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Tuesday, August 28, 2012

Stock "Flops" and Underlying Fundamental Value

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"Manchester United Latest Sports Stock Flop?" from Chris Preston at Wyatt Investment Research is getting picked up around the sports business sites.

The line?  The ManU stock offering was initially expected at $16-$20 per share, but it opened a few weeks ago at $14 and has fallen 5% since then.  [That's all the way down to $13.30.]  According to Preston, the drop in price is "not a good sign".  In fact, he lumps it together with the Cleveland Indians (MLB) and the Florida Panthers (NHL) earlier offerings as "fails":

"Manchester United wouldn't be the first sports stock to fail, should things continue this way.  The two most recent sports franchises to go public on a U.S. market also failed."

Perhaps Preston is just trying to warn traders in this stock about a likely outcome.  On the other hand...

No pro sports team stock in the U.S. has ever been a true equity offering; there were never any control rights that went along with any of these offerings.  This makes each stock certificate simply "suitable for framing" memorabilia of the first order and that is surely how all buyers treated them.  And the same is true of the ManU offering.  None of these offerings is like any other stock offering, generating information about the underlying "fundamental value" of the firm (discounted present value, for example).

While souvenir store prices would probably put the certificates in the $30 region (and more than that "authenticated" and framed), all the ManU owners did was bypass that middle man and sell the souvenirs directly to the public.  Owners reap the value of the initial offering sale at zero risk.  I read in another article at the Huffington Post that 16.7 million shares went at the original $14 per.  Let's see.  No control rights are offered, there is zero risk to the owners, and 14 x 16.7 million = $234 million is generated on a souvenir sale.

Reading on in the Preston article, his portrait of "failure" of the Indians and Panthers stock actually was a failure to keep pace with a hot stock market.  The Indians stock only rose 50% in two years but in a 123% market increase and the Panthers stock only tripled in two months with positive growth for five years.

But it seems to me the relevant comparison is to memorabilia prices, not to stock market indexes; again, these sports team "stock" offerings have nothing to do with the underlying fundamental value of these teams.  The price of memorabilia has nothing to do with the value of the team itself.

My favorite example is a recent Green Bay Packers "stock offering".  The Packers, of course, are already completely publicly owned and their operations are defined under that original agreement.  No power over the Packers can be included in the definition of the stock, so an additional offering is again just a memorabilia sale.  The Packers also made millions on theirs.  Interestingly, I can get a GIF of the stock certificate for free.

Preston closes with, "It's too early to bury MANU stock just yet... But it's off to a rather ominous start."

Fair warning to memorabilia traders.  But I'm sure that ManU owners are quite happy with the piles of easy cash they just generated in a matter of weeks.

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