Sports Betting, ETF Redemption, ‘Bips’

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So you just want to jump into it, which would be, um, well, you can do summertime and the listener questions are jumping. That, of course, from the opera Porgy and Bess, part of a new cold open series, Operatic, that we're doing for this week only. It's a one-time thing. Hi, this is the Baron Streetwise Podcast. I'm Jack Howe. With me as always, our audio producer, Meta. Hi, Meta.

Hi, Jack.

I cut you off. You were saying something. Was it something better than I had?

Absolutely not.

What are we going to be talking about today? We've got some listener questions. Thank you all for sending them in. What do we have? What are the topics? Give us a little tease. Just one word each.

All right. Sports betting.

Okay. That's your— we'll hyphenate that. We'll call that one word. Go ahead.

ETFs.

Yep.

12-year-old hyphened. We would have accepted kids, but okay, kids and percentages.

Now that's— you should have— we should have led with that one. I mean, nothing gets—

it's a hook. Yeah.

Okay, great. And it's 4 that you mentioned. Now we usually do 3 listener questions on a listener question episode. We're going for 4 today. It's a pretty big departure. What's got you confident that I can get to that many without rambling on. I've installed a little buzzer, but it's an electric shock. Yeah.

Yeah.

Okay. All right. Let's try it. Who's up first?

First, we've got Nathan calling in from Costa Mesa in California.

Oh, so it's a long distance call is what you're saying. I can remember a day when he might've spent 75 cents on his call. I think it's probably thrown in with his plan now. Let's hear it.

I would really love if you guys could do another podcast on the gambling industry. With players like DraftKings and Caesars Entertainment and all those sorts of things and the growth of online gambling as sports betting gets legalized in more and more states. I think it would be really interesting to get another view of that market, how it's going to grow and what the general timeline looks like because there's still a lot of states that haven't legalized the industry yet, how that's going to be shaping up over the next few years. What it could pay out as a potential investment opportunity.

It's a great idea, Nathan, and thank you. We'll definitely get back to another episode on online gambling. Let's say a few things on the subject for now because there's news. Disney is getting into sports betting, sort of. You know, Mickey Mouse isn't going to be walking around taking action on the over-under for the Twins game. We're talking here about ESPN, the sports cable channel that is owned by Disney. It has long been one of the most profitable properties in cable television, but the writing is on the wall for people canceling their cable subscriptions, and people are wondering what's next for Disney making more money off of ESPN. Will they get into sports betting, which has been a hot area? Now we have the answer. On Tuesday, ESPN announced a 10-year deal with Penn Entertainment. That's a casino company. They're going to create an online sports betting brand. It'll be called ESPN Bet. Penn will pay ESPN $1.5 billion. They get the name, access to ESPN talent, and so on. And ESPN also gets options to buy $500 million in Penn stock. Matter, we have touched on sports betting this podcast, I think I'll say 1.5 times in the past. We did an episode on DraftKings. When was that?

That was back in May 2021. We had an interview with the CEO, Jason Robbins.

Right. And then we, there was also one that we did on Dave Portnoy, uh, who's the founder of Barstool. When was that?

That was one of our first episodes. It was back in June 2020.

Right. I'll count that as one half about sports, cuz that was really about his participation in sort of wild online stock trading. Barstool Sports is a media company that caters to, I'll say, young male Gamblers. And Dave Portnoy is— how does one describe Meta? He's a big personality.

Sports reporting live from the red carpet.

AVNs, the porn, the pageantry. He says some outlandish things at times. You don't understand the technology and don't grasp the implications of what the FBI is asking Apple to do.

Is that glitter on your eyes?

I don't see the point of that question. I think this is done. Says some things that many, I'll say most people would find objectionable.

So just to give people an update too on what's happening at halftime, uh, I'm going to try to tackle one of these girls.

I don't know who, but he does have this very fervent base of fans and he's gotten a lot of attention over the years. And this is relevant because he did a deal with Penn Entertainment initially. Penn is known mostly for, I'll say, slot machines and kind of older folks. And they bought a stake in Barstool Sports back in 2020, and that was meant to get them, A, into online sports betting, which is now hot because the Supreme Court has allowed states to legalize it if they wish, and it's spreading quickly and it's a big business. And B, it was supposed to get Penn a younger crowd. And I don't know that it has really taken off in the way that Penn had hoped, and also Portnoy from time to time gets himself in hot water for things he says. And so now Penn is selling the company back to Portnoy and instead making this big investment to get ESPN's name and talent involved. So question number 1 is, will this propel Penn to new riches? And question number 2 is, what does it mean for DraftKings? Oppenheimer, the investment bank, has thoughts on both. It wrote in a note this past week, we see a minimal competitive impact to DraftKings based on having a better combination of product, OSB brand, that's online sportsbook, sports betting in other words, and most importantly, much higher CAC efficiencies. Analysts love acronyms. CAC stands for customer acquisition costs. In other words, how much you have to spend on marketing and the like to get new customers in the door. Oppenheimer argues that Penn is basically renting, as it puts it, this other brand with a much higher distribution, which is good, but it still has to get the customers in the door. And it seems to have struggled to do that with Barstool getting less than 5% market share. In Oppenheimer's view, similar content partnership results have been mixed at best, as it puts it. It says that customer bases are getting stickier. Everyone knows what I mean by that, right? Not, they're not literally getting stickier. I mean, if they're watching sports and they're eating maybe like teriyaki wings, they might actually be getting stickier. But sticky here means that customer retention is improving. Getting users to switch, as Oppenheimer says, is becoming more difficult. It writes, trying to get users to switch sportbooks, even with promos, could prove difficult for Penn. Which is committed to spending $150 million annually. Additionally, we see current Barstool users not being loyal to the new ESPN Bet product. So there you have it. If you had to sum up that view, it seems to be what really matters is the quality and popularity of the betting product, not necessarily the content deal. For now, anyhow. When I look at the stocks we've just mentioned, I don't see anything super exciting. Penn Entertainment trades under PENN. It's very cheap relative to what had previously been projected earnings, but those earnings estimates will almost certainly have to be adjusted for this new deal and the new spending associated with it. The future there is uncertain. DraftKings seems to have the hotter hand. The problem there, a couple of things for my taste. First of all, the stock is quite volatile. How well you've done in it depends greatly on when you bought it. If you bought it a year ago, you're up more than 60%. You're crushing the stock market and you're happy. If you bought it 3 years ago, you're down 15%. You've missed out on a tidy profit in the stock market and you're sad. And there's no free cash flow yet. The company has been burning cash for several years. It is projected to swing to positive free cash flow in the years ahead. I just think it's gambling, right? That's supposed to make good money all the time, and it's online gambling, so you don't even have to build casinos. I remember my conversation with the CEO, and I take his point that when you add new states, you have to invest money to get the product up and running. And so that sort of continuous investment as they add new states, he views it as a long-term good thing, and the money from that will flow eventually. The stock is, let's say, ambitiously priced at about Let's see, we can't really go by earnings or free cash flow. Let's call it about 7 times this year's projected revenue. It's risky for my taste, but Oppenheimer, as I said, likes it. And that is sports betting. Meta, one down.

Woo-hoo!

What do we have next?

Uh, we have Bill.

The Bill?

The Bill.

This is going to be good. Hey Jack, this is Bill from near Retirementville. Hey, we enjoy your well-researched reporting and dry wit delivery. Question: What is the prominent driver of a particular ETF price? Is it the funds flow from investors into or out of that ETF, or is it the price action of the underlying stocks the ETF tracks? Also, anticipating your answer might be both, where can an investor learn more on this subject? Thank you and hi to Meta. Thank you, Bill. What kind of a wishy-washy guy would I be to say both? It's mostly the price action of the underlying stocks, although it's a little bit of both. The answer to your last question, where can you go to learn more? Well, you can always count on the Investment Company Institute to have a thing or two to say about mutual funds and ETFs. And they have a page there called ETF Basics and Structure FAQs. If you'd rather watch a video, Fidelity has made one sponsored by BlackRock. That's a major ETF company. That one's designed for a pretty broad audience and uses a lot of metaphors. Don't let the phrase creation and redemption confuse you. No, it's not a prison movie narrated by Morgan Freeman. And while it may sound like a complicated process, it's not rocket science or string theory. That's got to be Shawshank Redemption, right? Because creation and redemption. Morgan Freeman? Is that the reference?

That's the only one I can think of.

It's got kind of a sad ending.

Yeah.

And now I feel like I might just need a moment. What were we talking about again? ETFs. Bill, let me put this in terms of prison movies. Now, you know what? Let me just tell you about ETFs. If we're talking about a regular mutual fund, what's called an open-end mutual fund, it's simple. At the end of the day, you take the prices of the underlying stocks and you use those to determine a value of the fund. And that's your share price for the day. One price per day. With ETFs, as you know, they trade all day like stocks. You get constant pricing. So what is it that makes the prices go up and down? Well, we know that ETFs are linked to the value of the underlying stocks. They rise and fall with the indexes they're supposed to track. But how do they do that? This is how. There are people out there called authorized participants, and by people I mean generally big financial firms, and they're given the right to create or redeem shares of the fund. They can transform shares of the fund into the underlying stocks and vice versa. And they do that all day long, and that's helpful for people adding money into or taking money out of the fund. It's also helpful for keeping the ETF closely tied to the value of the underlying shares, because if those authorized participants see a big difference in price between the two, they're going to take advantage of it. They're going to try to make a profit. They're going to buy one and sell the other. And that buying one and selling the other all day constantly keeps the two prices close. Another way to think about it is that a typical stock has a fixed supply. There are a certain number of shares outstanding. With an ETF, the supply is adjustable on an ongoing basis. As people add more money to the ETF, it doesn't necessarily have to pressure the price meaningfully higher because the authorized participant can just create new shares of the fund. However, if we're talking about a niche fund and we're talking about stocks that maybe aren't that liquid and there's a tremendous amount of money flowing into the fund, then I think that that money through all the buying and the underlying shares could push shares of the prices higher. So fund flows, like, I guess could have an effect ultimately in an indirect way on the price of the fund, but generally it's the price of the underlying stocks. Did that make sense, Meta?

Yeah.

Should I quote The Green Mile? Would that be—

Probably not right now, but let's see how it goes.

Okay, 2 down. Should we take a break here?

Yeah, it's time for a break.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.

Welcome back to the big listener question special. 2 down, 2 to go. Meta, How are we doing on time? We have to pick up the pace.

I don't want to hurry you, but I also do not want to not hurry you.

Got it. Not, not hurry. Who's up next?

Up next is Matt.

Hey, Jack. Big fan of the show, and I really appreciate the way you make the world of finance and investing news easily digestible and entertaining for the average investor. To that end, I was recently listening to an episode with my 12-year-old son, and he began to ask a lot of very good questions about investing basics. And I was curious, as a dad, are there some resources out there? I'm thinking primarily books, podcasts, or other media, but primarily books that would be good for an early teenager to kind of help build his knowledge of the basics and expand on that going forward. Thanks.

Thank you, Matt. I don't really have a good answer for this question in the holster. I should. I mean, there are a lot of books out there about investing for kids and teaching kids to invest and so forth. I don't have a particular title for you. I'll tell you how I learned, and it was, it might have been around 12. It was middle school anyhow. I started looking at the Wall Street Journal, mostly because it sounded impressive and I wanted people to think I was smart when they saw me reading the journal. But I noticed that in the back of the journal, there were these tables with a lot of numbers. And it just seemed preposterous to me. You have all these stories about what's going on in the world. Who in their right mind is turning to these tables and just looking at lists of numbers? It was like a code. There had to be something that the numbers mean. And so I wanted to find out what the numbers mean. And I bought a book and it was decidedly not for kids. It was called How to Buy Stocks. And I'm looking at it on Amazon and it says over 7 million copies sold. So I guess some other people read that one too. Anyhow, I'm not sure that's the best approach. I mean, I wanted to know when I was looking at the paper, one column says bid, one column says ask. So I learned about the technical details of what those things mean. But I think if you want to teach a kid about investing in stocks, you're better off talking about businesses. That's how I usually describe it to adults. If someone comes to me and says, I've never bought a stock before, well, how do you tell You know, some people have asked me, what does it mean when you see the numbers on the financial TV? How do you tell which one to buy and so forth? I tell them these are not abstract things dancing across the screen somewhere. Stocks represent businesses. For every stock you see, there's a company out there that at one point in its past wanted to raise money and went and sold part ownership in itself to the public. And now those shares are traded on an exchange somewhere, and anyone can come along and buy part of this company. And as a part owner in it, They're going to participate in the profitability of the company and how that changes its value over time. And plus, the company might pay out some of those profits as dividends. And that's basically it. Sometimes you hear people talk about investing in stocks as though it's like really risky, something not the average person should try for themselves. But then if you hear someone saying, well, I've left my job, I'm going to start a small business, I'm going to open a sandwich shop, you say, hey, great for you. But that's like putting a lot of your savings into one business. I mean, it's a great idea. Good for you. Hope you sell a lot of sandwiches. Wish you the best. But it's kind of the same thing if you're buying shares of stock, you're buying businesses. I don't see it as being particularly risky if you go about it the right way and you're buying high-quality businesses and you're holding the shares for a long time. But of course, choosing individual businesses is not for everyone. So you can easily buy a basket of businesses in the form of a mutual fund. And that can be a fund where either someone does the picking of the businesses for you. That's an actively managed fund. Or it could be a fund where it's just a set basket of businesses that you hold over the long term to participate in the overall growth of the market. That's an index fund. If somebody just wants to invest and they don't really have a deep interest in learning about it, I say an index fund is a great choice for you. But people can also buy an index fund and then tinker on the side. They can own a stock or two that they believe in over the long term. Maybe that's what you should do, Matt. Put a little bit of money in an index fund and a stock or two with your son. Get a book if you like. It doesn't have to be a kid's book. Get a grown-up book. You can read it and explain it to your son, or you can both read it together. I took a tour several years back of the Vanderbilt Mansion, which is in a town called— I think it's around Hyde Park, New York, or thereabouts. And I remember the tour guide was talking about Cornelius Vanderbilt, who was the start of this great generational wealth, and how he got his start And he left school at the age of 11, and he got a job working on his father's ferry in the New York Harbor. And by the age of 16, he had started his own ferry service. That's not part of my advice. I don't think your son should leave school and start a ferry service. I mean, I don't really know the ins and outs of that business, but it's just to say that young people are capable of pretty big things. So at 12, your son is not only ready to learn about the stock market, he's ready to learn a heck of a lot about it. Good luck. One question left, Meta. I'm, uh, I'm having a little snack to keep up my strength here.

What's your snack?

Trader Joe's dried mandarins. I've never seen this before. I don't know why it's in my kitchen, but it says soft and juicy on the package. Soft and juicy mandarins. I mean, like, a mandarin is soft and juicy if you're buying it dried. I'm not sure that soft and juicy is what you're looking for. What do you think?

You've said soft and juicy many times.

I feel like shelf-stable and already peeled is what it should say, but you know, it's soft. I'll give it that. It ain't juicy. Sorry, Trader Joe's.

They're actually a staple in my household. Those very soft and juicy Sore subject.

Now I've done it. Okay. Question number 4, not about fruit at all. Who do we have?

Troy from Vancouver, Canada.

Hi, Jack. I was a regular listener to your show from Jacksonville, and I'm enjoying it just as much now that you're in the metaverse. My question is about the point system used in financial media that I find totally confusing. This Friday, the Dow was up 43 points. The S&P was up 5 points and the NASDAQ was up 21 points. I honestly don't know which one did better. Next week, the Fed might raise rates by 25 basis points. Why don't they just say a quarter percent? I'm wondering if it's kind of like gambling in a casino where they make you use points and tokens so you forget you are playing with real money.

Troy, great to hear from you. Oh, I blew out the microphone, didn't I? I got too excited about Troy. Troy, Troy, it's great to hear from you. I see what you did there. With Jackson in Jacksonville, a meta in the metaverse. I heard from Jackson the other day. He's doing great. And thank you. Your question is all about points. Now, the first one is straightforward. There are different stock indexes out there. You see this one going up this many points and that one going up that many points, and you can't tell which is up more because you can't tell just from the points. You have to know the percentage. If the Dow is up 1% and the S&P is up 1.5%, then it's easy. S&P is up more. So why don't people just talk about index movements in percentages rather than points? It's because we're jerks. We do a lot of things that don't make sense and it just confuses people because people got used to doing it that way and that's the way they still do it. I don't really have a good reason for that, but I do it myself sometimes. If someone said to me, how's the Dow? I might just say to them, well, it's down 229 points. I wouldn't say it's down 0.65%. But I should. Now, your second question is about basis points, and that one is also because we're jerks. A basis point, you will sometimes hear it defined as 1/100th of a percent. It is not. It is 1/100th of a percentage point. There's a very important difference between a percent and a percentage point. Allow me to explain. If I go from 100 of something to 105, I'm up 5%. If I go from 90% of something to 95% of something, I'm not up 5%. I'm actually up 5.55555 as a repeating decimal percent, but I'm up 5 percentage points. Points is the right way to discuss how much you've changed when you've gone from one percentage to another percentage. Okay, so some things out there are discussed in minute increments of percentages. Treasury yields, for example. The 10-year Treasury yield, as I look at it now, it's 4.02%. Now, if the yield suddenly went up to 4.22%, we could say it went up 20 basis points. That means it went up 20 one-hundredths of a percentage point. And that's a very common way for bond investors and bond traders to discuss changes in yields. I don't love it if I'm writing something because if I use the phrase basis points, I feel like I then need to stop and say a basis point is 1/100th of a percentage point. And now you've taken someone's mind out of what they're supposed to be reading. So I would prefer to just say it's up 0.2 percentage points. But I gotta tell you, Troy, there's a whole other level of annoying out there beyond basis points because some people will abbreviate basis points as bips. If someone tells you the 10-year yield was up 10 bips, that's what they're talking about. I say just don't use annoying stuff. I'll tell you another related thing. Well, not really related, actually totally different on a subject that you didn't ask about, Troy, but these soft and juicy mandarins have me energized, so I'll tell you anyhow. You know how data is plural, the word data? And so when you write it, you shouldn't say the data is. You should say the data are. That's one of those grammar things. That's one of those things that is right, but sounds ugly. I don't like things that sound ugly. So I never write the data are. I try never to say the data are. If I'm saying it, I prefer to say it wrong, or I guess wrongly. And if I'm writing it, I avoid it altogether. I just say the numbers, numbers are, or the data points are. A grammatical scofflaw, you say? Maybe so., but I don't give two bips. I brought, I really brought that around, didn't I? Thank you, Troy, for your question. I hope that helps. I'd also like to thank Matt and Bill and Nathan and thank all of you for listening. Please keep the questions coming. You can tape them on your phone, just use the voice memo app and you can send it to jack.hough. That's H-O-U-G-H. @barons.com. Meta Lutzoff is our producer. She's a big fan of the dried mandarins. Definitely subscribe to the podcast.

The yumminess data are really conclusive.

Oh no, you didn't. Subscribe to the podcast on Apple, Spotify, rate it, review it, et cetera. Thanks and see you next week.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.