background. You could’ve bought Amazon at any number of points along the way, and if you just held on, you had your 100-bagger — and possibly more.
“Looking back, it is easy to see now why the skeptics were wrong. Bears would say Amazon sold books. And they’d do all this analysis to show how selling books could never justify Amazon’s price. They were right about that.
“But what they missed — what I missed — was that Amazon had millions of users. And Amazon would sell them more than books.”
If it’s growth you’re looking for, look no further than online gaming. “This is a booming industry,” says Chris — who directs your attention to this chart of gaming-industry revenues by region.
“Land-based casinos are something like 10 times larger than their Internet peers. But online gaming is growing nearly three times as fast. And online gaming is a better business. With a land-based casino, you can’t move. You have huge fixed costs.
“But an online gaming site has no such problems. At the conference I attended, the roll call of gaming companies was long: Amaya, Intertain, Playtech, The Score, 32Red, Gaming Nation and many more. Many of these are excellent businesses. They generate lots of cash. They’re growing at double-digit rates. They have millions of users all over the world. And the stock market correction has put the stocks on sale.”
Chris has three takeaways for you today…
- “Don’t be quick to discount strong sales growth and the long-term value of having many repeat customers
- “You only have to be right once — get the right stock and then hang on
- “If it’s a great business, you may not be too late in netting that elusive 100-bagger — even if it seems you are.
“Online gaming,” he concludes, “is one of a number of areas we’re looking at as we hunt for the next crop of 100-baggers.”
[Ed. note: Mayer’s 100x Club delivers ideas for potential 100-baggers every month. You can get a trial subscription along with Chris’ book 100 Baggers: Stocks That Return 100-to-1 and How to Find Them.
The cost? All we ask is that you cover our shipping and handling. Get your copy here.]
Major U.S. stock indexes are slipping as a new week begins. At last check, they’re all off between one-third and one-half a percent. The S&P 500 sits at 1,953.
The establishment media — always needing a “reason” behind every blip in the market — are latching onto weak economic numbers from China and uncertainty surrounding the Federal Reserve meeting this week. C’mon, guys, can’t you even try to come up with something original?
Gold is little moved at $1,107. Crude is moving further below the $45 mark — $44.12.
“Bad news: U.S. stocks moved higher last week,” writes Jonas Elmerraji of our trading desk. Evidently, Jonas is in the mood for paradox.
“The problem isn’t that stocks generally went up. Too, the problem is that most stocks went up at the exact same time. Or, more specifically, that most stocks are acting the same, no matter which direction they’re moving.”
In other words, there’s a lot of market correlation right now.
“Highly correlated markets — that is, markets where most assets are moving together – are a problem because when everything is doing the same thing, there aren’t any alternatives,” Jonas explains. “In other words, there’s only ‘one trade’ out there. Historically speaking, when correlations spike, it’s associated with downside moves in the market.
“And after starting the year decreasing, market correlations have been spiking ever since the big drop in the S&P that happened last month.
“Market risk is still quite high,” Jonas continues. “In fact, it’s probably a lot higher than most investors realize. And with high correlations, we can expect everything to make a big move at the same time and in the same direction.”
Don’t ask Jonas which direction — not with a major Fed decision looming on Thursday. “It’s still a very good idea to trade defensively on any positions you want to take on.”
If the Fed does raise its benchmark interest rate on Thursday, it will be against the advice of the Bank for International Settlements — the central bank of central banks.
“Debt ratios have reached extreme levels across all major regions of the global economy,” Ambrose Evans-Pritchard says of a new report from the BIS, “leaving the financial system acutely vulnerable to monetary tightening by the U.S. Federal Reserve.”
That sounds like another reference to the $9 trillion tsunami of dollar-denominated corporate debt in emerging markets — something our Jim Rickards has warned about all year. With emerging-market economies weak, and the dollar strong, a rate increase is sure to set off a wave of defaults.
The BIS is now on record against a rate increase along with the World Bank and the International Monetary Fund. That’s all of the Big Three global monetary institutions warning the Fed, “Don’t do it.”
In a live briefing this morning for Strategic Intelligence subscribers, Jim Rickards reiterated what he sees as the highest-probability outcome Thursday: The Fed will leave rates alone while jawboning about how it might still pull the trigger before year-end.
You know it’s bad when even Great Britain is considered a more competitive economy than the United States.
At least that’s our first impression of the latest Economic Freedom of the World Report, issued by Canada’s Fraser Institute. The United States ranks No. 16 — down from No. 12 last year, but still better than 2013’s No. 17 ranking. (The numbers on the right are the Fraser Institute’s ratings on a scale of 1-10.)
The report weighs five major factors — the size of government, the legal system and property rights, sound money, freedom to trade internationally and regulation.
Back in 2000, the United States ranked No. 2.
What gives? The biggest drop has come in the legal system and property rights category.
From the report: “It is clear that the increased use of eminent domain to transfer property to powerful political interests, the ramifications of the wars on terrorism and drugs and the violation of the property rights of bondholders in the auto bailout case have weakened the U.S. tradition of rule of law.”
“One of your readers mentioned Friday that it has been a down year for wind power. And that got me thinking,” reads an item in our inbox this morning.
“I’m sure traders and investors alike would love to see another ETF. God knows you can never have too many financial vehicles to ride off into bubble-land. The symbol will be BLOW and its muse the wind.
“I’m shocked it took this long to commoditize/monetize Mother Nature. I know She has a tremendous effect, indirectly, on the cost of things, but this, this will open up a whole new line of financial services.”
The 5: Someone beat you to it, long ago. The First Trust Global Wind Energy ETF trades under the ticker symbol FAN.
FAN had the ill fortune of launching in July 2008 above $30 a share — at the very moment energy companies both traditional and alternative were on the verge of imploding in the Panic of ’08.
Over the last year, shares have oscillated between $10 and $12.50 — they’re on the lower end of that range right now. Meh…
Meanwhile, derivative instruments based on the weather have a history going back nearly 20 years now.
Back to the drawing board…
“Has anyone bothered to correlate these state and local revenue shortage issues with the push to increase the minimum wage?” a reader inquires after our episode on Friday.
“To me, it looks like one of the greatest tax increases ever perpetrated on the people and businesses! Think about it. Payroll tax rates are a fixed percentage. These states are effectively legislating themselves a pretty hefty revenue increase. Especially in states and cities with an income tax. The feds get a boost as well. Imagine if a two-person min. wage-earning household also gets bumped to a higher tax bracket. The revenue stream fattens even further.
“Even without an income tax, they still win on the sales tax side. The wage increases must be passed onto the consumer eventually in the form of higher prices. Here in certain parts of California, the sales tax is already at 10%. So if your $10 widget goes up to, say, $12, then the state gets an extra 20 cents for every sale.
“I’d be curious to know if anyone actually ran any revenue projections on this for, say, Seattle or Los Angeles. I also wonder if there is a way to play this.”
The 5: Interesting. Of course, the scheme falls apart if rising minimum wages prompt employers to keep fewer people on the payroll….
Best regards,
Dave Gonigam
The 5 Min. Forecast
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