Let’s face it – the concept of gambling is controversial in any market environment. But in the midst of a raging pandemic and an economic crisis, you’re playing with fire. Not surprisingly, Landcadia Holdings II (NASDAQ:LCA) has aroused significant debate here at InvestorPlace. Some like Mark Hake view LCA as an undervalued opportunity. Others, like Will Ashworth, see this as a cynical ploy that mostly just benefits a billionaire.
That billionaire is Tillman Fertitta. As Ashworth describes it, “Fertitta, who is said to be worth $5.8 billion, is the poster child of the low-interest rate era that we find ourselves. He’s used debt to build his restaurants, hotels, and sports teams (he owns the Houston Rockets).” Making matters worse, this isn’t his first rodeo with special purpose acquisition companies (SPACs), hence the name Landcadia Holdings II.
Ashworth notes that Fertitta’s first SPAC candidate is Waitr Holdings (NASDAQ:WTRH). Thus, by buying into Landcadia’s SPAC sequel, you’re basically helping Fertitta “get himself out of a hole.” Bluntly, my InvestorPlace colleague warned, “Don’t be the one to help him.”
Understandably, I appreciate Ashworth’s concern. I myself had apprehensions when writing about LCA. Nevertheless, I realized a harsh reality: we’re living in the new normal. Like Las Vegas, anything goes here.
Not only that, I demonstrated statistically significant trends between LCA and its two main rivals, DraftKings (NASDAQ:DKNG) and Penn National Gaming (NASDAQ:PENN). Essentially, all three shared a direct correlation. Therefore, I reasoned that “the same fundamentals that are driving PENN and DKNG are also showing love to LCA.”
Plus, let’s be honest with ourselves. Anytime you buy a much-hyped stock, chances are, you’re either benefiting a billionaire or christening one.
LCA Is Heading Toward a Pandemic Storm
Of course, the other reality regarding the new normal is incredible volatility. I’m not just referring to the stock market but rather, the broader fundamentals. As you’re well aware, the novel coronavirus has completely overturned our lives. Additionally, we just don’t know whether the Covid-19 winds will blow (hopefully not in our direction).
Sure, Fox News pundits have noted that on average, new daily coronavirus cases have declined significantly from this summer’s peak. At the same time, Fox News was either minimizing or declaring victory before prior outbreaks. Personally, the fact that this outlet has credibility in the eyes of its viewers is remarkable.
And just like the guy that calls a field goal before it happens, daily coronavirus cases have started to gain momentum since Sept. 8, according to data from the Centers for Disease Control and Prevention. This development comes as mainstream news agencies have reported a second wave of infections in Europe.
If a second wave hits us back home, that will likely spell trouble for Landcadia Holdings. Here’s the deal: while LCA trend with rivals DKNG and PENN, these two also share an inverse correlation with new daily coronavirus cases. Intrigued, I wanted to see if LCA also registers a similar relationship.
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Sure enough, Landcadia shares and daily Covid-19 cases do have an inverse relationship, a negative correlation coefficient of 64.2%, to be exact. In a nutshell, as Covid cases increase, LCA decreases in market value and vice versa.
Logically, this makes perfect sense. For instance, the return of sports would be jeopardized if the coronavirus strikes again. That poses a dark cloud over online sports betting.
But look beyond that niche segment. If cases worsen, the economy would again be under siege.
Brace Yourself for Nearer-Term Volatility
Over the long run, the association that LCA has demonstrated with its gaming rivals makes it an intriguing play. But with the pandemic rearing its ugly head again, as a nearer-term consideration, I would shift tactics and avoid Landcadia.
Don’t misread this – I’m not here to pile on the negativity against Fertitta or the online gambling industry. For what it’s worth, I agree with the favorable Supreme Court ruling that allowed these companies to flourish this year. Ultimately, consenting adults are responsible for their actions. It’s not the government’s job to rule over personal preferences.
It is, however, the government’s job to protect the American people. In the case of this pandemic, there’s an argument to be made that sometimes, the government must protect the people from themselves. I’m not going to jump into this raging contentious inferno. But what I will say is that this debate has strong implications for LCA.
If we have a second wave soon, I’m not sure if President Trump has the political margin to downplay the threat again. Therefore, we may see tough governmental restrictions that will impact commerce. And that will likely scare off online gambling in the interim, making LCA unnecessarily risky 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.
