Do you like fast cars and racing? Then, you might have noticed that since late April, there has been considerable interest in Delaware-based Dover Motorsports (NYSE:DVD) stock.
Year to date, DVD stock is down about 22%, hovering at $1.50, but that’s not the full story. On April 23, the shares hit an all-time low of $1.06. So if you were brave enough to invest $1,000 in DVD stock then, you’d now have around $1,400.
Therefore, today I’ll take a closer look at whether the company should belong in a long-term portfolio.
DVD Stock Earnings at a Glance
In late April, the group reported results for the first quarter. As motorsports is a seasonal business and there were no major events held in the first quarter, DVD stock saw minimal cash flow. Revenue for the quarter came in at $204,000, versus $129,000 reported in the same quarter a year ago. Adjusted net loss per share was 8 cents, compared to a net loss of 7 cents last year.
Since March, due to the novel coronavirus pandemic, all racing events at Dover International Speedway have been cancelled, at least until August. Despite the lack of income, the company had no outstanding borrowings and had $5 million in available cash.
On June 3, the company announced in an SEC filing that it entered into a four-year agreement with NASCAR to host events for the 2021 to 2024 racing seasons. The first race is tentatively scheduled for June 20, 2021.
This is an exciting and even potentially profitable deal for the company. Yet investors should also note the costs involved. Nashville Superspeedway has not hosted any races for almost a decade. Dover has in fact been aiming to sell the Nashville property for some time now.
In the SEC filing Dover Motorsports said “While the facility remains in good condition, the registrant’s current estimate of capital spending requirements to prepare the facility to host a NASCAR Cup Series race in 2021 are approximately $7 million to $10 million over the next two years.”
Seeking Alpha’s Vince Martin has written in depth about the potential issues regarding the venue and the agreement with NASCAR. He concludes that “the DVD story has changed, and it seems more attractive as a result.”
What Could Derail DVD Stock
Investors in DVD stock should keep in mind that it is a penny stock. According to the Securities and Exchange Commission, a penny stock “generally refers to a security issued by a very small company that trades at less than $5 per share … [They] are generally considered speculative investments. Consequently, investors in penny stocks should be prepared for the possibility that they may lose their whole investment (or an amount in excess of their investment if they purchased penny stocks on margin).”
Therefore, as states open up and life goes back to a new normal after the pandemic, volatility in DVD stock is likely to remain high. Daily headlines surrounding hospitality stocks are likely to ebb and flow as we got updates on a potential second wave of the virus.
Yet, Dover Motorsports owns two racing tracks that are used in NASCAR events. According to recent research led by Kimberly Elsbach of University of California, Davis, “NASCAR is one of America’s most popular sports — commonly viewed as second in fan popularity to the National Football League. Many fans … identify with NASCAR.”
As a venue owner, Dover Motorsports is an important part of NASCAR’s operations. And that business relationship may end up creating considerable shareholder value in the future.
For example, in case of a corporate development, such the acquisition of Dover Motorsports by another entity, investors in DVD stock would likely see the share price reach new highs.
The Bottom Line on DVD Stock
On a given day, millions of market participants trade penny stocks under $5, such as DVD stock. Some win money and some lose money. Therefore, investors should appreciate the risk/return potential offered by such investments.
Although Dover Motorsports’ earnings report was nothing to write home about, investors were ready to put money into the shares. And those that did were handsomely rewarded since April. Now they are wondering if they should cash in?
If you are with paper profits, you may want to realize some of your gains, at least until the company reports second-quarter earnings in a few weeks.
Investors who want to commit new capital to DVD stock could be handsomely rewarded. However, it is still a risky investment in a penny stock.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, including a Ph.D. degree, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan did not hold a position in any of the aforementioned securities.