BAD investments: Betting, Alcohol and Drug Stocks (Episode 16)

Yeah, absolutely. CA thanks for having me show on, on the show today, but yeah, the bad ETF stands for bedding alcohol and drugs. And when we took a step back and wanted to look what is gonna be potentially a long term, sustainable ETF, and what industries have been to prove their durability through multiple economic cycles, we were kind of attracted to the betting alcohol and drug industries primarily because they offer investors, I guess, diversification in a sense that there's growth opportunity, there's value opportunity. And when you kind of add those all up, it gives investors a nice runway for something that's gonna be long term sustainable. You know, the bad acronym could be a little contrarian ESG to some extent, and we certainly will embrace that term primarily, cuz we do think some of those ESG funds lack some clarity, but when you're investing in the bad ETF, you're investing in betting alcohol and drugs, and these have undergone the tough scrutiny of the us government.

They've gone through multiple economic cycles. And I think there's a nice runway from each of them in a growth perspective. We're looking at expansion of legalization and gaming. You're looking at, we have a 10% cannabis carve out in there. You're looking at more expansion in those and then combine that with the drug industry, which has their traditional household drugs that they use. But they're also currently innovating. And I think now more than ever given the pandemic that we see there's a dependency on America to remain healthy at the end of the day. So kind of add all those up. It's a catchy name being the VA ETF, but we think there's actually true. Long-term sustainability. When you look at 'em and take this multi-sector approach.

Yeah, no, not necessarily at all. We like to look at, when we look at investments, we look at the broader industries and sectors of the market. So with that being said, you know, it just, you know, these have been considered sometimes vice plays, which offers some kind of characteristics of value, but then combine that with there being more, let's say expansion in legalization in these industries that it's a great time to be in each of these categories while we look at kind of the runway and they're attracting new customers and they're just growing overall. And again, it's a proven product at the end of the day, you know, we've seen the proliferation of whitewash ESG funds. We've seen a lot of people be heavy in the tech industries. This provides investors and opportunity not be so reliant or dependable on tech being their growth position. This kind of gives you a nice little hybrid of that and also protects you at on the flip side with having some consumer staple aspects in the drug and pharmaceutical industries in the alcohol where you may have a little bit better of a risk adjusted return, given that if there is some kind of recession, some of these things are recession proof to some extent.

Absolutely, absolutely. At the end of the day, nothing I would say is recession proof. Now, historically speaking, casino, stocks and gambling stocks, maybe go a little bit more stagnant when there is a recession. But look at the current environment that we're kind of entering right now where it's gonna be driven by rising interest rates and inflation where there's kind of these things underlying characteristics that may drive a recession. Well, that's primarily gonna affect lower wager earners. When we look at who's going to win casino at bed MGM and kind of being more involved with that, it's a little bit of higher wage earners and that's gonna be really where some of those industries or those casinos see higher margin because those are your big spenders at the end of the day. But again, right, nothing is recession proof. There is some concerns about that. You know, the cost of gas going up and things of that nature.

It can inhibit some or prohibit some challenges to get to Las Vegas or some of these other destinations. But we do think, you know, gambling and, you know, people going to the sports book and, and looking at sports is gonna be a little bit more resistant or not be impacted as much as some other industries or high flying growth type of stocks. But again, it's just something we wanna take a step back and if there's recession, we wanna proceed with caution and just make sure we're positioned well, which is why we also like having this multi-sector approach in our ETF at the end of the day.

Absolutely. So if we take a little bit of a step back and go into the COVID 20, 20, early 20 21, 20 21 in general, Penn was definitely, I would say one of the pandemic winners. They, they positioned themselves with the partnership with bar stool sports and they were really capable of attracting the retail trading crowd and the retail gambling crowd. So their price at the end of the day, when we saw all these type of pandemic winners, because they had the online platform and stuff built their stock price, certainly maybe got a little too hot to some extent taking a step back, right? Let's look at some of the headwinds that they may be facing, which is a lot more players coming into the online sports book marketplace. And it's gotten over competitive to some extent. And then you had mixed up with the Delta variant Aron where some of their more traditional brick and mortar businesses struggled to some extent.

And so kind of put these factors together as a high flying stock pandemic winner, they're trading a little bit higher than evaluation. They've come back to, let's say reality to some extent, which in my opinion, when we're looking at a, an investment we're not looking at the one year, two year, three year, we're looking at what's gonna be a real Penn event, a real winner three to five years out from now. And I think Penn is honestly positioned really well as they've embraced the online sports book, they partnered with one of the digital media brands, bar stool, sports who really attracts and has some die hard fans. So you add up all these things together. I think they're gonna be positioned well as they keep reinvesting in themselves to be in a good position three, five years from now, when you have everything working where there's gonna be more space states that have opened up to legalize gambling, they've already got the platform and those things to kind of roll out, not to mention they do have a national presence to some extent and some of their brick and mortar casinos that they have. And it just, again, allows them a nice avenue to be successful three, five years from now, maybe sooner, honestly, as we look at the reopening story, that's, you know, in my opinion, upon us right now,

That is correct.

Yes, certainly. And I think, you know, with draftings it can certainly kind of be categorized in that online marketplace where when the pandemic hit in 2020, they were already strictly online. They weren't burning cash or paying unnecessary expenses and some of their brick and mortar casinos in that, you know, so they didn't have that. Let's say that burn back in that time, they are also, I consider one of the forefathers of the online sports book and bringing the sports book to you, the consumer, they started off with online fantasy. So they have this huge FA or this daily fantasy model that is legal across, you know, all the United States with the daily fantasy type of setup. But with that, they've been able to attract and retain handful of customers and really have this robust online sports book. That in my opinion, they're reinvesting, right? You mentioned the revenue growth is going up, up up.

Well, they're reinvesting a lot of that in back into the company because they're trying to be the first one or attract new customers. When these states open up to legalized sports betting, they do have a little bit of a different model there again, where it's a little bit more technology based. But again, if we take a step back, more sports are going, you know, more sports are coming back fully and full force audiences going there. Their online sports book is extremely, I'd say user friendly and sense that you're engaged when you're on there. There's a lot more online live betting stuff that keeps you as a sports better, but constantly focused on the game itself. And I'll be honest with you. The house always wins on those live bets that people actually play

Yes. But at the end of the day, when I say there are definitely, they have their national presence, we've seen their commercials for years. They've just gotten to a little bit of a competitive space here, but I like that they're reinvesting in themselves so they can expand into new markets when it does become legal in other states and here in the future. Certainly.

Absolutely. Yeah. So one thing we always wanna remember as investors is that the market is always forward looking, you know, when this pullback happened. Right. And I think it's, I mean, 80, 60, 80% or so from a ties, I think it was around $80 or 60 or $80. And it was trading right around 20 right now. I think there's some value there in the sense too, where, you know, if you look where there are revenues and where they're gonna be a year or two out from now, I think it's safe to say it's probably gonna be a little bit higher than a 20 or $30 stock when we look out there. Now it's extremely difficult to time the market perfectly, but we wanna have that exposure in this type of sports book because when some of these things come out, maybe there's another pandemic or not a pandemic. Another variant that comes up this upcoming winter or fallen winter.

I know, I don't even wanna think about that myself, but in draft Kings is gonna be positioned where if we do see more closures, they're still gonna have that online sports book present and not be going through that burn in the brick and mortar. However, they are also expanding. And you know, they're creating some online and some brick and mortar presence as well, and that's just gonna help them, you know, I'd say sink their teeth into the market even more as they expand. So they have that brand recognition in the future as well.

Yeah. I think Boyd gaming has really done a well, a good job in their management to some extent them having that Las Vegas, you know, that Nevada presence as well, not having, having the international exposure that maybe you've seen with win casinos and some of them MCCA, you know, when they have these global shutdowns, I think Boyd is in a good position where they're a little bit more nimble in a sense that they can manage their balance sheet a little bit more effectively than some of the, let's say the other bigger players, despite their huge online presence and whatnot. So again, I think it's more so they're reinvesting themselves as well as they're, you know, looking to adapt more of their online gaming type of presence as well. So just kind of add all that up. You put 'em in, you know, their Las Vegas setting, they're reinvesting, they're going out and investing in technology. They're just positioned well to really have a profitable year looking forward. I would definitely say

Yes. We're knocking it all out gambling now, booze

Absolutely. So the sector as a whole, I would say is gonna be a little bit more defensive in a sense where it's that consumer staple, right? There's nothing I'd say sexy about the alcohol industry. However, when you look at some of the bigger players like InBev constellation, all them, they've undergone a little bit of pressure here over, I would say the past several months, six months or so. And a lot of that was maybe due to the ready to drink the vodka and the can type of drinks where they had overproduced. They had manufactured too much of that. So they had a lot of stuff sitting on the shelves because they thought there was gonna be a little bit more of demand. However, you had some of these other micro breweries or micro startup companies that also released a ready to drink where it just became such a crowded space. The good news is they've gotten that a little bit more in check as of recently. And I think it's gonna set up for a nice runway here in the future. When we look at, is this concern of a recession coming it as a consumer staple, regardless of economic cycles, people are going to continue to get their booze. Yes, they

Now where they get their booze is gonna be the big question, mark. But you know, we expect the major players in this industry just to remain profitable. They're gonna consistently pay out their dividends, their investors. And they're also just looking to expand a little bit past the alcohol. We've seen constellation getting a little bit of some cannabis exposure investing there. And I think that is because if you see a legalization of cannabis federally, they're gonna be in a position where they can distribute that because it's going to a lot of the same areas and channels by some leads

Yeah. 2020 was definitely a little bit more of that. Now we did notice that they just had to adjust, but we did see originally at some point I think the alcohol business saw 22 billion decline in 2020. However, we saw consumers adjust to the times we could say where now alcohol companies are better positioned to bring their product to you. We've seen some of these online things come together, so they're better positioned and right when you lose sporting events, concerts, some of those other bigger events, right? People aren't always, you know, consuming as much alcohol at home, regardless if they're still drinking, then they are at some of those other major events, right. It just didn't make a whole lot of sense. But let's look at forward again here, right? Alcohol again, a little bit recession proof. And you look at the reopening play you see in sports coming back, you know, heading into summer. I think you're gonna see an uptick in alcohol sales, definitely here in the upcoming years. And I think there're also just better positioned and they've learned a lot and they're gonna continue to just expand and, you know, improve their presence amongst liquor shelves.

You have a little bit hybrid of both one. They like to use their branding power. When you look at some of those things and be able to put their name on the can on the flip side, I think you saw some of these companies or some of these hard seltzers and alcohol companies, when you take the big boys, like the big distributors, like the constellations, the inves, those big players they'll actually go out and buy those companies because they have the meats to give them national distribution. And so they are able to see what's working. What brands are maybe gonna be the best in a certain market. Then they're gonna be able to improve the margin of those cans per sale because they go out and acquire them. They have the market, they have the scalability, they can put 'em on their trucks. Now you've also seen that they want their name on it and they've created their own products.

And so there comes a couple different price points. They maybe have an high end one, they maybe have a lower tier end, but they're again, just learning to adapt to their consumers and what their consumers are frequently drinking. You know, the RTD space ready to drink. Obviously it was a pandemic winter space because people didn't want to go and make their own cocktails. They wanted to go to a lake or they wanted to go somewhere outdoors, have a can. They wouldn't wanna carry the bottle of vodka in their backpack. They'd rather have a six pack in their cooler. So again, you know, they do have some trial and error, but they kind of look at they're just so powerful. They look at the space and they see what's working and they'll go out and acquire them to some extent, which gives them a nice growth revenue or a growth opportunity when we look at the alcohol

It's a little bit of both, right? We see someone like InBev come out with a new product every year and they try to appeal. But a lot of it is through acquisition because they just are able to scale that distribution process so much better than a regional alcohol company or brewery. Right. They can then put it up where their trucks are already going. InBev can just load it up on there and then they have a distribution network or they can get it into their bud houses or something of that nature opposed to your mom and Pop's brewery that has a really delicious drink. And you know, they've maybe expanded regionally across a few states. Well, if they wanna get that product out in California or get it to New York, they don't have the trucks or they're gonna pay a lot higher shipping costs to get that product on the ground there. So that's why you see these national distributors come in, buy those companies up and get their products out there and, you know, expand them overall.

Yeah, certainly when we were looking at the ETF and I'll just take a quick step back, we wanted to separate us from what would be a traditional vice type of fund. And we thought, what better way could we do that than to put in something that maybe seems like a vice, but is absolutely not right. We know the drug companies are trying to make us live longer and all that type of stuff. So we, when we looked at the pharmaceutical space and the drug industry, it just offers this portfolio such a great and just in, in, as an industry as well, a nice hybrid of value in a sense where people are always gonna continuously have a need for medicine. But when you look at the research and development, some of their biotech and, you know, therapies that they're rolling out, it just gives the drug industry such a long runway to be profitable and also generate, you know, some new profits and or cash flows through new therapies and whatnot.

You know, in us, in particular, we like to focus on the bigger players in this space stuff that doesn't just have a single line of, you know, a single I'd say drug pipeline, someone like Pfizer or J and J Moderna's where, okay, we do have, you know, your household items that they have and you can find those over the counter, but they also are the leaders in some of the, you know, more specialty drugs that are a little bit more, whether they're cancer treatments, whether it's, you know, for most recently being COVID 19. Now we're starting to see an oral pill that can be taken post COVID, you know, if you can get it in in time. So we look at those types of companies and we think that's gonna be able to offer investors the longest term success. Now we do have a couple smaller, I'd say smaller cap or single ones and those in our portfolio, but that's gonna be able to, I'd say give us a little bit more growth in our later down the road. But again, we like to focus on some of those more household traditional names that we're familiar with.

Yep. Yep. And that's something we obviously want to pay attention to. I think some of the volatility overall has been sparked with some of the headline news that we've maybe seen in from the pandemic in particular when it comes to Thea's J and J's and advisors, primarily because something comes up, you know, there's headlines, a lot of retail money is in there. Retail's usually the first to come or last to come first to leave. So that may overly drive the price down a little bit at this point in time. Cuz there's just so much focus. But historically speaking, if you look back at some of those charts, right, they do are a little bit more, I wouldn't say smooth sailing, but we don't see the drastic swings that we've seen over the past year and a half 18, 24 months. Definitely. So

We do have a few biotechs in our portfolio, but we'll definitely obviously like to focus on some of the bigger winners because of the volatility that you mentioned and that space, those other ones, where they have are dependent or reliant on a single drug therapy to kind of control the direction of their stock. We don't think that's a healthy long term strategy for investors. So again, we do like to focus on that those premier companies that are gonna have their household names that we're buying, whether that's, you know, your J and J's or someone where you have the household products that you're buying over the counter. But then again, you can get a little bit more growth because they may be out and going and acquiring some of those successful biotechs, cuz it comes down to the distribution and getting into certain channels at the end of the day too. So again, we just kind of like to focus on those companies.

Absolutely. And you know, that's kind of how we like to manage the funds, right? When we look at it as an ETF, we think that there's a lot of value in individual stocks. But when we look at the long-term play for an investors, we think there's so much more, uh, sustainability and value in an ETF as a whole because you have these levels of a diversification now, single stocks again, right? That's gonna maybe be a little bit more exciting to an investor when I'm in there. But if you have one stock that goes down 40% or something like that, take pen and draft Kings on the gambling side of things that can be detrimental to your portfolio. When our ETF, we still were able to achieve growth last year in our index that we had built, regardless because we had a multi asset class diversification portfolio involved. So again, I think it's important to focus when we're focused on the higher quality companies to look at the industry as a whole, because you know, those are gonna be the ones that have been there, done that and succeeded. And I think that's, what's ultimately going to be a good long term play for investors, right?

Yep. If they're interested, they can visit our website. The easiest one is either go to bad investment code.com or invest bad.com and they can take a look at our portfolio where we're trading on all the major platforms and things like that in particular is B a D. So not too hard to remember for anyone listening out there. And if you have more questions, feel free to reach out. We've got our contact information there and we're happy to give you a little bit more in depth, thorough explanation of our reasoning and methodology behind the ETF itself. So thank you Kate. I really appreciate you having me on the show this afternoon. All

Yep. Thanks Kate. Bye.