For the last few years, we’ve been singing the praises of sports teams (primarily major league North American teams) as investments. We own stock in Madison Square Garden (MSG) and its sister company MSG Networks (MSGN), which together own the New York Knicks (NBA) and New York Rangers (NHL). We invested in Liberty Braves Group (BATRA), which owns the Atlanta Braves MLB franchise. We also recently bought Formula One Group (FWONK), which owns the Formula 1 racing series.
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On Monday, it was announced that the Houston Rockets NBA franchise sold for $2.2B. This was 33% higher than Forbes’ $1.65B estimate of the value of the franchise. Sports franchises almost always sell for a sizable premium above their Forbes’ value estimate. When we bought our shares in the Knicks, Rangers, and Braves, we bought them for well below Forbes’ valuation estimates. We think the recent sale of the Rockets illustrates the attractiveness of sports teams as investments.
While there are significant changes happening in the television, media, and streaming ecosystems, we think the changes will ultimately benefit major league sports teams. Over the last year, only two types of programming saw ratings increases: news (thanks to Donald Trump) and sports. In 2015, 86 of 100 top-rated TV shows were live sports. (Back in 2005, only 7 top-rated shows were sports. Just 7!) As the new entrants in the media world try to differentiate their products, sports programming rights will be a valuable asset. Of course, they’ll be a valuable asset to the traditional media companies looking to retain viewers.
We are already seeing some of the new media entrants dip their toes into the sports programming markets. Twitter (last year), Facebook, and Amazon have all purchased packages of major league games.
Last year, the five big traditional media companies generated about $25B in free cash flow. Any increase in the amount they bid for sports rights will have to come from this yearly cash flow. Now, if you add in the new tech companies that are entering the media world, you have a total of $81B ($133B if you include Apple, which we do not believe should be included at this point) in yearly free cash flow. That is a 220% increase in the amount of money that is now available! To be clear, we don’t think sports rights are going to increase 220%. What we are saying is simply that more bidders with deeper pockets should bode well for the prices that will be paid for sports rights when TV contracts expire.
In other news, investors may have noticed more activity in their portfolios than usual over the last few months. We have been making a concerted effort to get rid of our “losers” rather than hanging on. When a company, or even entire industry, reports challenging conditions or a changing competitive landscape things are unlikely to improve rapidly.
In fact, the 10 to 20 top-performing stocks regularly account for half the market’s gain each year. It’s not a bubble so much as it’s evidence of how outsize economic gains tend to accrue to a small set of “good” companies while a vast majority of companies operate in extremely competitive industries where durable economic advantages are fleeting. Our goal is to attempt to build a portfolio of companies with these durable advantages. Once it becomes clear a company doesn’t meet the requirements, we think it’s better to get rid of it sooner rather than later. This is why we sold our media company stocks and companies such as Verizon, which faces technological changes that are eroding the value of its spectrum as well as a wireless price war. It is why we’ve sold companies after they’ve made dumb acquisitions, such as United Technologies when it wildly overpaid for Rockwell Collins.
Our goal is for client portfolios to be invested in a basketful of excellent companies.
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About Our Portfolios
The Capital Appreciation Fund and the Dividend Fund are innovative, investor friendly alternative to traditional actively managed mutual funds called a Spoke Fund ®. We can also customize portfolios for clients seeking less risk and volatility by including allocations to other asset classes such as bonds and real estate.
Spoke Funds are significantly less expensive and more transparent than a large majority of mutual funds. Both portfolios are managed for the long term using value investing principles. Fees for both portfolios are 1.25% of assets annually. That figure includes both our management fee and all trading costs. We try to minimize turnover and taxes as well in both funds.
Investor accounts are held in your name (we never take investor money) at FOLIOfn or Interactive Brokers*.
For more information visit our website.
*Some older accounts may be custodied at TradePMR.
Disclaimer
Historical results are not indicative of future performance. Positive returns are not guaranteed. Individual results will vary depending on market conditions and investing may cause capital loss.
The performance data presented prior to 2011:
- Represents a composite of all discretionary equity investments in accounts that have been open for at least one year. Any accounts open for less than one year are excluded from the composite performance shown. From time to time clients have made special requests that SIM hold securities in their account that are not included in SIMs recommended equity portfolio, those investments are excluded from the composite results shown.
- Performance is calculated using a holding period return formula.
- Reflect the deduction of a management fee of 1% of assets per year.
- Reflect the reinvestment of capital gains and dividends.
Performance data presented for 2011 and after:
- Represents the performance of the model portfolio that client accounts are linked too.
- Reflect the deduction of management fees of 1% of assets per year.
- Reflect the reinvestment of capital gains and dividends.
The S&P 500, used for comparison purposes may have a significantly different volatility than the portfolios used for the presentation of SIM’s composite returns.
The publication of this performance data is in no way a solicitation or offer to sell securities or investment advisory services.
Article by Ben Strubel, Strubel Investment Management