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2 Stocks to Play the Rise in Sports Betting

Sports betting is quickly becoming legalized and normalized. Two stocks to ride this trend are Draftkings (DKNG) and Caesars Entertainments (CZR). Both stocks are positioned for further gains. Andy Hecht lays out the best strategy to profit.

  • Sports are now the primary entertainment venue for many

  • Watching at home- Action enhances the viewers’ experience

  • DraftKings (DKNG) is a leader in sports betting- A growing business as Caesars buys William Hill

 

  • At around the $55 level, the stock is in the buy zone

  • I favor long-dated in-the-money options to limit the risk

During the height of the shutdowns caused by the global pandemic, one of the most challenging aspects of being locked into our homes for many was the absence of sports. March Madness, the annual college basketball tournament, could not take place in 2020. ESPN, the popular sports network, had to resort to rebroadcasts of classic games. As a sports enthusiast, I found myself watching baseball from Korea and more than a few recycled games.

Sports came storming back. The National Hockey League did a great job creating a bubble to protect players. The NHL playoffs leading to a Stanley Cup final generated lots of excitement for home viewers. The NBA finals were underway at the end of last week, as were the MLB playoffs. We are already one-quarter the way through the NFL 2020 season. Golf, tennis, horse and car racing are back. Soccer remains one of the most popular sports on our planet. The action on the ice, field, court, racetracks, and gridiron is exciting. For many fans, betting on contests enhances the experience.

When I was a child, I would look forward to ABC’s Wide World of Sports each week. The show started by highlighting, “The thrill of victory and the agony of defeat.” Participants in the sporting world feel the thrill and agony, and their fans are by their sides.

Sports betting enhances the emotional response for us couch potatoes watching the contests. As many states allow sports betting these days, and technology allows us to make wagers from our couches, the potential growth for gambling platforms is rising. DraftKings (DKNG) is a leader in the technology for sports betting, and its stock is likely to continue to move higher. The thrill of winning and the agony of losing money is a powerful force for the growing addressable market for DKNG.

Sports are now the primary entertainment venue for many

We are still in the midst of the global pandemic. The second wave of the virus is now moving across Europe and the United States. Last week, almost half of US states were reporting increasing cases. President Trump’s infection and hospitalization was a sign that no one is immune from the virus that scientists continue to scramble to cure.

When we go out these days, most of us wear masks. Many people are working from home, and others remain on furlough or are looking for jobs in a challenging economic environment. While some schools are open, online instruction remains prevalent. The bottom line is that people are staying at home a lot more than in the past. Sporting events are a welcome distraction from the news and other entertainment options in the current environment.

Watching at home- Action enhances the viewers’ experience

The stadiums, arenas, tracks, and courts are mostly empty, aside from the competitors and staff. Team owners are doing without the revenue flows from filled stadiums and venues. The only fans in the stands these days are cardboard cutouts. The stadium roar comes from a soundtrack. Watching sports in 2020 is a different experience. The power and advantage of a home crowd are gone.  The cheers and boos we hear through our TVs are fiction.

Meanwhile, more home time means more opportunities to watch games. Enhancing the experience with additional action is at our fingertips. Placing wagers on specific games, a combination of games, or the many options for gambling on an outcome either at the end of a contest or even during a game when it comes to in-game betting adds to the excitement. It brings the thrill of victory and the agony of defeat directly to fans and viewers.

DraftKings (DKNG) is a leader in sports betting- A growing business as Caesars buys William Hill

DraftKings Inc operates as a digital sports entertainment and gaming company in the United States. The company provides its users with daily sports, sports betting, and iGaming opportunities. DKNG is also involved in the design and development of sports betting and casino gaming platform software for online and retail sportsbook and gaming products.

DKNG’s products are available through a traditional website, directs app downloads, and direct-to-consumer digital platforms. DraftKings is on the cutting edge when it comes to fantasy sports that allow enthusiasts to make bets on individual players’ performance in a range of sports. The company’s headquarters are in Boston, Massachusetts. DraftKings is a high-tech bookie. In April 2020, DKNG became a publicly traded company through a reverse merger with a special-purpose acquisition company.

William Hill has been around since 1934 at a time when gambling was illegal in the United Kingdom. The company has grown over the years. In 2002 it was listed on the London Stock Exchange. In 2009. William Hill moved its online and fixed-odds games division to Gibraltar for tax purposes. On September 30, 2020, the company agreed to a 2.9 billion pound or $3.7 billion takeover by Caesars Entertainment (CZR), the Nevada-based casino operator.

While Caesars paid almost $4 for William Hill, DraftKings had a market cap of over four times that level at the end of last week, and the stock looks inexpensive at below $50 per share.

At around the $55 level, the stock is in the buy zone

Since mid-2019, DKNG shares have traded in a range from $9.76 to $64.19 per share.

 

Source: Barchart

As the chart highlights, at $48.82 per share on Friday, October 9, DKNG has declined from its all-time peak on October 2. The company has a $17.36 billion market cap and trades an average of over 19 million shares each day. The earnings record has not been all that attractive since the beginning of 2020. DKNG suffered as sports contests have only recently made a comeback, and the company experienced a long period of opportunity loss from March through the summer as sporting events ceased.

Source: Yahoo Finance

In Q1, the company reported a loss of 24 cents per share, and in the challenging second quarter, the loss expanded to 40 cents. Analysts expect the company to lose 38 cents per share in Q3. However, the return of many sporting events in Q3 could cause an upside surprise when DKNG reports earnings over the coming weeks.

A survey of sixteen analysts on Yahoo Finance has an average price target of $53.94 per share, ranging from $35 to $70.

I am bullish on DKNG’s prospects, but further showdowns that cancel sporting events are the risk of holding the shares.

I favor long-dated in-the-money options to limit the risk

I believe that we can see a significant upside move in DKNG that could push the shares to double, triple, or more over the coming years. However, the pandemic is a short to medium-term risk for buying shares at the $48.82 level.

I favor buying a long-dated call option on DKNG and adding to the position on price weakness if risk-off returns to the markets over the coming weeks. The stock was at just under the $50 level at the end of last week. The $50 call option for expiration on January 21, 2022, was trading at $17.60 per share.

The option has enough liquidity to support flexibility as of October 9. With the stock at $48.82, the call option has no intrinsic and $17.60 of time value. In a volatile gambling stock, the option’s risk is the premium at $17.60 per share. Each option represents 100 shares at a cost of $1,760. The option may seem expensive, but when the stock market tanked in Mach, DKNG shares traded to a low of $10.60. A return to that level after buying the shares at $48.82 would yield a $38.22 loss compared to $17.60 for the option. In the volatile world of gaming stocks, I prefer the option to limit downside risk.

Digital betting is only going to grow over the coming years. The pandemic is the short-term risk, but the thrill of victory and agony of defeat when it comes to making or losing money on betting on sporting events and the other sports-related wagering offered by DKNG is a powerful magnet that will fill the companies accounts with profits over the coming years. DKNG combines the power of technology with gaming, which can be a volatile pair. I believe this stock is heading significantly higher over the coming years.

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DKNG shares were trading at $50.56 per share on Tuesday afternoon, down $0.04 (-0.08%). Year-to-date, DKNG has gained 372.52%, versus a 10.25% rise in the benchmark S&P 500 index during the same period.



About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles.

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