Justin’s note: The U.S. Supreme Court made history in May, when it struck down a federal law that barred single-game gambling in the U.S.
As a result, each state now has the power to license, regulate, and tax the sports betting industry within its borders.
Nobody knows more about this opportunity than Strategic Investor editor E.B. Tucker. So I recently got E.B. on the phone to learn the best ways to turn this big decision into fat profits.
Justin: E.B., the Supreme Court made history with its decision on gambling. Why should investors care about this?
E.B.: So let’s first make sure we’re clear on what the Supreme Court did. On May 14, the Supreme Court heard an argument challenging a 1992 federal law—the Professional and Amateur Sports Protection Act—banning sports betting. Like most federal laws, this one accomplished the exact opposite of what its name implied.
This act did nothing to safeguard the integrity of competitive sports. After all, sports betting on every imaginable outcome was still legal in licensed venues.
The Supreme Court case argued that the law was unconstitutional, violating the 10th Amendment. Specifically, the Constitution didn’t give the federal government the right to legislate gaming laws. Therefore, it belongs to the states. In a 6-3 decision, the court agreed.
Now, this ruling does not completely legalize sports betting. Instead, what it does is give each state the power to license, regulate, and tax the industry within its borders.
Justin: And how have state governments responded to this Supreme Court ruling?
E.B.: Delaware made gambling legal on June 5, just weeks after the court decision. It took in $322,000 worth of sports bets in one day. And the only games playing that day were regular-season Major League Baseball games.
There was no World Series or Stanley Cup Finals. None of that stuff. And they still took in more than $300,000 on a Tuesday… when most people were at work.
Pennsylvania, New Jersey, New York, Connecticut, West Virginia, and Mississippi also have legalization legislation in the works already. Another dozen states have earlier-stage efforts in progress.
One by one, the floodgates will open. States realize sports betting dollars already flow through illicit hands. The chance to regulate, tax, and control that revenue is something they can’t pass up.
Justin: Just how big do you think this market can become?
E.B.: It’s impossible to know how much revenue legal sports betting will bring in.
All we have are estimates to work from. We pored over studies like the one management firm Ernst & Young carried out on sports betting. Based on all the available data, we think $250 billion in wagers could flow through licensed channels when sports betting is fully legal.
That sounds like a huge number. But the American Gaming Association estimates that $10 billion was wagered on this year’s Final Four men’s college basketball tournament. And about $4.7 billion was wagered on the Super Bowl.
Justin: And almost all that money flows through the black market.
E.B.: You’re right. About 97% of this betting happens underground. The rest—or only 3%—happens in Nevada-licensed gaming casinos that have sports cages. So all these numbers are estimates, but they start to look realistic when you add everything up.
Justin: Who will be the biggest winners in all this?
E.B.: Sports teams stand to make a killing from this. That’s because gambling increases people’s interest in watching sports games.
Betting increases people’s attention span and desire to be at the game. It encourages people to participate in the fan experience. That’s good for ticket sales and TV ratings.
And this couldn’t come at a better time. I’m sure you’ve heard about ESPN having trouble renegotiating its TV rights.
There’s a lot of trouble with that right now. For years, TV rights have been an important income stream for professional sports team owners. ESPN lost 500,000 subscribers in April alone. While a lot of this is a result of “cord cutting,” it still means less revenue for the network. That, in turn, means less money available to pay teams for the right to broadcast games to a shrinking audience.
These are critical streams of revenue for professional sports teams because they’ve kind of pushed to the limit what they can pull out of advertisers and TV contracts. They’re trying to figure out how they can fill this void.
So this comes along at a great time for professional sports teams.
Justin: But what about the rest of us? How can everyday investors cash in on this?
E.B.: Well, neither of us owns a sports team. And I doubt that either one of us wants to become an avid bettor on sports games.
So we see this as an investment opportunity. And we’re covering it from all angles in my Strategic Investor newsletter.
What we found is that all these states that are passing these bills are requiring the licensed operations to flow through a business that has a brick-and-mortar presence in the state. So if you’re in Pennsylvania and you want to take sports bets—whether it’s on an app, or online, or in person—you’ve got to have a physical presence to get that license.
We’re focused on all the states that have early legislation in the works.
There were some states that had legislation ready to go in case the Supreme Court came out in favor of legal sports betting. So we looked at those states. There’s really six that we focused on: New Jersey, New York, Connecticut, Delaware, Pennsylvania, and West Virginia. As I mentioned earlier, Mississippi also has regulatory legislation in progress, but we felt the northeastern states had more investable opportunities in this case.
We found casinos that operate in those states. But we didn’t look at casinos, like MGM, which are predominantly in Las Vegas with their gaming activity. Remember, Nevada already had licensed sports betting, so this landmark decision doesn’t do much for casino companies focused there.
We looked at casinos that you don’t hear much about. Nobody takes a weekend trip to the Iron Horseshoe in western Pennsylvania, right? That’s the kind of place where regular people go and have a nice time on a Friday night. It’s also the kind of place where you can easily install a sports betting cage, take sports bets, and then scale that into online (and mobile) betting.
This is all going to be good for team owners. It’s going to be good for the value of sports franchises. It’s going to be good for average people who want to place a small bet on their home team and don’t want to risk going to jail or having their knees broken by a bookie to do it.
Justin: What kinds of companies are you looking to recommend in Strategic Investor?
E.B.: We’re looking at the first movers… companies that are going to be able to expand their online footprints.
There are early indications that online sports betting will be limited to people who are physically in the states that allow it. This is fairly easy to police these days. Mobile betting apps will use the phone’s location to determine if a bet is lawful.
The stocks we’re looking at will benefit because they already have brick-and-mortar casino properties in states pushing to be the first to legalize. Our initial research shows online betting sites will need a physical presence to apply for a state license.
Being a first mover in legal sports betting means huge profits.
Justin: Great stuff, E.B. This definitely looks like a huge opportunity. Thanks for taking the time to break it all down.
E.B.: No problem, Justin.
Justin’s note: E.B. has found three specific companies primed to soar from this tidal wave of legal revenue. Strategic Investor subscribers can get all the details in his latest issue.
This investing idea and these explosive picks are still flying under the radar today. If you’re not a subscriber to Strategic Investor, you’ll want to sign up before these stocks take off. Click here to learn how you can access E.B.’s top names today.
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