Last week, in the Federal Reserve’s final policy-setting meeting before the 2020 election, the U.S. central bank announced the benchmark federal funds rate would remain between 0% and .025%. The target range was initially slashed in March when policymakers first sought to boost spending and improve the labor market conditions brought on by COVID-19. Economic projections now indicate the majority of Fed officials expect the rate to remain close to zero through 2023, so it is worth wondering how the anticipated prolonged period of low interest rates might affect the sports world. RSM U.S. (an audit, tax and consulting firm) chief economist Joe Brusuelas suggested today’s unique financial landscape will bring a “burst of stadium construction, new people entering the market to purchase [pro franchises]” and perhaps an increase in sponsorship revenue. Jack Ablin (chief investment officer, Cresset Capital) suggested that the low rates would also lead to an increase in team valuations.
Our Take: If the next decade is going to “be defined by the massive modernization of the U.S.’s aging infrastructure,” as Brusuelas projects, it reasons to believe smart owners will take advantage of the attractive debt financing terms and invest in the replacement or upgrading of outdated venues. The economist suggested these would likely be elaborate, privately financed, projects “along the lines of what [has been done] in Inglewood, Calif.” (think: stadium as part of a greater mixed-use real estate development). He reasons a large-scale project like the one Stan Kroenke constructed in Los Angeles around SoFi Stadium enhances the value of the team (see: Sportico’s NFL valuations pegged the Rams as third most valuable franchise), and as Jack Ablin explained “low interest rates mean it becomes easier to invest; that projects become more viable.”
Brusuelas anticipates considerable ownership turnover across the big four leagues over the next 10 years with a fair share of current team owners “elderly and facing succession issues.” He envisions the next generation of owners will be younger and have a tech, life sciences or a finance background—industries where entrepreneurs/executives “have lots of cash [and knowledge of venture capital/finance] to use creative financing vis-à-vis lower interest rates to purchase teams.” The RSM economist cited Tilman Fertitta as an example of a current team owner who used creative financing to buy a franchise. The Rockets owner “basically issued debt based on the [Landry’s] restaurants and [Golden Nugget] casinos in order to raise the $2.2 billion needed to buy the [club],” Brusuelas said.
Low interest rates won’t just affect who is buying teams, they’ll impact the amount new owners will pay for them (all other things being equal). Brusuelas explained, “The price someone is willing to pay for an investment that is generating income and earnings over some future period of time is going to be discounted back with a substantially lower interest rate. Just the math forces the present value of the franchise higher.” He cited Steve Cohen’s purchase of the New York Mets at a $2.42 billion valuation as the “most poignant example [of low interest rates affecting a team’s purchase price].”
It reasons to believe that large corporations—like the smart pro sports franchises—will issue corporate debt to fund expansion and modernization while rates are low. Brusuelas suggested that he “wouldn’t be surprised if there was a little leakage into the sports economy. Given the ratings of live sports, many firms will lean in favor of using [cheap money] on sponsorships.”
Personal seat licenses have become part of the business model for teams building new stadiums (at least across the NFL and NBA). “With interest rates this low,” Brusuelas said, “individuals will clearly tap equity in other assets to borrow and ultimately buy PSLs [at new venues]” (which in theory would allow teams to charge more). He reasoned that when adjusting for inflation, interest rates are “profoundly negative. [The borrower] will actually pay back less than they borrowed out to a 10-year interval.” But Ablin was not convinced. “A lot of the stuff the Federal Reserve has done with the financial markets hasn’t really trickled down to the individual,” he said. “Somebody financing a seat license personally is still going to be paying a pretty high consumer rate.”
Sports Stocks Surge As Live Games and Bets Power JohnWallStreet Index Up 17%
Sports-related shares are running up the score against the stock market as the return of games and the embrace of betting makes investors as enthusiastic as fans. The JohnWallStreet Index has advanced more than 17.2% since its inception at the start of August. By comparison, the S&P 500 has gained 2.6% in that time, while the tech-heavy Nasdaq 100 Index has posted a 1.7% gain.
“Enthusiasm for sports-related stocks fits into the broader narrative. Optimistic investors are beginning to look at life beyond the lockdown,” said Jack Ablin, Chief Investment Officer and founding partner of Cresset Capital, a wealth management firm in Chicago. “Let’s hope they’re right.”
The JohnWallStreet Index is Sportico’s basket of 40 publicly traded sports team- and sports-related stocks. The index began at 1,000 points based on the close of trading July 31 and has risen 172.4 points in six weeks. It’s a period that has seen all the major North American sports playing in some form, including playoffs in the NBA, WNBA and NHL as well as regular season action in baseball, football and soccer.
The ability to place wagers on play again has made gaming stocks the biggest winners. Penn National Gaming (Ticker: PENN), which owns casinos and racetracks as well as a 36% stake in Barstool Sports, is up 111%. William Hill (WIMHY), the world’s largest bookie, has advanced 108%. PointsBet (PBTHF), Australia’s largest gaming operator with significant operations in the U.S., increased 95%—good for third. Scientific Games (SGMS), a gaming technology maker for casinos, lotteries and apps, posted a 73% gain overall, including an incredible 63% surge this week. The Las Vegas-based company saw investors nearly giddy on news that billionaire takeover artist and Scientific Games chairman Ronald Perelman is selling his long-held stake in the company.
It’s not just gambling that is powering the index. The JohnWallStreet Index components are equally weighted with each stock entering as 2.5% of the index—to better capture the broad-based performance of the sports business. It shows nearly every segment is on the rise. Fully 15 other components are up double-digits since the start of August, including sports card grading firm Collectors Universe (CLCT, up 41%), Premier League fixture Manchester United (MANU, up 17%) and The Walt Disney Co., owner of ESPN and other sports-related properties (DIS, up 10%).
Only nine JohnWallStreet stocks are down for the period, including both sports video game stocks on the index—Electronic Arts (EA, down 12%) and Activision (ATVI, down 5%). The biggest decliner is Hall of Fame Village (HOFV), which has shed more than 30% of its value. The company is developing a mixed-use real estate project adjacent to the Pro Football Hall of Fame in Canton, Ohio, and went public by a blank-check company, or SPAC, this summer. Shares are suffering in part from an exodus of shareholders who bought into the SPAC when it had a stated aim of buying a financial technology company.
While sports stocks have been thriving this summer, there is evidence the market-beating performance isn’t a fluke or just the result of restarted play. A review of past performance of the index shows that it has beaten the S&P every calendar year to date since 2015, including this year. Over the past five years through June, the JohnWallStreet Index has beaten the S&P by nearly 10 percentage points, returning 92% to the S&P’s 82.5% in that time.
You can read more about the JohnWallStreet Index, including a list of its components, here. We’ll be writing regularly about the index, the stocks that comprise it, and how it reflects the sports business and investing world more broadly.
-By Brendan Coffey
Market Snapshot:
JohnWallStreet Index: 1,164.88 (-0.64%)
NASDAQ: 10,793.28 (-1.07%)
S&P: 3,319.47 (-1.12%)
DJI: 27,657.42 (-0.88%)
JSSI Biggest Movers (Sept. 18):
- SGMS 32.96 (+6.84%)
- FWONA 32.76 (-4.43%)
- DKNG 55.39 (+4.29%)