בס״ד

Why Bet on a Lame Horse? (CHDN)

Posted on November 11, 2021

Today’s letter is brought to you by the American Association of Equine Handicappers – whose proud motto is:

“Your Vice is Our Bread and Butter.”

“Bread and Butter Delivery!”

Gotta hand it to the folks at Churchill Downs Inc. (NASDAQ:CHDN), who turned a mere racetrack into a lucrative mechanism for stealing billions via casinos, online gaming and other wagering addiction technologies.

The outfit is now worth $8.46 billion by market cap, but we say that’s a bit rich for this pari-mutuel predator.

Consider the following fundamentals –

  • P/E is a bloated 40.91,
  • Dividend Yield is a paltry 0.27%, and
  • Price to Book – a monster longshot 26.54.
  • Moreover, Debt/Equity is an out-of-control 5.81, and
  • Earnings Per Share for the past year are DOWN 89.30%.
  • Yes, two weeks ago, the company beat analysts’ earnings estimates by some 8% – but that was from an already rock-bottom real earnings number.

Bottom line is the market didn’t buy the hype.

As the chart below shows, the earnings beat was a “sell the news” event.

Here’s two years’ worth of daily price action –

Technically, we have a number of indicators that speak to a continuing decline of CHDN shares –

  1. First, the overbought RSI indication in late September (in green) has now gone sub-waterline bearish (green arrow).  This is patently negative, as it demonstrates a massive loss of confidence and momentum among bulls.  CHDN underperformed the market by several furlongs over the last 20 trading sessions.
  2. More than that, MACD will confirm the bearish hypothesis by going sub-waterline TODAY.  Now that both indicators are trending below this mid-way threshold, a good deal of technical selling becomes imminent.
  3. Longer term, we see that the most recent high formed a bearish double top at 260 (in black), and
  4. The third of three waves higher (in red) will now have to be tested in the 210 range.
  5. That same 210 level also marks strong support for the shares (in purple), as both the 137 and 274 DMAs converge there.
  6. A gap at 195 (in blue) may have to be filled and should mark the low point for the move.

But we’re just playing the decline to 210.

How?

With a speculative, short-term trade that has the potential to deliver big.

Have a look –

A Jew and his Gold recommends you consider selling the CHDN December 17th 220/230 CALL spread* for a credit of $5.60 (17.10/11.50) and buying the CHDN December 17th 230/210 PUT spread** for $6.35 (8.80/2.45).  Total debit on the trade is $0.75.

[*Sell the 220 CALL and buy the 230 CALL.  **Buy the 230 PUT and sell the 210 PUT.]

Rationale: the decline has commenced and initial support has been hit.  Yet there’s more downside to come as the stock looks very heavy here.

A relatively small drop will offer a very nice maximum payoff of $19.25 should we be correct.

Conversely, max loss for the trade is $10.75 (difference between the CALL spread strikes plus the initial debit).

Breakeven arrives at $224.25, just 3.7% below the current price.

The trade’s duration – just 36 days – makes it a speculative venture.

Very grateful to all of you who wrote with good wishes and prayers while we were out of commission.

It’s appreciated.

Many happy returns!

Matt McAbby

 

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