Last week was a good one for Paddy Power Betfair, with shares soaring following a US supreme court ruling ending a federal ban on US sports betting.
The announcement came in the same week the UK government announced a clampdown on fixed-odds betting terminals, slashing maximum stakes from £100 to £2. That will hit revenues but it was priced in, as evidenced by the quick recovery in the shares prices of Paddy Power, William Hill, and Ladbrokes Coral owner GVC.
Attention focused instead on US developments. The illegal US sports betting market is worth an estimated $150 billion and Paddy Power is well placed to benefit. It already has a US presence – with casino interests in New Jersey, a fantasy sports outfit Draft and is in talks to buy FanDuel, a much bigger fantasy sports company.
Valuation is a tricky art, but last week’s 20 per cent share price jump seems understandable. Credit Suisse and Merrill Lynch had previously estimated William Hill’s market value could ultimately rise between 25 and 39 per cent in the event it successfully penetrated the US market.
However, it will take time. Some states will quickly legislate to allow sports betting; many more will move slowly and with restrictions. Tax rates, how much marketing will be allowed, who will be allowed to operate, fees to sports leagues – it will take years for such matters to be resolved. The “floodgates of optimism” are “unlikely to turn into a flood of business opportunities”, as Regulus Partners put it.
Profits aside, analysts note US operators may be tempted to buy into European firms on account of their sport betting expertise. Paddy Power’s earnings outlook may be unchanged, but the strategic value of the company has undoubtedly increased.
Is Soros a Tesla bull?
Tesla shares have been under pressure recently following concerns about the electric car maker's financial stability. Accordingly, there was much excited chatter last week after a quarterly filing revealed George Soros has been buying convertible Tesla bonds.
However, Tesla bulls shouldn’t assume Soros, who sold his shares in the company last year, shares their enthusiasm. Firstly, the purchase – $35 million – is tiny. Secondly, 87-year-old Soros is retired and no longer does the buying and selling at Soros Fund Management. Thirdly, money managers don’t have to disclose their short bets against stocks. Given that hedge funds often buy convertible bonds to increase or mitigate bets against company stock, it’s dangerous to try and discern their intentions from quarterly filings.
Of course, Soros might be bullish on Tesla – who knows? Whatever his beliefs, the endless focus on who's buying what is misplaced. The Soros fund, for example, dumped its entire holding in Amazon in the last quarter of 2017 only to buy 51,200 shares (about $75 million worth) in the company in the first quarter of 2018. Traders nip in and out of positions all the time, so it's unwise to read too much into data that may already be outdated.
US earnings – as good as it gets?
Stocks barely budged during earnings season, despite companies’ healthy profit outlook. Are markets worried that the only way is down for earnings growth rates?
Well, the last quarter’s growth rate may well represent a peak of sorts. Earnings growth of 26 per cent was the best since 2010. Even if you exclude the impact of the recent tax cuts, the figures are stellar – profits growth neared 20 per cent, according to LPL Research. A record 78 per cent of companies beat estimates; earnings topped estimates by 7.5 per cent, the highest number since 2010; and revenue growth of 8 per cent was the highest number since 2011.
So yes, it might be some time before investors enjoy another earnings season like the one just passed, but that’s not necessarily a bad thing. LPL looked at the last 12 earnings growth peaks and found that, on average, it took a further four years before a recession took hold. On average, the S&P 500 returned 59 per cent during the periods between the earnings growth peak and the start of the next recession.
Earnings are forecast to continue growing, just not at the same pace. That’s not necessarily cause for concern.
No end in sight to crypto scams
The cryptocurrency craze may have faded, but scammers still feel there’s money to be made by duping the gullible.
Last week, the US Securities and Exchange Commission launched a mock initial coin offering website, www.howeycoins.com, touting a too-good-to-be-true investment opportunity. Meanwhile, financial blogger Babak complained that cryptocurrency scammers had impersonated him on Twitter in an effort to lure those looking for a quick buck.
“In case any doubts linger,” he tweeted, “cryptocurrencies are an abomination that exist in defiance of God, man and all things holy. I look fwd to raucous celebration when we shall be rid of them.”
An abomination? He needs to talk to Harry Redknapp.
