Then The Horse Stepped On Me…
The Dynamic Wealth Report
October 19, 2009
Linda was out of town recently. She had a conference at some resort up
north. While she enjoyed the cool weather, I was holding down the fort
at home. Of course, we had another heat wave hit the valley. The
temperature was around 100 degrees.
One of my responsibilities was feeding and caring for the horses. All
was fine for the first few days, but of course, life is never that
simple.
Last Wednesday at 5:00 am, I was out in the barn feeding the horses.
Linda’s horse, Slew, decided he wanted his food. He tried to bully his way
towards the feeding area.
That’s when he stepped on my foot.
I’ll spare you the litany of swear words that escaped from my mouth. I
will share with you one small fact… I was wearing flip-flops. It was not
one of my brighter moments.
Now, I don’t know if you’ve ever had the pleasure of being stepped on by
a horse. Trust me, when a 1,200 pound animal puts his foot down, it’s
not comfortable. As a matter of fact, it’s downright painful. Despite my
recent and painful interaction with the horses, I still think they’re
amazing animals.
Slew is a descendant of the famed racing horse Seattle Slew.
Slew, while running a few times at the track, never achieved the fame
and fortune his ancestor did. That’s why we own him now. Linda rescued
him from the racetrack.
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The racetrack is a fun and exciting entertainment venue. Who doesn’t
enjoy watching the ponies run? Most people, however, forget that it’s also
a business. There are ways to make money off of racing horses other than
betting the trifecta.
That’s what got me thinking about the racetrack as an investment
opportunity.
If you haven’t taken the time to research this interesting area, don’t
worry… I did all the hard work for you.
Here’s what I found. During the most recent economic downturn, a number
of racetracks have struggled. Attendance has waned at the racetrack and
profits have dried up.
As a result, Magna Entertainment Group is putting some of their prized
racetracks on the auction block. I’m sure you’ve heard of Pimlico,
Santa Anita, and Gulfstream. Believe it or not, all of these famous
racetracks are up for sale.
Pimlico is home to the Preakness Stakes… the second leg of the famed
Triple-Crown. And Santa Anita is host to the 2009 Breeder’s Cup.
Unfortunately, the bankruptcy of Magna Entertainment and the auctioning
off of these racing sites might mar the “Sport of Kings” a bit. But
never fear. With the recession coming to an end and consumer confidence
building, attendance at the tracks is certain to build. Racing
enthusiasts will once again return to the track.
Normally when looking for investments in an industry, I like to stick
with the 800lb gorilla. In the horse racing world, that would be
Churchill Downs (CHDN)… the location of the famed Kentucky Derby. They
have a half a billion dollar market cap and last year generated more
than $430 million in revenue.
But I found a little company doing something exciting.
Take a look at Youbet.com (UBET). They provide live horse racing and
accept wagers all online. You can visit their site and place bets at
more than 180 racetracks all over the country. Their technology is state
of the art. And, because they deliver the horse racing experience
online, their overhead is limited.
Unlike a racetrack that only draws in visitors from the local area, UBET
can attracts spectators from across the country. No attendance issues
because of race times or weather conditions.
UBET is an emerging growth company with a $100 million market cap. While
their numbers are down a bit because of the recession, I see some very
attractive data points.
First is revenue. Their revenue last quarter actually grew to more than
$30 million. Not bad in a tough economy… imagine how they’ll do when
things get better. Despite an industry wide fall off in betting
activity, UBET is seeing the number of wagers they are processing
increase over 13%.
Net income fell a bit because of increased operating costs, but more
importantly, the company posted a profit for the quarter. UBET is seeing
their working capital and cash position improve. Best of all, they’re
continuing a stock repurchase program for up to 10% of the company!
The only red flag I see is news the company will restate results because
of an accounting error. Normally this would scare me away, but the
adjustment looks minor. Provided nothing else is found wrong with the
accounting system, now would be a perfect time to buy the stock. It’s
pulled back since the news of the restatement.
Take a look at UBET for your own portfolio. It’s an interesting way to
profit from the Sport of Kings. Just remember not to wear flip-flops
around horses… and don’t get stepped on.
• Food Industry (Up 12%)
This is an interesting development. The food industry is a market
leading industry over the last month, posting a better than 12% gain.
Leading the charge is Safeway (SWY), up more than 20%, and
Whole Foods
Market (WFMI), up more than 18%. Looks like consumer spending is
rebounding.
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