How to Gamble on Sports Betting

06/04/2018 5:00 am EST

Focus: CONSUMER

Glenn Rogers

Contributing Editor, Internet Wealth Builder and The Income Investor

On May 14, the U.S. Supreme Court issued a decision that struck down a 25-year old law, which was known as the PASPA (the Professional and Amateur Sports Protection Act), explains Glenn Rogers, contributing editor to Internet Wealth Builder.

That law largely outlawed sports betting anywhere in the country other than Nevada It had been challenged in the courts by several states with the lead plaintiff being New Jersey. Now the Supreme Court has had the final say and the states have won.

As a result, any State that wants to allow betting on professional and college sports is free to do so and a number of them are planning to get started right away. A racetrack in New Jersey intends to have betting windows open in two weeks. Mississippi and West Virginia are likely next, followed by New York and Illinois.

It's estimated that as many as 32 states will have legalized gambling over the next few years. Of these, 20 states have already introduced bills that would legalize sports betting.

This ruling is a big deal for the gambling industry. A number of companies saw share prices jump on the news and by the time you read this they will surely have moved higher. But this is an enormous market. Some estimates run as high as $150 billion in the illegal sports betting market that exists today.

In Nevada alone, gamblers spend $5 billion (figures in U.S. dollars) betting on football, both college and professional, along with basketball and other sports. Because this is likely to be a bonus for the states in terms of increased tax revenue, it is unlikely at this point that many will refuse the opportunity.

There's still a chance that Congress will act to establish some federal guidelines. In fact, some participants hope it will do so in order to smooth out the differences that will emerge by allowing a free for all state-by-state implementation.

However, whether Congress acts or not it is entirely likely that legalized sports gambling is now a reality. Of course, there continues to be concern that this rollout of sports gambling will lead to corruption on a massive scale and result in athletes being ensnared in various forms of gambling scandals. Be that as it may, it's going to happen and the question now is who is going to benefit and how can we profit from it.

Interestingly, the companies with regional interests did much better than companies like Wynn Resorts (WYNN) and Las Vegas Sands (LVS), which actually sold off after the news broke.

On the other hand, Caesars Entertainment (CZR) along with MGM Resorts International (MGM) saw their shares rise. So did some of the smaller gaming companies like Penn National Gaming (PENN) and Boyd Gaming Corp. (BYD). Investors appeared to be betting that the smaller regional players would benefit the most from this ruling.

Interestingly, two of the biggest movers were technology stocks. Scientific Games Corp. (SGMS) and International Game Technology PLC (IGT), which is located in the United Kingdom, did very well. These companies provide the technology platforms that will be popular as the sports betting projects take off. Scientific Games spiked 11% on the news whereas International Game Technology was up a more modest 3.1%.

These companies are interesting for different reasons. SGMS is more leveraged to the technology sector whereas IGT gives you some exposure to Europe, particularly Italy, in that they provide a number of business-to-consumer gaming products in that country.

Both companies are involved with state lottery systems, which should help them when they are proposing gaming solutions as the states begin to roll out these new programs.

Another technology stock that did very well after the announcement was Canadian-based The Stars Group Inc. (TTSG). I don't closely follow this stock, but it appears to be well positioned to benefit from this new opportunity in that it offers a number of poker sites and sports betting programs known as Sports Book, which would seem to be a natural under this new regime. It bounced up over 9% when the news was released.

The easiest way to play this whole sector is through the VanEck Gaming Vectors Gaming ETF (BJK), which holds many of the securities mentioned. Is now trading at slightly below its all-time high. The units pay an annual dividend in December (it was $1.077 in 2017).

This ETF owns 45 gaming stocks, with Galaxy Entertainment Group, Las Vegas Sands, Caesars Entertainment, and MGM Resorts among the top positions. It's an international fund, with about 42% of its assets in U.S. companies, 17.5% in China, 12.5% in Australia, and the rest widely distributed. Return for the 12 months to the end of April was almost 22%. The expense ratio is on the high side for an ETF at 0.65%.

This fund should start to see fairly strong cash inflows as the impact of this Supreme Court decision becomes well known and more investors rush to get on board. Action now: Buy VanEck Gaming for broad exposure to the gaming sector.

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