On Saturday, when California Chrome followed up on a powerful, exhilarating win in the Kentucky Derby with a win in the Preakness, the hype began in earnest. The story is made for TV or Hollywood. A group of blue collar guys invest $10,000 in a horse that takes on the multi-million products of the thoroughbred world and wins. The Triple Crown bid is on!
Since Affirmed won it all in 1978, there have been 12 horses who won both the Kentucky Derby and the Preakness, only to fail when it came to the last and longest leg of racing’s Triple Crown. History suggests that victory is unlikely, but the way in which California Chrome has won suggests that there is at least a fighting chance, assuming that the owners, aware of this history, allow him to run.
I, for one, will be rooting for the unlikely hero. I won’t be betting, however, as I live in a state where that isn’t possible. If you are in a similar position, though, there is a way to have an interest in the outcome. Should there be a Triple Crown winner this year, it will give a huge boost to horse racing as a whole. The publicity surrounding such a win could only be good for the tracks, especially given the fairy-tale nature of the story, and investors in Churchill Downs, Inc. (CHDN) could reap the benefits.
Thoroughbred racing as an industry has been going through a tough time. Predictions of its demise are commonplace. One theory that I have heard is that, in these days of genetic engineering, how long will it be before somebody, somewhere engineers the perfect racehorse? The incentive is certainly strong; California Chrome’s owners reportedly turned down a $6 Million offer for 51% of the colt even before the Derby win. If he pulls off the Triple Crown we can only guess what he will be worth. For now, though, I have to believe that that dystopian sci-fi future of engineered horses is still quite a way off.
More common is the belief that, with the advent of online gambling, the days of the tracks are numbered. On that front, Churchill Downs has you covered. Most people probably assume that, in buying CHDN they would simply be buying a part of the home of the Kentucky Derby, but they would be wrong. Churchill Downs, Inc. is a diversified holding company with interests in several other tracks, casino gaming, the totalisator machines used for on track betting, and, through their subsidiary Twin Spires, a dominant position in the online Advanced Deposit Wagering (ADW) business.
The legal status of online betting in the US is, at best, a messy mish-mash right now, but the trend in most states is towards allowing their residents to do what they see fit with their money. There is, of course, a regulatory risk that the federal government could clamp down on this growing business, as they did with online poker, but many industry insiders feel that moves toward legalization are more likely.
Whether that comes or not, there is still the prospect of renewed interest in the ponies in general should California Chrome defy recent history. If you believe that will happen, then CHDN is the best way to play that through the market.
The stock has lost around 11.5% since reaching new highs in February, but is now close enough to two support levels, around $82.50 and $80, to make it attractive. At first glance, with a forward P/E of over 22, CHDN looks expensive, but remember this is a play on changing conditions in the popularity of their core horseracing interests, whether live or online. The 3% earnings growth that is currently forecast would rapidly be increased with a popular Triple Crown winner, making that P/E number irrelevant.
Buying Churchill Downs is, appropriately enough, a gamble to some extent. It is not, however a careless one. Those support levels suggest a stop around 10% away from the position entry point, while there is an event approaching that could make a fundamental difference to the stock’s value. Given that, the risk reward ratio makes it appealing to buy the stock, then cheer on California Chrome in a couple of weeks.