The legalization of sports gambling in more states is a storyline to watch in 2021
The pandemic accomplished the unthinkable and derailed what many had taken for granted; constant live sports. However, sports betting companies such as Penn National Gaming (PENN) and DraftKings (DKNG) have turned in outstanding year-to-date gains of 157% and 377%, respectively. To many there's no better time than now to look into these type of stocks, with sports gambling possibly on the verge of a paradigm shift. But to others, there are very real roadblocks and perhaps the notion that the fad has come and gone already. Articulating the landscape of sports betting and its major players can help an investor better prepare for life after the pandemic, whenever that occurs.
As alluded to above, there is a camp that believes if you didn't jump in on a sports gambling stock like DKNG in the summer -- when fall sports were in limbo -- then the train has left the station. Sports are mostly back now, and all of that optimism is baked in. But plenty of the sports betting market remains untapped simply because its incomplete. Users are only permitted to bet on sports through the apps in one of the 18 states plus Washington, D.C., that have set up fully operational legal sports betting. A CivicScience survey by way of Axios Markets showed a large number of people in those states are still unaware of the apps.
Those same naysayers will also cry that greater exposure hinges on legislation, which in of itself is a daunting hurdle. Per a Deutsche Bank report: "There has been little to no incremental legislation that advanced the iCasino or sports betting agendas in the U.S.," and even less to back expectations for a doubling of the total addressable market (TAM) for sports." However, that same Axios article also showed that four states have passed legalization bills already this year, while nine more have legislation pending.
If – and that's a big "if" considering the gridlock of American politics these days – you believe that in 18 months, the majority of states will have legalized sports gambling, then now is the time to strike on the likes of PENN and DKNG while their technical setups and overhead remain enticing. Don't be scared off by their astronomical year-to-date gains; there is evidence that suggests a second leg higher could be imminent for both securities. Per the chart below, you can see DKNG's torrid year-to-date rally was halted at 500%, with the pullback cushioned by the prior 400% peak. PENN, on the other hand, saw its rally halted at 200% with pullbacks contained at 150%. Back during the COVID-19 crush of March, DKNG's year-to-date breakeven level stepped up as support. PENN wasn't as lucky, and was instead obliterated by the shutdowns given the hits it took from its brick-and-mortar casinos and racetracks. But despite losing 82% of its value, PENN's handsome rebound must be commended, and for contextual purposes, it’s worth noting that at $11 billion, the equity's market cap is almost half that of DKNG's $21 billion.
The similarities don't end on the charts. Options traders, as they tend to do, have gotten out in front of the two 2020 darlings. Thanks to data courtesy of Schaeffer's Senior Quantitative Analyst Rocky White, DKNG popped up on a list of 20 stocks that have attracted the highest options volume over the last 10 trading days. In those two weeks, 692,393 calls have changed hands, compared to 331,208 puts. Not to be outdone, PENN showed up on a similar list of S&P Midcap 400 stocks, with 220,264 calls and 129,394 puts traded in the last 10 days. Plus, premium can be had from both DKNG and PENN at an affordable price. Their Schaeffer's Volatility Indexes (SVI) of 86% and 77%, respectively, both sit lower than the bottom 20th percentile of readings from the past year.
If your crystal ball sees sports gambling legalization as the future, choosing between the two comes down to DKNG’s and PENN’s business fundamentals. If you're sold on casinos and racing facilities returning to glory in 2021 while also intrigued by Penn's 36% stake in Barstool Sports, then PENN has some staying power. But if you see DraftKing's app and increasing partnerships with professional sports teams as only the beginning, take a number and get in line. One thing’s for certain; given the volatile nature of the industry as outlined above, options contracts that decrease your initial cash outlay may be the prudent move until the future of sports betting becomes more crystallized.
Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, October 4.