The NFL season is almost upon us…
Bars across the nation will be flooded with patrons rooting for their favorite teams – while ordering beers and spicy buffalo wings.
Stadiums will be packed with raucous fans cheering touchdowns and jeering turnovers.
Some of the fastest, strongest and most skilled athletes on the planet will be on full display.
Many play for the love of the game. Others play for the glory of victory.
Whatever their motivation, however, these are also some of the highest-paid people on the planet.
This raises the question… Is there a way for us to get a cut of the action?
Besides owning them on your fantasy football team, can you “go long” a professional athlete like you would a stock and profit from their individual success?
As it turns out, there does seem to be a way…
Fantex, Inc. is a marketing and brand development company that focuses on acquiring minority interests in the income associated with the brands of high-profile individuals, like professional athletes and entertainers.
The company also assists these individuals in enhancing the reach and value of their brands.
Currently, there are listed “tracking stocks” for two NFL athletes: E.J. Manuel, second-season quarterback for the Buffalo Bills… and Vernon Davis, star tight end for the San Francisco 49ers.
What does this mean for you?
In short, it allows investors to purchase a stock linked to the earnings of the athlete’s brand.
That includes current and future playing contracts, endorsements, appearance fees, as well as post-career income – such as broadcasting contracts. Therefore, the athlete’s brand can continue to grow after retirement from football.
However, income received from activities unrelated to professional football is excluded from brand income. For instance, the fact that Vernon Davis owns a Jamba Juice won’t help you.
Why would athletes allow investors to profit from all of their hard work in this way?
Each athlete gets a lump sum payment in exchange for surrendering a minority stake in his brand. In Vernon Davis’ case, 10% of his brand was sold for approximately $4.2 million, implying that his brand’s total present value rests at around $42 million.
This is a great way for athletes to hedge the risk of their brand value declining. So, these tracking stocks essentially represent a transfer of risk from the players to the investors.
This is perfectly well and good, since one of the primary functions of the financial markets is the transfer of risk.
When it comes to owning these securities, however, the risks investors face are numerous and significant…
The Ultra-Speculative Wager
Fantex admits it can’t guarantee that the tracking stock will, in fact, accurately track the performance of the athlete’s brand.
This is actually irrelevant, since it’s impossible to observe a brand’s value anyway.
I mean, if estimating the future cash flows from a stock is difficult, then imagine estimating the future cash flows from an athlete’s brand.
Fantex has actually provided its discounted cash flow (DCF) analysis, or the estimation of the present value of future brand cash flows. However, around 77% of Vernon Davis’ total brand value has been derived from anticipated contracts.
Put another way, they currently don’t exist!
Even the contracts that do exist are uncertain.
Here are my top seven reasons to stay away from these securities…
Reason #1: Negotiation Blunders. In an attempt to gain leverage to renegotiate his contract, Vernon Davis didn’t participate in some organized team activities this past off-season and ended up forfeiting a $200,000 workout bonus. That’s easy money he left on the table.
Reason #2: Athletes Aren’t Invincible. Another huge risk to the brand value assumptions is a career-ending injury. Indeed, Houston Texans running back Arian Foster had his IPO pulled after a serious injury.
Reason #3: A Less-Than-Stellar Moral Compass. Then there’s the risk that the athlete tarnishes their brand in some way.
During the off-season, a high-profile running back was charged with felony assault for knocking out his fiancée, and is suspended without pay for two games to start this season.
Just this past Wednesday, two running backs were charged with marijuana possession.
Investors had better be very confident in the athlete’s judgement off of the field.
Reason #4: Not Your Average Stock. The shares don’t trade on an exchange like the New York Stock Exchange. Instead, you have to open up an account with Fantex Brokerage Services.
Reason #5: Few Buyers When You Need to Sell. Lack of liquidity is a major concern. Since its initial offering in April 2014, the average daily trading volume for the Vernon Davis Tracking Stock is just 138.5 shares (no zeros were omitted). Heck, 15% of the trading days so far have had zero trades.
The shares reached an intraday high of $12.50 at one point, but have now settled near the IPO offer price of $10.00.
Reason #6: Dividends Uncertain. The Vernon Davis Tracking Stock paid a $0.70 dividend on August 18, which equates to a 6.9% dividend yield based on the price on the ex-dividend date.
This was a big milestone. However, Fantex is not required to pay these distributions, further adding to the difficulty in valuing the shares.
Reason #7: The Big Reveal. Perhaps the biggest risk of all is the fact that the brand is not a separate legal entity, and the brand contracts aren’t secured by any collateral.
The prospectus makes it clear: “Holders of shares of any of our tracking stocks will have no direct investment in the associated tracking stock brand, brand contract, or individual.”
So when you buy one of these tracking stocks, you’re actually just buying an ownership interest in Fantex itself.
Bottom line: If you’re considering buying either of the existing tracking shares – or investing in the upcoming IPO for Cincinnati Bengals wide receiver Mohamed Sanu – you need to read the risk factors enumerated in the prospectuses carefully before taking any action.
Owning and trading shares in the brands of professional athletes is certainly a fascinating concept, but the tracking stocks aren’t viable investments. They’re more akin to ultra-speculative novelties.
They’re certainly a sign of the times, though…
There seems to be a push to securitize anything and everything under the sun in an attempt to feed investors’ risk appetites. We can expect to see these types of crazy things during bull markets… and not usually during the beginning.
Regardless, if you’re like me, you’re eagerly awaiting this year’s football season. By all means, enjoy a few cold ones while cheering for your favorite team… just be sure to sell those popular beer stocks while you’re at it!
Alan Gula, CFA