The JohnWallStreet Sports Stock Index is up 38% since its Aug. 1 introduction, reflecting investor optimism in approved vaccines putting an end to the pandemic, as well as relative confidence in a rebirth of the live events business in a post-COVID world. For comparison purposes, the S&P 500 has risen “just” 12% over the last five months. As 2020 nears its end, we look ahead at what the next trip around the sun is likely to bring shareholders of publicly traded companies within the sports and entertainment ecosystem.
Conversations with a trio of well-respected insiders—a sports financier (Eric Grubman), a wealth manager (Jack Ablin) and an economist (Joe Brusuelas)—indicate the sector’s performance in 2021 will almost certainly be tied to developments in public health. “As long as the pandemic abates and procurement and distribution of the vaccine happens, [we should be] looking at a boom in the overall sports and entertainment industry in the second half of 2021,” predicted Brusuelas, chief economist at RSM.
Our Take: It’s not particularly surprising that the JohnWallStreet Sports Stock Index has performed well. As Ablin (chief investment officer, Cresset Capital) noted, “a lot of the companies that were what we’ll call pandemic losers have been among the biggest gainers in the second half of this year” (see: Royal Caribbean Cruises, at +37%, outpacing Amazon, at +16%, in H2 ’20). That’s because as it became evident a vaccine was on the near-term horizon, the forward-looking markets began to price in a recovery.
Like Brusuelas, Grubman is bullish on “anything that is publicly traded in sports and entertainment—unless it has a specific defect like a bad balance sheet.” The Sports Entertainment Acquisition Corp. executive chairman said he foresees the public markets “remaining supportive and positive because [of] several factors: very accommodative fed and central bank participation around the world, increasing confidence around COVID ending—or at least getting under control—and a sort of pent-up animal spirit [among] consumer societies in the big developed countries.”
Ablin agreed the suppressed demand to do “the things Americans couldn’t do during the stay-at-home orders”—combined with the stockpiles of cash available (savings within the economy are roughly $1.25 trillion above where they were pre-pandemic)—should be “a boon to the sports and entertainment sector” come H2 ’21. The wealth manager pointed to the price of airline tickets and hotel rooms doubling between this Christmas and next as evidence of the anticipated demand.
Of course, within stock markets there are always going to be winners and losers. Grubman says for live events businesses, 2021 will ultimately “come down to: Do [investors] envision butts in seats? If they do, then they’re going to give credit to the revenues. And if they don’t, they won’t.” While it’s likely to be months before stadiums are full again, “markets look forward pretty far,” the SEAH executive chairman reminded. “[If] people start to take the vaccine in [large] numbers and it’s working and the COVID-19 numbers are going down during the winter, that should bode well for [live event] stocks,” he said. That includes publicly traded teams and rights owners (see: BATRA, MSGS, JVTSF, MANU, FWONA and WWE), venues (see: MSGE, DVD, CHDN), ticketing (see: LYV) and F&B companies (ARMK).
The JohnWallStreet Sports Stock index surged 20% in November on the back of its sports betting-related components (see: TSCRF, DKNG, PDYPY, PENN, WIMHY, SGMS, PBTHF). But Brusuelas and Ablin both warned that troubles may lie ahead for a sector many presume is on a rocket ship. “There is a portion of the [sports betting] industry at risk of becoming oversaturated,” Brusuelas said. “Incomes are likely to be restrained for a number of years—even if the economy rebounds. And I don’t see how companies related to sports betting perform better [in the future] than they did at a time when we had lots of young men with little to do, who [still] switched over to investing in public equity markets as opposed to betting on sports.” Ablin agreed it’s going to be an uphill battle to convert those who transitioned to day trading back into sports bettors: “A lot of these guys who have seen their bets pay off in the stock market are going to be reluctant to go back and pay a 10% vig [to a sportsbook].” Grubman had a different take—he continues to like the space and thinks that sports betting is becoming mainstream entertainment and thus is likely to continue to grow in popularity.
The sports media landscape will continue its evolution in 2021 as consumers increasingly realize “it is simpler [and cheaper] to subscribe to the apps [than linear cable],” Brusuelas predicted. While that’s not great news for the index companies that own television networks (think: DIS, T, CMCSA, FOX, VIAC), Grubman said it’s not nearly as problematic as it may seem for most, either. That’s because the majority of the linear networks with sports media rights are owned by entities with other irons in the fire. “You could argue NBC has a real problem,” he explained. “But [the company] is owned by Comcast. And you could cut all the cords you want on Comcast cable and [they] still have Comcast internet. So, Comcast will be fine, and anything they own will be fine.” The same can’t be said for companies that are “purely or mostly linear” and don’t have those other revenue streams to count on (think: SBGI).
The video game and esports industry was among those that benefited from COVID-19, so it’s fair to wonder if the business is destined for a setback in ’21 as the economy opens back up (as it stands, the U.S. economy is operating at 79% capacity). Grubman didn’t think there was “any turning back. People are not going to all of a sudden stop using all of the electronic devices and entertainment and media that they’ve increasingly used during COVID. That trend has been established and it will only become stronger.” Brusuelas agreed that the video gaming sector represents a “frontier market” with the potential for “massive growth over the next five years.” EA and TTWO, two gaming equities within the index, should be among those who benefit.