DraftKings (DKNG) has had one hell of a ride. 

On May 14, I wrote about how this was one of the best stocks to ride the sports gambling trend.

At the time, shares were trading at roughly $25. 

On Monday, it closed at $33.54. 

That’s a nearly 34% return in a month.

Not too shabby when you consider:

There hasn’t been much sports on over the last three months

Today, I want to explain why DKNG is a “Hold” for the short term. 

 

On Sports Gambling, I’m Bullish

 

I am wildly bullish about the future of sports betting and online gambling. 

Gambling has been the seed of many a fortune, both legitimate and illegitimate over the years.

The house always has the edge.

But a significant portion of the population has to test their knowledge against that edge. 

A few win. 

Most do not. 

And the house keeps its cash.

Owning casinos and sportsbooks is a fantastic business. It made the Corleone’s and the Wynn’s rich.

It can do the same for us if we buy at the right time and hold on for the long term. 

Right now, it is not the time to buy DraftKings. 

It will be someday, and I promise you that I will resound the trumpets and lead the charge when that time comes.

There are a few reasons why we have to step aside. 

 

The Challenges Mount

 

The first problem: There are not many sports that gamblers can wager on right now. 

Although baseball and the NBA are trying to put a season together, we see an aggressive spread of coronavirus among the athletes before teams even start practicing.

 

 

Major League Baseball’s plan involves too much traveling and too little containment. Players are already opting out.

It is almost inevitable we see COVID-19 race through the league. It could shut down the season. I hope I am wrong, but we’re facing steep odds that we see 60 games and the playoffs this year.

The NBA has a better chance of a season coming together. 

If everyone stays inside the bubble in Orlando, the NBA might pull this off. 

I see two problems with this working. Orlando is a hot spot for the virus right now. 

A random employee entering the bubble to wait tables to collect the trash cans could end the season.

You also have the issue of well over 300 players that have an unfortunate history of playing by the rules collectively. 

One player sneaking out after curfew could crash the season quickly.

 

 

The sports betting granddaddy, football, looks increasingly unlikely as well. 

We see reports from all over the country of virus flare-ups as college teams have tried to work out. 

Clemson has 37 cases so far. 

Texas has more than a dozen. The Crimson Tide has reported double-digits.

Several NFL players have tested positive, and trading camps haven’t even opened yet.

We may want sports to watch and bet on, but if you have not figured it out, the virus does not care much about what we want.

All of this is going to make life a bit difficult for DraftKings for the rest of 2020.

 

Warning Signs

 

The lack of sports is the macro factor. 

The company-specific warnings are more important.

First, DraftKings took advantage of its popularity in Mid-June by selling 40 million shares at $40. 

Again, that figure is 300% higher than the $10 IPO price from April.

Now here’s the most important part: 

Only 16 million of the shares were new shares with proceeds going back to the company. 

The other 24 million were shares sold by insiders moving to take advantage of the rally and cash in. 

This means that the people INSIDE THE BUILDING were selling their stock.

The founder of SBTech Shalom Meckenzie is a director of DraftKings. 

He sold $182 million worth of stock in the offering. 

Robert Kraft of the Patriots and the Dolan family (owners of the New York Rangers and New York Knicks) sold some of their holdings. 

Jerry Jones, the owner of the Dallas Cowboys, liquidated some of his DraftKings holdings as well.

 

 

Officers and directors were also dumping the stock. 

  • Director Harry Sloan sold 558,700 shares for a total of $21.7 million.
  • Chief Executive Jason Robins sold nearly 549,000 shares for $21.3 million. 
  • Chief Legal Officer R. Stanton Dodge sold nearly 400,000 shares for $15.5 million. 
  • Matthew Kalish, president of DraftKings North America, sold 330,000 shares for $12.8 million.
  • Chief Financial Officer Jason Park sold 76,000 shares for $2.95 million. 
  • Director, Woodrow Levin, sold 50,000 shares for $1.94 million, and 
  • Another director, M. Richard Rosenblatt, sold 23,700 shares for $919,000.

Do you see the pattern?

 

The Technical Move

 

The market took note of the profit-taking. 

As a result, shares of DraftKings broke below the 20-day moving average last week. 

The stock price appears to be heading for a test of the 50-day MA soon.

 

 

The 20-day has rolled over and is now moving down.

After reaching an RSI of 90 last month, the stock now appears to be broken technically and heading towards eventual oversold levels. 

As you know from previous RagingBull Investor columns, I consider these factors to be red flags.

I love the sports betting business. 

I am a huge fan of the DraftKings business model. 

I’ll probably own the stock someday. 

But if you bought into the stock back in May when we discussed it, now is the time to take your gains off the table.

The COVID-19 pandemic is a significant challenge to sports and sports betting right now. 

Insiders have sold an enormous amount of stock.

The stock is technically broken and should be avoided for now.

We’ll talk more on Thursday about a stock I’m very excited about. 

 

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

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