Left Brain Thinking: October 7, 2020

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high yield bonds with the potential for dramatic price appreciation. Today we're gonna be talking about a very different class of COVID stocks, not the popular stuff that everybody's been discussing, but some other COVID ideas. Joining me right now to do that, Noland Langford, Chief Executive Officer at Left Brain. Noland, great to chat with you again.

Thank you, Chuck. And as usual, very excited to be here.

Today, we wanna focus on some COVID ideas that highlight the creative thinking because the standard thinking in this COVID environment has been get the work from home, office at home, who's going to help you with that technology, that kind of stock. And quite honestly, I've heard that so much that— Yeah, my brain hurts. So I want to put a left-brain lens to that. You've got some creative right-brained ideas where it's not about just working from home. One of the companies you've talked about is Zillow Group, where the idea is less about the home technology than it is about the home itself.

Right? That's exactly right. A few years ago, Zillow was an online subscription business where they just tried to drive traffic to their site by showing you images of homes, and what they really were trying to do was sell advertising or subscriptions to agents to drive traffic. 12 or 18 months or so ago, they switched the business model somewhat. The sales growth in that area shrunk to a little over single-digit numbers. At that point, they did a little restructuring, expanded their business model, and decided to really go into the, for lack of a better word, the flipping business, where now it becomes a seamless experience for the seller, where Zillow will now make you an instant offer to buy your home, so you can actually sell your home worry-free. Then you can actually go out, connect with an agent, buy your next home, and not worry about selling yours. Zillow buys it for you, makes an instant offer. They do the work of repairing the home and relisting it. They have a very small margin for doing it, but it's a very sticky business and it really drives growth to the rest of their model. And it's really starting to take off. They're about 4 months through the transition. It's really starting to show legs and they're expanding the city that they have coverage in. So it's a name that's very interesting to us and it's on our chosen list.

People think real estate and they're thinking the commercial side and that's going to be real problems. But housing, homebuilders, housing stocks, that has been a market sweet spot. So a different take on something that's been a pretty good area.

Absolutely. And unlike homebuilders, where they generally make revenues once when they sell a home or when they build a home, and then they have to go look for a new land tract, Zillow's model actually makes money even if the existing housing stock doesn't expand. And the amount of transactions just increase. So it's a business model that could have really good margins. And again, this is an innovative business model. We've never seen a national player with scale, with a public market balance sheet, that can come in and offer consumers a seamless housing experience. I think consumers would love that. And with the Zillow report, They're actually bearing that out.

In fact, another stock you're looking at is a different home trend, and that's the workout from home trend. And while it has been very popular, conventional wisdom might be that it's getting played out, that as we get back to where people can go out and gyms can open, that's around the time that you'd give up on some of these stocks. But you believe that Peloton— well, it doesn't have legs, it has wheels, right?

That's really good. I like that, Chuck. Legs, wheels. I like that. One of the things that we follow and we really pay attention to is on the quarterly earnings releases, we really drop everything, clear our schedule, and we really tune in to the quarterly analyst calls. We don't listen to them live, but I generally listen to the transcripts or we read them, and our entire analyst team does by their preference. Really what we're listening for is we're really looking for businesses where their business model is not only proven, but growth is actually accelerating. That's what we have with Peloton. Maybe in the past there was this competition where Peloton equipment at home competed with gyms, but then after we're all sort of stuck at home, people actually, I think, got used to exercising at home. Even though the gyms will reopen, not everybody will be comfortable going back to the gym immediately. And those that do probably won't go as often immediately. So I think that sort of cements Peloton's business model for the next generation.

Well, let's now turn to a very different subject because one of the things that's happened through the pandemic is, of course, people who couldn't get their sports fix and sports betting fix wound up coming to the market and becoming stock investors and stock jockeys. But you're looking at going back towards sports now that we've got more sports happening.

Yes, surprised me. I was with my trainer. I had not seen him in a while. I had been working in Miami where I had been since they had started the quarantining a few months ago. And the first thing he told me this morning, I checked in with him, he and I are huge fantasy football fans, and I asked him, "Alex, what's the record? It's all that matters. You 3-1? You 2-2?" He didn't even want to talk about the squad. All he wanted to talk about is this new sports betting he had been doing on games and how it had consumed him and his buddies for the last few weeks. And then it occurred to me, Chuck, I've been stuck in Florida and sports betting, which is the biggest thing that has happened— nobody has paid attention to it— but now betting on games, which used to be taboo and only legal at the physical sportsbook in Vegas, is now able to be bet online in specific states. Florida is a state where it's not legal or permissible yet. But here in Illinois it is. And from what I understand, he lit up like a 10-year-old at Christmas. I think it's going to be catchy and sticky in both DraftKings and Flutter Entertainment, who owns FanDuel. I think they're going to have a duopoly, and I think they're going to be a gushers of cash for a long, long time.

So obviously it's not just as simple as, hey, somebody gave me a great idea, let's go do it. You are looking at the numbers here, and I mean, these are going to be going from, hey, we were the fantasy companies to we are the sports betting companies, not just on fantasy, but on, you know, you want to lay your bet on who's going to win the Super Bowl.

Yeah. If you think about casinos, they make a lot of their money from the sportsbook, and they have a monopoly, a local monopoly, because you have to go to Vegas and that's the only place you can bet. But they have a lot of competition. If I can sit on my couch in Chicago and place a wager, and now they compete with everybody in every state, and now it's not taboo. I don't have to be the bad guy at a bar with a paper bag. It's legal, and I can do it at home. And what these platforms have is they have user experiences where these users like me have had wonderful experiences for the last 2 or 3 years using technology to play fantasy sports, All they have to do is send a note and tell you, hey, we now do sports betting, and all you have to do is click a button. Your profile is already in there. It costs them almost nothing to gain new clients. Their customer acquisition cost, at least for people that are on the platform already, is very, very low. And yes, you're right. I think as more states roll this out, we have every reason to believe with COVID states' budgets are probably going to be cramped. and I think they're going to be in a rush. This is one that they can roll out, not have any public pushback. I think you're going to see more states adopt this, and I think these two businesses are going to do very well for a very long time.

It's DraftKings, DKNG, and Flutter Entertainment, which in the U.S. trades under PDYPF. Noland, great stuff. Thanks as always. We look forward to doing this with you again next week.

It's always great, Chuck, and thanks for catching up.

Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations but are designed to engage your brain. Please do your diligence before making any financial transaction. I am your host, Chuck Jaffe. You can learn more about my weekday podcast at moneylifeshow.com, and you can find me on Thursday, October 8th, making a cameo appearance at Left Brain's online special event about election-proof stocks. Learn more and find out how to get in at leftbrainir.com. The firm's on Twitter @leftbrainir. Thanks to my guest, Nolan Langford, Chief Executive at Left Brain Investment Research. Left Brain Thinking's available for you every Wednesday. Please subscribe on your favorite podcast app. And until next week, stay safe, everybody.