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March Madness: If You Want to Invest in Sports Teams, Think Local

March 27, 2013
Investing, Investments
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As we enter into the final rounds of March Madness 2013, avid sports fans want to know: is it smart to think about investing in sports teams?  NerdWallet provides a rundown of some of your top options as well as the risks and benefits of each.

The Sports Investing Landscape

The vast majority of sports franchises are closely held, which is a good thing for those sports teams.  This is because sports team managers have to make player decisions that can be wildly unpopular at home, and a rabble-rousing group of public shareholders dominated by hometown fans could severely distort the decision-making process. At various times in the past, the Boston Celtics, Florida Panthers and Cleveland Indians experimented with trading shares publicly. All of these experiments were short-lived and unsuccessful. Sports teams tend to concentrate ownership in a few people, selected not only for their access to capital, but also (we hope) for their ability to make rational investment decisions in the best interests of the team and the owners.

By extension, most of the pro sports leagues we have today are owned jointly by the closely-held team owners. It is therefore not easy for an individual retail shareholder to get a direct piece of the action when it comes to pro sports teams. No matter how mad you are about March Madness, you can’t buy a share of the NBA or any NBA franchise on the stock exchange.

Basketball Investing Opportunities for Avid Investors

You can, however, buy yourself some shares of the American Basketball Association (OTN – ABKB). This is a true penny stock, though, currently trading at three cents per share. The market capitalization at this price is less than a million dollars. Note that this isn’t the same ABA as the one that existed from 1967 to 1976 before it merged with the NBA. This particular business was founded in 1999. Their business model: Sell a team franchise to practically anyone who can fog a mirror. This has led to dozens of failed franchises as poorly-capitalized owners go belly-up, but it’s also allowed them to expand quickly, with scores of franchises in small and medium-sized cities across the country.

I don’t see much to go on in the way of buying ABKB stock. There’s no dividend yet, and no earnings. The last publicly available annual report came out in 2007. I don’t see a particularly compelling case to back up the truck to buy shares at this point. But if you are passionate about basketball, and you’ve got the scratch and leadership abilities to put together a team of your own, it’s probably an easier franchise to get into than any McDonald’s restaurant – and a lot more fun!

These teams don’t make headlines. But some of them have terrific hometown fan bases, and turn a consistent profit season after season. With a little TLC and some creative marketing, they create a positive fan experience – and teams that win games.

Baseball Investing Options

More of a baseball fan? You don’t have to buy a whole major league team. You can start or buy into a Rookie League or scratch pro baseball team for a lot less – by some accounts for under $250,000. Buying a team is one thing: Keeping it going is another, and you need to have a lot of liquidity to see a team through the early years, when ticket sales are low, startup costs are high, you’ve got a lease on a stadium to keep up and you have to advertise and market madly to get paying butts in seats.

Interested? Your Merrill Lynch or A.G. Edwards guy’s not going to be able to help you. This is a specialized market, and runs largely on personal relationships. Give the folks at The Sports Advisory Group, or Cosmos Sports a call. They act as brokers in the sports team business, right down to the bush leagues.

Not up to running your own franchise? You can buy a piece of the Green Bay Packers – actually a consistently good team that just won a Superbowl a few years ago. It likely won’t help your portfolio, though. 

It’s not easy to get a direct piece of the action as a regular Joe shareholder. But you can share in the fortunes of American sports franchises indirectly by buying shares of, say, the Madison Square Garden Company (Nasdaq – MSG). Although if you become an owner, don’t be surprised if MSG behaves more like a media company than a sports franchise. That’s because it is. Yes, they own the Knicks and the New York Rangers hockey franchise – and therefore keep all the licensing and merchandising revenues. But they also own the venue, Madison Square Garden itself. And they book a lot of boxing and concerts in that hall. Additionally, they also own the two iconic New York brands, The Rockettes and Radio City Music Hall. They also own the 3,600-seat Wang Theater in Boston.

MSG lost about 100 million in market capitalization after Jeremy Lin left the Knicks to sign with Houston. That was silly. MSG can make money in a lot of different ways – it even owns a music video channel, Fuse – and does not rely on any one personality that much, so-called “Linsanity” notwithstanding.

MSG recently had a bit of a scare with a labor dispute between the National Hockey League and the players’ union, which threatened to force the cancellation of an entire NHL season. Insiders sold heavily, with the Executive Chairman James Lawrence Dolan dumping large sums of his shares within two days in November 2012, when things looked bleak for hockey. But the NHL walkout was worked out in January, which took a big chunk of the uncertainty out of the financial outlook for the company.

As of this writing, you can buy shares of the Madison Square Garden Company for $57 per share. That’s not far off its 52-week high. MSG currently sells for a P/E of just under 34. That’s still a bit pricy, though, compared to the broad market. Furthermore, although the Rangers, Knicks and the Garden itself have been around for years, the company issues no dividends. This isn’t terrible news, as long as the company is able to continue reinvesting profits productively via acquisitions, advertising and marketing.  Meanwhile, the name Madison Square Garden itself is one of the great brand names in entertainment. I love baseball, but you aren’t going to get an amazing nationwide franchise when you’re cranking up the Cowlitz Black Bears, a new expansion franchise in the West Coast League.

Go Big or Go Home?

If you’re ready for the big league, here are some top tips for making sports investing work for you:

  1. Win games. Run a decent set of books and you can get away with murder if your players win a lot.
  2. Look for hometown talent. That means players returning from the major leagues or college teams who grew up in the area, and have friends or family in the area.
  3. Get a good lease and maintain your stadium. Nobody wants to bring his family to a lousy park.
  4. Promote heavily. There is nothing so good it doesn’t have to be sold. Venue owners of all types have more competition than ever, from restaurants, television, movies and the Internet.
  5. Get a good, imaginative promotional staff and some room for them to run.
  6. Understand the liquidity needs. Many teams fail mid-season when they can’t make their payrolls or fix the team bus. That’s bad for everyone. Don’t paint yourself into a liquidity corner.

Disclaimer: The views and recommendations in this piece are held by the individual contributor and do not necessarily reflect the opinions of NerdWallet as a whole.