The world’s most important investment committee made an odd choice last March…
In short, it added an online gambling stock to the powerful index that it oversees.
The gambling company was one of the COVID-19 pandemic’s so-called “meme stocks.” Outspoken Barstool Sports founder Dave Portnoy might’ve had some influence, too…
Portnoy put the company on the investment map with his antics. And it made him wealthy…
You see, the company had bought 36% of Barstool Sports from Portnoy in early 2020. In return, the digital sports media firm got $163 million in cash and stock.
In March 2021, the company’s stock peaked at more than $130 per share – up more than 250% from when the Barstool Sports deal closed. That’s when the world’s most important investment committee decided to add it to the world’s most important stock index.
It was a gamble… And the investment committee lost.
The company we’re talking about is Penn National Gaming (PENN).
On March 22, 2021, a week after the company’s stock peaked, the investment committee that oversees the S&P 500 Index decided to add it to the index. To be fair, Penn National doesn’t make up a huge weighting in the benchmark stock index… But it’s still a member.
Folks, more than $40 trillion of market cap is pegged to the S&P 500. It’s hard to understate how big it is when a company gets added to the index.
And yet, the investment committee couldn’t have had worse timing with Penn National. Take a look…
The takeaway is clear… The world’s most important investment committee made a bad call.
Now, this secretive group of folks didn’t give their rationale for the pick. But their methodology states that they look for companies that meet certain criteria for market cap, revenue, and earnings history.
We can’t help but wonder what they were thinking, though…
Maybe it was the call from Goldman Sachs (GS) on the projected growth of online sports betting. Around the same time, the investment bank said the industry could grow more than 40% annually through 2033.
Or maybe it was the success of Portnoy and his followers. They pushed the stock up so high from the depths of the COVID-19 pandemic that the committee could no longer ignore it.
No matter the reason, Penn National checked all the boxes for the investment committee.
But not even a year later, the stock wouldn’t qualify for the S&P 500 based on its published rules. Its market cap of roughly $8 billion is too small for the esteemed index.
To be eligible for inclusion in the S&P 500 when Penn National was added in March 2021, a company needed a market cap of at least $11.8 billion. Today, the market-cap threshold is even higher – $13.1 billion.
Now, the investment committee behind the S&P 500 might not have seen Penn National’s plunge coming. But our Power Gauge system sure did…
The stock hit its high on March 15, 2021. And our unbiased, non-human-interfering ratings system downgraded it to “bearish” a week later. It traded for about $113 per share at the time…
Penn National closed at a low of $40.92 per share on January 21, 2022. That’s a 70% loss in 10 months. We’d call that a “dumpster fire” on my old trading desk.
Of course, we’ll never know how the investment committee that oversees $40 trillion in market cap within the S&P 500 got this so wrong. It could’ve been a combination of things. And frankly, it doesn’t really matter.
The point is, even the folks with all types of data at their fingertips can pick a bad stock. But in this case, our Power Gauge wasn’t fooled… It saw Penn National’s downfall coming.
Even today, Penn National is still in a negative trend as it trades near its recent lows.
In the end, market forces win every time. And if you don’t use a solid process to identify those forces, you’ll always be the last to know.
Good investing,
Pete Carmasino
