The fact that online sports betting platform DraftKings (NASDAQ:DKNG) skyrocketed following its debut by itself doesn’t raise eyebrows. As you well know, Americans love their sports. Even more, they love betting on their favorite teams. However, it’s the timing behind the bullishness of DraftKings stock that caught some folks flat-footed. After all, we’re still in a pandemic along with an economic crisis.
Back in mid-August, I was wrestling with these two contradictory circumstances. On one hand, you had a favorable U.S. Supreme Court ruling that facilitated the dramatic rise of DraftKings stock. But, on the other, the unemployment rate — while improving dramatically from the April peak — is still incredibly elevated at 8.4% at this point. Until we see substantive solutions, this will impose a dark cloud over DKNG stock.
Furthermore, the novel coronavirus dramatically changed our society, including our broader entertainment landscape. When I discussed the bullish case for DraftKings stock in August, there were still some questions about the upcoming football season. At the time, a few college football conferences cancelled their seasons.
Still, I also noted that there was a bullish pennant formation developing in the charts for DraftKings stock. According to the discipline of technical analysis, this was one of the strongest indicators of an imminent upside move. Thus, even though I questioned the fundamentals — i.e. a second wave of the coronavirus — I declared that DraftKings stock was flashing a high-conviction buy signal.
I must admit that I was worried using such strong language. Ultimately, I believed that the markets were acting rationally ahead of positive news. And with the NFL season starting, along with college football’s Big Ten reversing course on its cancellation decision, the bulls received exactly that.
Is DraftKings Stock Still a Buy?
In the month so far, DraftKings stock is up a whopping 40%. And frankly, the enthusiasm isn’t surprising. Slowly but surely, we as a society are returning to normal. And that has reflected in our professional sports leagues, with limited fans allowed to attend NFL games.
But now, the question is, what to do about DraftKings stock? Earlier this summer, it was not a guarantee that America’s biggest sporting enterprise, the NFL, would return. It’s here now, though, along with college football to a large extent. Fundamentally, however, I’m not sure if there are enough big catalysts to justify buying DKNG stock right now.
In addition, there appears to be an inverse relationship between new daily Covid-19 cases (as reported by the Centers for Disease Control and Prevention) and DraftKings stock. Put another way, as daily coronavirus cases decline, DKNG rises and vice versa.
As evidence, consider the period between April 6 through June 1, and June 1 through July 17, which featured negative correlation coefficients of 66.7% and 78%, respectively. Statistically, these are significant indicators of an inverse relationship.
Moreover, between July 17 and Sept. 17, DKNG stock and daily Covid-19 cases registered a negative coefficient of 38%. Admittedly, this comparison is weak and is slightly over the edge of statistical significance.
Nevertheless, when you visualize the relationship between DraftKings stock and coronavirus infections, you can see that they move opposite to each other. To me, that’s a signal that DKNG stock moved higher from late summer until now because the market anticipated that coronavirus cases would decline.
Sure enough, they did decline. Society started to come back. As well, sports leagues restarted play in the new normal. But with DKNG shooting to new highs, it may be time to take some profits.
Selling Is a Short-Term Consideration
Don’t get me wrong: I like DraftKings stock as a longer-term investment. When I talk about taking profits, this is a temporary consideration. If your horizon is in years and not days, you may not need to worry too much about the above.
Still, I think it would be crazy to completely ignore obvious signals of epidemiological trouble ahead. As USA Today reported, a fan who attended the NFL’s regular-season opening game tested positive for Covid-19. While that’s not a smoking gun of a second wave, it raises major concerns.
That’s because international health agencies have sounded the alarm about Europe, which has suffered a resurgence of coronavirus cases. According to CNBC, the spike in infections could be tied to “pandemic fatigue” — people and governing jurisdictions got tired of mitigation protocols and loosened restrictions.
Overall, I don’t want to overstate what’s happening in other parts of the world. However, it’s possible that we’ve got a long way to go in our battle against the coronavirus. If so, the return of sports could be truncated. And right now, I see more risk than reward. Thus, investors should be careful about DKNG stock at this juncture.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.