Thursday, June 12, 2008

Investing in Tottenham Hotspur Football Club TTNM.L / TTTHF

(Note: This write-up is prefaced by a post on investing in publicly traded professional sports teams found here, right below this post).

If someone gave you the opportunity to buy a stake in the Chicago Cubs, would you do it? How about the San Antonio Spurs? Or, *insert popular and/or successful team here*. The point is, I think everyone out there, regardless of what team they are a fan of, knows a successful franchise when they see it. And, as investors, we wouldn't turn down the opportunity to invest in such a thing. Now, Tottenham Hotspur aren't quite as dominant as the New England Patriots or New York Yankees, but they're generally the 5th or 6th best team in their league. So, think of a team that is generally 5th best overall in any given American league, and ask yourself if you would buy a stake in them if you had the opportunity. My point is: to most investors, investing in professional sports teams is usually off limits because they are private entities (not publicly traded) and you don't have the millions on hand to buy these teams. However, in England, this is not the case. Some of their teams are still publicly traded companies and you can buy as little as 1 share.

I'm an avid football/soccer fan and a regular follower of the English Premier League. So, my homework is already done, as I've been following the league for years and I know many teams inside and out. So, teams that can be bought on the London Stock Exchange are limited to: Sheffield United (SUT.L), Tottenham Hotspur (TTNM.L), Birmingham City (BMC.L), and Watford (WFC.L). Now, right off the bat we're limited in our options because we want to be buying teams who compete in England's top division, the Barclays Premier League. Sheffield United and Watford compete in the second division, so we don't want them. And, we don't want Birmingham City either because they've just been relegated down into the 2nd division this past season after a horrible performance in the Premier League. So, that leaves us with one option: Tottenham Hotspur. And, surprisingly, having only 1 option to invest in is not a bad thing at all, considering how well positioned Tottenham actually is. And, here's why:

1. Tottenham continually finish in the top half of the league and usually finish anywhere from 4th-8th place, just outside what is known as the "Big 4": Manchester United, Arsenal, Liverpool, & Chelsea. And, since all the above teams are already private, Tottenham are actually our best choice based on team performance should an outside buyer want to purchase them. On paper, they are the best available option in terms of available publicly traded buyout candidates. This past season was full of turmoil for them due to mid-season coaching changes and player transfers. But, now that they are building up their squad, they are ready to compete again.

2. They have a strong fan base & thus a strong revenue stream. Tottenham finished 3rd overall in terms of "Best supported Premier League Teams," behind only Arsenal and Manchester United. Tottenham Hotspur's White Hart Lane (their stadium), saw the total amount of people that attended matches last season: 683,370, an average attendance of 35,967 in a stadium with a capacity of 36,247. This means that their stadium was 99.23% full throughout the season. Again, I want to emphasize that Tottenham are 3rd in the entire Premier League (20 teams) in terms of best supported clubs. They definitely have strong revenue streams.

3. They've made some great acquisitions as of late. First, they brought in their new coach this season: Juande Ramos. He has previously won numerous UEFA Cup titles with his old club Sevilla, provides new hope. Secondly (and more importantly), they've signed Luca Modric from Croatia and Giovanni Dos Santos from Mexico, two promising young stars who've already proven they have talent. Basically, they've signed two very good attacking players who can only get better in order to complement the core of players they already have.

4. The stock itself is up 15% over the past year, and 664% over the past 5 years. Yes, that's correct, 664%. This reflects the growth of the Premier League itself as well as Tottenham's emergence as '5th or 6th best.' I say that mockingly because breaking into the Top 4 of English football is quite hard to do, as those teams are immensely talented. However, with Tottenham's recent signings, they are definitely sending signals that they are here to compete and are here to break into the top echelon of teams in the league.

5. Takeover rumors have begun to swirl over the past few years. The number being tossed around in one of the other rumored takeovers was £400 million, while the club currently has a market cap of £121 million. Believe it or not, there were rumors at one point that Phoenix Suns' guard Steve Nash wanted to buy the team (it's his favorite football club). After all, they are now the only publicly traded team left in the Premier League. If the trend continues, that won't last for long and they'll be bought out. And, the main part of this investment thesis was based on the identification of this buyout trend.

6. Two groups already have somewhat prominent stakes in the club, so they might want to takeover the club themselves, and a foreign buyer might not even be necessary. The current chairman's group, Enic, is the club's largest shareholder with 32% of shares. Secondly, Sir Alan Sugar, the former chairman, owns 14.6% of the shares. So, in addition to possible foreign buyers, you've got some large stakeholders who could possibly launch a bid as well.

At the same time, there are some barriers to entry & some possible downsides to this investment which need to be detailed.

1. Liquidity. It is only available on the London Stock Exchange or the Over the Counter (OTC) markets. And, unfortunately, if you're in America, this presents you with a problem. Even if you have an E-trade account with global trading, you still can't purchase TTNM because it does not trade directly on the London Stock Exchange, it trades on a secondary exchange (think ARCA for NYSE). E-Trade only lets you trade on the main exchange so this option does not exist for American investors. Secondly, even if it was available, this thing is not very liquid at all. Today, it traded just barely over 2000 shares. So, the only option American Investors are left with is to go with the OTC version: TTTHF. This trades just like the TTNM stock. But, you won't be able to track it easily since its OTC. For instance, if you pull a quote up for this, it shows that there is no volume, weird bid/asks, etc. Additionally, numerous brokerages won't let you buy OTC foreign ordinaries, so make sure you check with your brokerage.

2. Stock coverage. Over here in the states, you won't get the daily updates surrounding this name seeing as it trades in England. So, you'll have to take a proactive approach if you want to monitor the possible takeover situation. Not to mention, you'll want to keep an eye on the League Table/Standings, to see how well the team is performing (seeing as the stock will trade slightly based on how well they play). So, if you're not a soccer fan, this could become a burden. Not to mention, you can't even really track the equity you're technically invested in, TTTHF. You'll have to keep track of TTNM, the one that trades in London.

So, wrapping up. This is definitely not an investment for everyone considering the barriers to entry and the task of tracking developments. We have to evaluate this name by a different set of metrics simply because it trades differently than most equities. The closest comparison I can think of is biotech/biopharma stocks. Often times, biotech stocks trade on future pipeline and FDA approval, so you have to evaluate those equities in a slightly different manner. Tottenham is even more odd in that it trades on performance of the team, player signings/transfers, & possible takeover rumors/bids. Although the finances do of course matter, they play second fiddle to all the things just mentioned. I'm confident in this name because I'm an avid football/soccer fan and I have followed the league for years now. I am not biased because I'm not a fan of Tottenham. In fact, I'm actually a fan of a completely different team. So, favoritism obviously played zero role in my decision. I tried to look at things objectively from an outside , neutral perspective. Tottenham are easily the best available publicly traded football club left. And, even if there were more options for us in terms of publicly traded teams, I'd still choose TTNM.L/TTTHF simply because they're consistently in the top 33% in the league, they have a very strong fan/revenue base, and are the best possible option right now. Not to mention, reatil investors will never have a realistic chance of investing in the top 4 teams in the league (ManUtd, Arsenal, Chelsea, Liverpool).

This thesis is mainly based on a rising secular trend. We've seen increasing foreign ownership in Premier League clubs as new ownership groups take these clubs private. While this trend is gradually rising, we have to highlight that this is an event driven play and the timeframe for a catalyst is obviously unknown. While Tottenham has a lot of potential as a buyout target, there are other factors to consider. As always, do your due diligence before investing and see our disclaimer at the bottom of the site.

Investing in an Alternative Sector: Publicly Traded Professional Sports Teams

As investors, we're always looking to diversify across various industries and markets, especially internationally. And, this post is a result of combining two of my passions: investing and sports. In particular, I'm talking about investing in publicly traded football (soccer) teams. Now, I've probably lost my audience already haha, seeing how soccer is not exactly the most popular sport in America. But bear with me! Its the most popular sport practically everywhere else in the world. And, especially in the UK. So, we can capitalize on that.

First, let me address the rising secular trend in this segment that I have noticed over the years: increasing foreign ownership. Specifically, in the Barclays English Premier League (England's top football/soccer division), numerous American and various other foreign owners have taken clubs private. Previously, many of these teams were actually traded on public exchanges. Today, there are only a handful left that trade on exchanges. Football clubs that have been taken private by American owners include: Manchester United by Malcolm Glazer (he also owns the Tampa Bay Buccaneers), Aston Villa by Randy Lerner (he also owns the Cleveland Browns), Liverpool by Tom Hicks & George Gillett (Hicks is the American and he owns the Texas Rangers and Dallas Stars). Additionally, you've got Stan Kroenke who has slowly but surely been building up a stake in already privately held Arsenal (he also owns the Denver Nuggets, Colorado Avalanche, and US soccer team Colorado Rapids, among other things). And, this is just covering the American owners side of things. Recent developments have seen numerous other nations trying to get involved, including Dubai International Capital (DIC), who are trying to acquire Liverpool from either Hicks or Gillett. And, a few years back, billionaire Roman Abramovich bought out Chelsea and took them private. There are even more, but those are the major ones I wanted to touch on. The point is that there are only 20 teams allowed to compete in this prestigious league, and I'm fairly confident all the rest of them will be bought out over the years.

Basically, the trend here is increasing foreign ownership of English Premier League teams. And, with only a few publicly traded teams left, now is the time to act. The main investment thesis here would be to buy a stake in a successful Premier League team on public exchanges and hope it receives a bid to be taken private, thus allowing your shares to appreciate in anticipation of this bid, or outright selling your shares to the new hopeful private owners. Now, this presents a problem in that you don't want to be investing in something *solely* with the hope of a buyout. So, there's got to be another reason to own the stock. And, luckily we've found one: team performance. These club's shares typically trade on team performance and club happenings (signings, player transfers, etc). While financials obviously still matter, these stocks trade differently than typical equities. So, the investment thesis here is more macro in nature as you seek to capitalize on increasing interest in the Barclays Premier League by investors wishing to take sole ownership of the club. But, at the same time, you will need to invest in a team who realistically has a shot of performing well in the league. And, this is where my sports passion/knowledge comes in.

By following the Premier League for years now, I've been able to really get a feel for the league in terms of successful clubs vs unsuccessful clubs. I've used this knowledge as my research in order to highlight potential investing opportunities. Again, this is mainly an event driven pick based on a rising secular trend. The caveat here is that you could be waiting a long while for the catalyst to occur. However, the trend seems to be slowly building up as investors realize the investment potential in the English Premier League. Tune in tomorrow morning for the follow-up post presenting an investment idea. Click here for the follow up post.

Wednesday, June 11, 2008

Fundamentals / My Quick Value Scan

One thing that's bothered is me is I've come across blogs that post up "Oh I ran my scan yesterday..." but they fail to tell us what the scan actually is, as if its some huge protected secret. So, thought I would go over one of the main scans I run to get a quick glance at possibly undervalued equities.

This is a quick fundamental scan I run on yahoo finance, just to keep up to date weekly on what equities are nearing tempting levels. This is a value based scan, but I am NOT a deep value investor. So, the various banks or retailers that come up in this scan I'll take a quick look at, but I rarely invest in or trade those names. You have to weed through the garbage, because more often than not, there's some garbage that shows up. I'll call this scan "QuickValue". This scan has provided me with past beauties such as Ensco drilling (ESV) and more. Let's get to it, here's what you want to run in your scan:

PE < 15 (<25 if you want to loosen up the restrictions)
Return on Equity > 20%
PEG ratio < 1 (< 0.5 for extremely undervalued companies)
Price to book < 2.5 (< 1.2 if you wish to be like Benjamin Graham)
CurrentRatio > 1.5
Price to sales < 5

A few additional categories you can add:
Strong dividend growth
Low debt to equity
EPS growth of 3.3% of more year over year for a 5 year period
Strong Insider Ownership
Strong Institutional/Hedge Fund Presence

Now, as you can see, you can tweak a whole bunch of different things within that scan (omit a few categories, add a few categories, etc). I run the loose scan first and then fiddle around a little bit. Please note that I do NOT find all my companies through this scan. Companies like Apple (AAPL) and some of the fertilizer plays Potash (POT) and Mosaic (MOS) would never show up on these scans, and yet I'm invested in them. This is just one of the starting places I look for ideas in terms of value. Remember, this is a quick, loose VALUE scan.

Typically, the main things I look for in my companies not necessarily found in this scan are operating margins between 15-20%, a return on equity greater than 15%, strong (accelerating) quarterly revenue growth on a year over year basis, strong (accelerating) quarterly earnings growth on a year over year basis, a PEG ratio of under 1, a price to sales of under 5, insider/institutional/hedge fund ownership.

This is just an idea of fundamental things to look at when you're starting your research on any stock. This is literally just the tip of the iceberg in terms of fundamentals. But, I've found it to be a good starting place to generate some ideas and find some value for the value side of the portfolio. Fiddle around with some of the constraints and see what you come up with. Anyone have any other favorite scans they use pretty often?

Monday, June 9, 2008

Thermo Fisher (TMO): Critical Juncture

As you can see from the chart above, Thermo Fisher Scientific (TMO) has been forming a beauty of a triangle over the past few months. Triangles of this size usually imply consolidation before a big breakout/breakdown. And, this one certainly looks like it will breakout to the upside, given the number of times it has tested overhead resistance at around $59. But, at the same time, it very well could breakdown below its triangle given the shoddy market conditions we've been seeing. I'm in this name and have been for a while. This is not a trade for me, its an investment. TMO and MIL make up my "life sciences" basket in my portfolio. And, an added bonus is that numerous very smart hedge funds have been accumulating positions in TMO over the past few quarters. (Most notably, Blue Ridge Capital, as detailed here).

So, even though I'm personally not trading this name but rather investing in it, I'm definitely keeping my eye on the overhead $59 resistance and the trendline that is established on the bottom side. If we break below this trendline and make a lower low, I will most likely exit this name and look for a better entry point to get long this as an investment again. This is why technicals are so important and can be a great weapon to add to your investment arsenal. Even though I think TMO is a great name to own, this chart is implying a big move soon, most likely to the upside. I believe this is the case because the formation has been building for months and accumulation/distribution is showing slow and steady accumulation over the months. So, keep an eye on it, and get in it for a trade or an investment, whichever you prefer. Momentum traders would like to play this name on a move upwards of $59 on some solid volume. Whereas others might like to play it right now on todays bounce off the 50 day moving average.

All I know is that TMO is making higher lows and has consolidated beautifully over the months. Look for a move with conviction in either direction. Just let the break of the triangle dictate whether to get long or short. I know I'll be monitoring my position intently due to the nature of this market and the nature of this big formation.