Betting on sports is now legal in America. The Supreme Court ruled it is now OK for any state to set up bookmaking operations.
It’s a well-known fact that sports fans were gambling without the Supreme Court’s approval. Experts estimate that $150 billion is wagered illegally each year. That’s about three times larger than the marijuana market, which has provided big gains to investors.
The two markets will be similar in many ways. Both gambling and marijuana were considered vices a generation ago. Both were untaxed before legalization and now provide coveted cash to state governments.
But the two markets are different. We have a chance to get in on the ground floor of gambling even if we missed the first stage of the marijuana boom.
The Coming Sports Gambling Boom
Since January 2016, the Marijuana Index is up more than 230%, trouncing the S&P 500 Index, which gained about 40% over that time. Now it’s time to prepare for the gambling boom to come.
Some companies are already positioned to enter the new market. Casinos are ready to accept bets. But sports betting will be a small part of their business. Horse tracks are also ready to accept bets and could be a better investment.
The Supreme Court decision involved racetracks. The Supreme Court ruled on New Jersey’s law permitting anyone over 21 to bet on sports at New Jersey casinos and racetracks.
Publicly traded racetracks include Churchill Downs Inc. (Nasdaq: CHDN), Penn National Gaming Inc. (Nasdaq: PENN) and Dover Downs Gaming & Entertainment Inc. (NYSE: DDE).
Of the three, Dover Downs is the cheapest. Its price-to-book (P/B) value is just 0.5. This is just 15% of the industry average P/B ratio of 3.2. The company’s assets include the Dover Downs Hotel & Casino, the Dover Downs Conference Center and the Dover Downs Raceway, all in Dover, Delaware.
This month’s news from the Supreme Court broke the stock out of a four-year trading range. But the price remains 90% below its 2006 high.
A Low-Risk Trade
Another potential gaming trade is the VanEck Vectors Gaming ETF (NYSE: BJK). This is a relatively small exchange-traded fund (ETF) with less than $30 million in assets. It is thinly traded, which means traders should use limit orders.
A limit order to buy will include the highest price an investor is willing to pay for the ETF. A limit order to sell sets the minimum price the investor will accept for their shares. Limit orders prevent the market makers, the firms providing liquidity to traders, from taking advantage of individual traders.
This ETF’s holdings include gaming companies from around the world.
An interesting trade with low risk is call options on BJK. Call options give buyers the right, but not the obligation, to buy 100 shares of a stock or an ETF at a predetermined price for a limited amount of time. Buyers of calls can never lose more than they pay to enter the trade.
For BJK, the trade requires less than $200 to open. This would buy one December $51 call on BJK. This contract expires on December 21. If BJK is below $51 at that time, the option is worthless, and the trade results in a loss of the $200.
But if BJK gains 10%, the call option would gain about 100%. The trade could be closed anytime before expiration, locking in a gain if BJK rallies at any time in the next few months.
Michael Carr, CMT
Editor, Peak Velocity Trader