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Contra Guys: This stock offers a play in the sports-card craze arising out of COVID-19

BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR


Monday August 17, 2020

Drop the puck,throw the first pitch, three-pointer, punt it – North American professional sports leagues are now back in semi-full swing. Many fans are craving the action that mundane television and Netflix do not inspire. They have not been able to place bets on games or play in fantasy leagues. Others are trying their hand at stock trading with online brokers to get a kick. And there are those who simply missed watching as an enjoyable diversion. Hopefully, this restart will satiate some of their desired return to normalcy.

Even when the world is in flux, opportunities still arise. As people were confined to their homes, one often overlooked industry experienced a surge in business: sports cards, autographs and memorabilia. High prices have created new interest. In May, a Mike Trout rookie card broke the record for a modern-day baseball card by selling for US$900,000. In mid-July, a LeBron James first-year set the rookie record at US$1.85-million. A vintage Honus Wagner holds the top spot at US$3.1-million.

In the past decade, sports-related collecting has been growing due to a younger generation of collectors. Advancements in production technology and social-media platforms have been a big part creating this billion-dollar industry. These loopy valuations are even starting to catch the eye of hefty financial players such as hedge funds. Gone are the early days where the major excitement for sports fans was Pete Rose signing autographs.

Perhaps you want exposure to the industry but prefer the stock market? One idea is to buy shares in California-based Collectors Universe Inc. (CLCT). It is a small cap that started trading on Nasdaq in 1999. This company is a third-party authenticator and grader of sports and coincollectibles. Its coin division slipped from 68 per cent to 63 per cent to 57 per cent of revenue over the past three fiscal years. Meanwhile the sports card, autographs and memorabilia business has grown from 25 per cent to 31 per cent to 36 per cent of revenue. The rest comprises nominal sales from memberships, printed publications and advertisements. The company has been profitable for more than a decade and the balance sheet is squeaky clean. For the first nine months of the 2020 fiscal year ending June 30, revenue grew by 11 per cent to a record US$58.4-million. The bottom line jumped to almost US$10-million, or 90 US cents a share, from US$6.2-million.

Authentication of cards has become key for Collectors Universe. There is competition, but it holds the largest market share as its service is preferred by most collectors, dealers and auction houses. The company certifies most of the valuable sports collections in North America, and in the third quarter handled more than 730,000 total collectibles.

But with success comes the need for execution. Right now, its trading card and autograph grading backlog is unprecedented, at more than one million units. The US$22.2-million in cash and credit line of US$15-million should help pay for increased operational capacity and cover the quarterly dividend of 17.5 US cents.

However, just like when buying sports cards, the phrase caveat emptor applies to an investor considering CLCT. In this case, reputational risk is a consideration among others. Scandal reared its ugly head last year as there was a big online seller and a party who apparently doctored cards. The FBI is investigating, and it is possible this could lead to a jump in warranty claims from buyers.

Another challenge the company faces is from Alta Fox Capital Management, which owns 5.4 per cent of Collectors Universe, and recently nominated six directors for election at the annual general meeting. It wants the current board removed from the mound, even though the stock is trading more than 33 per cent higher than at any time in the past 20 years. Things could get feisty and these disputes are almost always costly.

When markets crashed in March, CLCT’s stock value almost halved but has since rebounded to hit a record high of US$39.50. The momentum crowd loves the company, which likely includes some of those same sports fans with the online betting accounts. Certainly, it is not a value play, as the book value sits at a lowly US$2.50, so it is outside of our wheelhouse. Whatever valuation metrics are used, it likely makes sense to wait for the AGM to see the company’s lineup card.









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