🎰 Other Bets Besides DraftKings

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REVIEW

US stocks fell Friday as investors continued to weigh the potential impact of geopolitical tensions between Russia and Ukraine. The day’s session was highly volatile, something market veterans will note is not atypical for the third Friday of the month, when a significant number of options and stock futures expire. Investors remain skittish amid the uncertain environment, which has included confusing reports regarding troop deployments and the possibility of a Russian attack on Ukraine. Analysts note Wall Street tends to be highly sensitive to geopolitical concerns, and in this case, the world’s oil market is in focus given Russia produces around 10% of the world’s supply. Crude prices have been surging and some energy stocks have sold off amid the uncertainty. There’s also the expectation that war between Russia and Ukraine could cause inflation to continue its rise in developed nations, given the interconnectedness of global supply chains and their impact on commodity prices. All the while, the market is closely watching the US central bank, as St. Louis Fed President James Bullard has called for aggressive action in response to inflation. In company-specific news, Shake Shack sold off after providing weaker-than-expected revenue guidance. Restaurant operator Bloomin’ Brands beat analyst expectations on the top and bottom lines. Heavy equipment maker Deere posted earnings and revenue that beat estimates, while also raising its annual profit forecast. Pilgrim’s Pride slipped after Brazilian meatpacker JBS abandoned plans to buy out the remainder of the poultry producer that it doesn’t already own. In economic data, January’s existing home sales and available housing inventory tell the story of an incredibly tight housing market. Existing home sales rose by 6.7% from December, which surprised analysts. Meanwhile, the number of homes for sale came in at 860,000 units—a new low since data was first tracked in 1999. For the week as a whole, the Dow Jones Industrial Average fell 1.9%, the S&P 500 dropped 1.6%, and the Nasdaq Composite shed 1.8%. 

PREVIEW

Monday is the Presidents Day holiday. There are no economic data releases scheduled 

On Tuesday, the Consumer Confidence Index for February is due. This aims to measure how comfortable consumers are regarding their financial outlook. The number declined last month. January’s index came in at 113.8, down from 115.2 in December. Housing market data is also on the way, in the form of December’s S&P Case-Shiller home price index, and December’s FHFA home price index. Information provider IHS Markit will also release its manufacturing PMI for February, and its services PMI for February.

Thursday, be on the lookout for January’s new home sales. The number increased in December to 403,000 — up by 6,000 new homes from November. That represented a nine-month high. Initial jobless claims are also due. Last week’s number came in at 248,000 which was higher than both the previous week, and the 219,000 claims that were expected. The Department of Commerce will also release its revised Q4 GDP, after the initial figure showed a 6.9% increase at an annualized pace.

Friday, new inflation data is set for release. The January PCE or Personal Consumption Expenditures index is due. This is the Fed’s preferred inflation gauge. It rose by 5.8% year-over-year in December, the highest such rate since 1982. November’s index checked in at a 5.7% increase. Core inflation will also be reported for January, which strips out food and energy costs. December’s core inflation rose by 0.5% from November. Also Friday be on the lookout for January’s nominal personal income, nominal consumer spending, real consumer spending, and real disposable income. Finally, the University of Michigan’s final revision is due for February’s consumer sentiment.

Fewer earnings calls are on deck this week given the President’s Day holiday.

On Tuesday, Home Depot (HD) reports Q4 earnings. During Q3 2021 the home improvement company beat analyst expectations on the top and bottom lines. Wednesday, Booking Holdings (BKNG) will hand in its report card. During its most recent earnings call the travel technology company said total room nights booked in Q3 2021 increased for the third straight quarter. Thursday, Anheuser Busch Inbev (BUD) will post its earnings report for the quarter ending December 2021. The company’s Q3 revenue surprised analysts amid lockdowns with sales up 8%. Friday, Foot Locker (FL) rounds out the week, as analysts are expecting $2.35 billion in revenue. That would represent a 7.3% increase from the same quarter in 2020.

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Regional Casino Operators All In With Online Gambling

Investors Look Beyond DraftKings for Bets

DraftKings (DKNG) may be getting all the online gambling love, but with the industry facing headwinds, investors may want to consider bets elsewhere. Competition is fierce and profits are hard to come by as the sector's competitors chase growth through marketing and advertising. With profits not forecasted until 2023 or 2024, the pure plays require a lot of patience.

That’s where regional casino operators come in. They’re building online gambling businesses but that’s not the only thing they offer investors. Bally’s (BALY), Boyd Gaming (BYD), Penn National (PENN), and Caesars (CZR) have cash, profits, and in some cases brand name recognition which may help them as this market grows.

Bally’s and Boyd Are Betting Big on Online Gambling

Online sports betting is currently allowed in 22 states and is coming to more soon. Revenue for the industry is poised to pass $6 billion in 2022 and hit $12 billion by 2025. Investors may be betting on DraftKings to dominate the market, but Bally’s could end up the better pick.

It operates an international online casino and an online sports gambling platform. Bally’s stock is beaten up, holding out a potential opportunity for bargain hunters. The company does have $3.5 billion in outstanding liabilities, but investors don't seem too worried about its ability to service that debt.

Then there’s Boyd Gaming, the regional player with operations in ten states. One third of its profit comes from off-the-strip casinos in Las Vegas. It’s also the owner of 5% of FanDuel, the online gambling company and DraftKings competitor.

Caesars and Penn National in the Race

Caesars is another contender in online gambling that's been investing heavily in the market. The casino operator doesn’t expect its sports gambling franchise to be profitable until the first half of 2023, but it’s okay with that. Caesars does have a lot of debt—to the tune of $15 billion—but it intends to pay some of that down in 2022.

Bargain hunters may also want to give Penn National a look. The regional casino operator’s stock is battered, down more than 40%. This could make it look cheap to some who are bullish on its bet with content powerhouse, Barstool Sports. 

Without a doubt, DraftKings is a formidable player in online gambling but it's not the only one. There are other ways to play a market that appears poised to take off.

Could the Tobacco Stock Surge Go Up in Smoke?

Income-Seeking Investors Lift Tobacco Stocks

Tobacco stocks are in vogue again as investors shift their focus away from growth picks in a rising interest rate environment. So far this year, shares of Philip Morris International (PM) are up 17% and Altria’s (MO) stock is 9% higher. Their UK counterpart British American Tobacco (BTI) is faring even better — up over 24% since the start of 2022.

It’s a big departure for a group of stocks that have underperformed since the end of 2017. That’s when investors started getting worried regulatory scrutiny and oversight would stunt growth.

The recent reversal in tobacco stocks’ fortunes is being attributed to hedge funds’ shift to value. Funds are looking for dividend-paying stocks and tobacco companies pay out. Good in the short term, potentially troublesome for the long haul. Here’s why.

E-Cigarette Market Needs to Show Growth

In order for the stocks to hold up, two things need to happen. First, they have to prove their smokeless businesses can replace their traditional cigarette operations in terms of profits. If 2021 was any indication, they are off to a good start.

Sales of smokeless products grew 50% at British American Tobacco, with its Vuse brand of e-cigarettes breaking even in the US in the second half of the year. What Philip Morris calls “reduced-risk products,” including e-cigarettes, made up about 30% of sales in the fourth quarter. Altria is still recovering from its bet on JUUL Labs.

There is a risk to the tobacco companies’ e-cigarette growth stories, however. The European Union is currently overhauling taxes levied on tobacco products. If smokeless products get taxed, thereby increasing prices, consumers may not be so willing to switch. It may also eat away at profits given that the European market is bigger than the US.

Regulatory Scrutiny Still an Issue

The tobacco companies also have to convince investors that increased regulatory scrutiny won’t hurt their smoke-based products. For example, stateside the Food and Drug Administration wants to ban menthol cigarettes. If this move is successful, it will have a meaningful impact on Newport-owner BAT.

Tobacco stocks are having a moment. Whether it lasts beyond the near term remains to be seen. It hinges on profit growth in the e-cigarette market and/or an easing of regulatory scrutiny. Nonetheless, for now, income-seeking investors looking for places to park their money in a rising rate environment are turning to tobacco stocks. Long-term investors, however, think this bet could go up in smoke.

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US Commercial Real Estate Market Is Hot Again

Foreign Investors Snap Up Warehouses, Rental Apartments

The US commercial real estate market is hot again now that pandemic restrictions are easing and the economy is booming. Sovereign wealth funds, pensions, and foreign investors from Canada, South Korea, Singapore, and the UK are pouring billions into the US market. Last year they collectively spent $70.8 billion on US commercial real estate. It’s the largest amount since 2018, when real estate investments stood at $94.6 billion.

International money is going to purchase warehouses, rental apartments, and spaces for pharmaceutical companies. Prior to the pandemic, overseas investors were snapping up office buildings and hotels in US cities.

Returns Are Better With Real Estate

There’s good reason for foreign investors to pour money into the US commercial real estate market. For one thing, the yields on real estate investments are much better than what they are with bonds, with interest rates low across the globe. What’s more, the economy in the US is roaring back quicker than in other countries, driving foreign interest.

Money is going toward smaller markets in the US, with 64% of the foreign investment in 2021 outside of major cities. In 2019 it stood around 53%. Investors are eyeing low-tax markets that are seeing fast growth including Dallas, Charlotte, Austin, Denver, and Nashville.

Interest Remains in 2022

Spending on US commercial real estate is projected to be strong in 2022 as well with investors purchasing properties outright or investing in US PE funds focused on commercial real estate. Investors are positioning to get their hands on more warehouses, rental apartments, and high-end office buildings, areas that are seeing a lot of demand.

Foreign investor interest is high, but one country is notably on the sidelines: China. Last year Chinese investors spent just $534 million on property in the US. In 2016 it was $19.1 billion. Investments in US properties by Chinese players had already been waning prior to the pandemic. With or without China, the commercial real estate market was on fire with foreign investors last year, and more of the same is expected in 2022.

This communication from The Street Sheet is for informational purposes only. It is not intended to serve as a recommendation to buy, sell, or hold any security and is not an offer or sale of a security.  Information contained within should not be perceived as a research report and is not intended to serve as the basis for any investment decision. Any third-party views reflected herein do not reflect the opinion of The Street Sheet. All investments involve risk and the past performance of a security does not guarantee future results or returns. There is always the potential for financial loss when investing in securities or other financial products. Investors should consider their investment objectives and risks before investing.